Cash is king so show me the money: getting paid during the COVID-19 crisis

We have received numerous queries regarding emerging payment trends during the COVID-19 epidemic. We are aware that we have reached month-end and for our contractor clients receiving full value and payment of the sums due is more important than ever. A particular concern is that paying parties might issue ‘undervalued’ payment notices or ‘robust’ pay less notices. While generally these practices are not unknown in the industry, with the uncertainties contractors and employers are facing currently, the impact of practices such as undervaluing is likely to be felt harder, particularly where business have had to suspended live projects.

We want to set out some of the protective measures you can do to minimise the payment risk and impact to your business. These apply to contractors and sub-contractors.

What Protective Measures can we take?

If personnel are being redirected from live projects, now is the time to focus resource capability inwards. It will be key for your business to maintain cash flow; the so-called ‘lifeblood of the industry’.

In this regard, we recommend that you ensure that personnel follow four key protective measures:

• Measure 1: Keep project records accurately maintained, update records as necessary
• Measure 2: Keep the valuation of your works up to date across all live and suspended projects
• Measure 3: Ensure that payment applications are issued on time, and in accordance with your contracts
• Measure 4:  Be diligent in monitoring incoming notices. In particular, any negative payment notice/pay less notice seeking payment from you normally requires very rapid review and response in accordance with the contract. If your notices are normally issued to an office address that is not currently manned, can you notify a change of address to your payer such as an email address?

A contractor that follows these measures is in a far stronger position to protect its payment positon.

What can we do about undervalued payment notices?

When a contractor is on the receiving end of a seemingly undervalued payment notice, there usually are two main reasons for this:

1. There is a genuine dispute as to valuation – in which case following the protective measures above will help ensure that you are in the best possible position to consider the actual valuation of your works and inform any negotiation.

   Where valuations differ, it does not harm to start a dialogue with your employer to assess where their valuation position comes from. In times of social distancing, we are having clients convene without prejudice meetings over Skype. At the very worst, maintaining a dialogue puts your business in a better position to understand the employer’s valuation position. This in turn will help inform whether further action is justified.
    

2. The paying party is simply stalling for time – in which case again, following the protective measures above, you are in a far better position to assess the actual valuation. Again, this will inform any further action you take.

The key point we wish to emphasis, is that in either of the above scenarios, a contractor is in a far stronger legal position to both:

1. recover payment by negotiation, or alternative dispute resolution; and
2. decide whether further action is justified, and ultimately, maximise chances of success

What further action can we take?

When looking at payment disputes in construction, there are two main routes to recovery we tend to focus on:

1. A ‘notified sum’ recovery – the so-called ‘smash and grab’ dispute; where a paying party fails to respond to a validly issued payment application by the payee (refer to measure 3)
2. A ‘valuation’ recovery – this type of dispute is where both parties essentially put forward their respective valuations and a decision is made as to what the correct valuation of the works is for an issued application (refer to measures 1 and 2)

Our advice to clients pursuing either a ‘notified sum’ or a ‘valuation’ dispute is to be sensible and realistic on the sums sought in applications. Following measures 1 and 2 will help enable this and both inform a realistic valuation, and provide a firm evidential basis to support your entitlement before a future tribunal.

Avoid the temptation to overvalue applications. An employer’s recourse following an unsuccessful adjudication on an overvalued notified sum is to commence its own ‘valuation’ recovery. This is not in the interests of either party and often leads to both escalating costs, and the prospect of ultimately losing a valuation argument. On the other hand, we tend to see that an unsuccessful party following a ‘notified sum’ recovery is far less likely to challenge the sums paid by commencing a ‘valuation’ recovery. Generally, in circumstances where an unsuccessful employer believes the notified sum is in fact broadly accurate (or believes the difference is not significant enough to justify a subsequent ‘valuation’ claim), further ‘valuation’ disputes are uncommon.

For further information on any further action steps, please contact Tricia Morrison and Matthew Cookson of our construction and engineering team, who specialise in payment in construction projects. Tricia can also advise on both Scottish and English payment matters.

For further updates and other articles discussing the impact of the coronavirus please view our coronavirus hub.