How contractors and subcontractors from the construction industry may tackle these prominent issues
FEATURED PAPER
By Jeremy Rullaud
SKEMA Business School
Lille, France
ABSTRACT
This paper has been conducted through the course titled “International Project Contracts”, for the Master of Science “Programme and Project Management and Business development” in Skema Business School.
The designation of prompt payment clauses in the public debate has been brought to the fore together with the repeated occurrence of late payment situation or worth, absence of payment, in the construction industry. In this context, this paper tries to stress out the factors that may encourage their appearances and so presents the different tools that can minimize the repetitiveness of these tricky situations for contractors or sub-contractors. Throughout the completion of this paper, two best solutions have been highlighted as being the most effective ways to prevent late payment situations from happening and to remedy the absence of payment. In order to conduct this whole research, fishbone diagram, non-compensatory model, matrix analyses, disjunctive reasoning, charts and Pareto analysis have been performed.
This Paper concludes on how effective are the use of Late Payment Fee and Payment Bond to resolve the issues mentioned above. However, this paper also concludes that the kind of tools needing to be used, depends also on the situation the contractor or subcontractor is, at a given time.
Keywords: Construction industry, Owner, Contractor, Sub-Contractor, Prompt Payment, Mechanics Lien, Payment Bond, Payment provisions, Late payment Fee
INTRODUCTION
“0,080 baked bricks, property of Samas, are against the account of Samas-zer-iqisa son of Erbaya; he will deliver them at the end of Sabattu, day 7, year 1, Nebuchadnezzar king of Babylon. “[1]Construction contracts have been existing for hundreds and hundreds of years now. This exhaustive construction contract for the supply of bricks in Babylon dated from 605 BC, highlights, how construction contracts have changed since then. Nowadays, the construction sector is widely contractual. Construction contracts have become significantly more specifics, with lots of clauses, conditions and terms.
Why does the construction industry require very specific contracts? The construction industry is very complex. As the matter of fact, the construction industry is a specific structure of contracts and sub-contracts, setting it apart from other industries. This industry involved lots of different people. The owner selects a General Contractor to build the project, then, the Owner can engage a specialized project manager. The project manager is the “person responsible for leading, directing and managing the project and project team to deliver the project deliverables to an agree time, cost and quality/performance.”[2] Thus, he has a great responsibility in the follow up of the construction project. Finally, once the contractor is selected, he has to enter into sub-contracts with Trade Contractors for the various segments of the construction project. Sub-contractors can also further sub-contracts to other trade contractors. The high complexity of the construction industry is not without consequences in business management.
Actually, one of the major issues in this industry, is the late payment. It has dramatic effects on the whole pyramid chain. Therefore, “Prompt Payment laws” have been enacted by States and Government in order to establish norms for payment schedule in the construction industry. These are legal recourse against owners and contractors who fail to meet the payment terms specified in the contract. However, even if there are prompt payment clauses, recent studies have pointed out that over 90 percent[3] of contractors have troubles obtaining the retainage after a job is completed. Consequently, late payment and in the worst case, outright default, have cascading effects down the rest of the contracting and sub-contracting chain. They can result in freezing cash flows across an entire project. There are multiple causes explaining late payment or worst, outright default in construction contract.
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Editor’s note: This paper was prepared for the course “International Contract Management” facilitated by Dr Paul D. Giammalvo of PT Mitratata Citragraha, Jakarta, Indonesia as an Adjunct Professor under contract to SKEMA Business School for the program Master of Science in Project and Programme Management and Business Development. http://www.skema.edu/programmes/masters-of-science. For more information on this global program (Lille and Paris in France; Belo Horizonte in Brazil), contact Dr Paul Gardiner, Global Programme Director paul.gardiner@skema.edu.
How to cite this paper: Rullaud, J. (2019). Ensuring prompt payments or recovering his money: How contractors and subcontractors from the construction industry may tackle these prominent issues, PM World Journal, Vol. VIII, Issue VI, July. Available online at https://pmworldlibrary.net/wp-content/uploads/2019/07/pmwj83-Jul2019-Rullaud-ensuring-prompt-payments-in-construction-industry.pdf
About the Author
Jeremy Rullaud
Lille, France
Jeremy Rullaud is a PGE Student at Skema Business School, currently studying in MSc Project and Programme Management and Business Development in Lille, France. He has a solid experience in Project Management since he was Project Manager several times throughout his associative experiences and during his internship within 3S Entertainment company. He is also about to start an Internship in January within Orangina Suntory, as Assistant Project Manager. Jeremy has competences in Budgeting Cost control and Business development as well. He worked for 5 months in a startup incubator in HQ Raleigh, USA. Regarding his academic background, he did a preparatory class for competitive entrance in the most prestigious French business schools, then, he obtained his license and Master 1 in Skema Business School. Jeremy just passed with flying colors Agile PM and Prince 2 certification.
Jeremy Rullaud can be contacted at jeremy.rullaud@skema.edu or rullaud.jeremy@icloud.com
You can also send him a message via LinkedIn: http://www.linkedin.com/in/jérémy-rullaud
[1] The contractor’s Guide to getting paid, A prime for contractors, subcontractors and suppliers, retrieved from https://www.lienitnow.com/the-ultimate-guide-for-getting-paid-on-construction-projects
[2] Project Manager, Harpham, A., Chairman, APM Group, UK, 2002. Retrieved from http://www.maxwideman.com/pmglossary/PMG_P16.htm – Project Manager
[3] Karina Fabian, Contractor’s guide to getting paid, retrieved from https://www.business.com/articles/contractor-guide-to-payment/
