Cashflow is still king - Managing payments in a construction business
In a construction company, managing your finances is critical to the success of your business and, in today's current market, it is more important than ever to stay on top of payments and cash flow.
In this article, Senior Associate Aleksandar Kovaceski from our Dispute Resolution and Litigation Team provides some general advice to help construction companies and subcontractors navigate some of the challenges involved in receiving payments from customers.
Don't wait until it's too late to follow up payment of invoices and progress claims
One of the biggest mistakes that parties in the construction industry make is waiting too long to follow up on payment of invoices and progress claims. This can lead to cash flow problems and negatively impact your bottom line. It is essential to stay on top of payments and follow them up in a timely manner.
There are a number of options that a business owner or contractor can follow before undertaking more assertive litigation proceedings.
The Building and Construction Industry Security of Payment Act 2002 (Vic)
The Building and Construction Industry Security of Payment Act 2002 (Vic) (SOPA) is a mechanism designed to ensure payment of progress claims in the construction industry. It provides a fast and cost-effective way to resolve payment disputes between parties.
Under the SOPA, a payment claim can be submitted by a claimant, usually the contracting business or subcontractor, to the respondent; the party responsible for making the payment.
If payment is not made within the specified timeframe, subject to complying with the requirements under the SOPA, the claim can be referred to adjudication, a process under the Act that seeks to help resolve payment disputes quickly, fairly and at a lower cost than going to court.
The adjudicator is independent and will base a decision on written submissions received from both parties as well as possibly carrying out inspections or meetings as required to assist them to determine the amount due in a progress payment.
The adjudicator's decision is binding on the parties, subject to any merits determination in relation to the dispute, and can be enforceable through the courts.
If the claimant receives an adjudication determination in their favour and the respondent does not pay the determined amount in time, then the option open to them is to seek an adjudication certificate and apply to the appropriate court to obtain a judgement against the debtor.
It is important to note that the Act applies to all contracts for construction work or related goods and services, including those for residential projects. It does not apply to the drilling for, or extraction of, oil or natural gas, or the extraction of minerals including tunnelling or boring, or constructing underground works for that purpose. It is also worth noting that each state has their own version of the SOPA and, whilst they might be largely similar to the Victorian legislation, there are some distinguishable differences.
VCAT or Court Proceedings
If a payment dispute cannot be resolved through the SOPA, then it is open to the party chasing the debt to make either a Victorian Civil and Administration Tribunal (VCAT) application or issue court proceedings to recover the debt owing.
The appropriate forum for the recovery action will depend upon the type of construction work that was carried out (i.e. Domestic or Commercial) as well as the amount being claimed.
At this stage it would be an appropriate time to seek legal advice on the best way to proceed.
How to seek payment of invoices and progress claims
As a guide, the following steps should be taken:
- If your claim satisfies the requirements under the SOPA, serve a payment claim on the party responsible for making payment in accordance with the construction contract.
- If payment is not made within the specified timeframe, follow the procedure pursuant to the SOPA and, if the amount under the payment claim remains unpaid, then apply for adjudication.
- If the adjudicator's decision is in your favour, enforce it through the appropriate court application; or
- If the adjudication process is unfavourable, or if your debt does fit within the criteria for an adjudication application pursuant to the SOPA, then it will be open to you to pursue the debt pursuant to either a VCAT application or through issuing proceedings.
Cash flow is king in the construction industry
Cash flow is king in the construction industry because it is the lifeblood of your business. Without adequate cash flow, you may struggle to pay your bills, meet payroll, or invest in future projects. Managing your cash flow effectively is essential to the success of your business and it is important to stay on top of payments and invoicing, maintain accurate financial records, and manage your expenses carefully.
It is crucial to avoid a situation where past projects are paying for future projects. This can create a cash flow problem and negatively impact the financial health of your business. It is essential to manage your finances carefully and ensure that you have adequate cash reserves to fund future projects.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.
