Experience has shown that when there is a significant over capacity in the construction sector, that contractors slash their tender prices in order to win work. The danger is that some contractors will slash their prices too much and end up being loss making.

While over capacity in the industry creates its own issues for contractors, another issue facing contractors is that developers may have paid too much for property sites at the height of the boom, and will now struggle to earn a profit on developing the site, and the developers’ only option may be to squeeze the contractor as much as possible.

Given the issues facing contractors in the sector, it is more important that they fully understand the terms of the contracts that they have entered into, and exploit them to the full.

RIAI Contracts

The main contracts governing residential and commercial building in this country are the standard form contracts which are published by the Royal Institute of the Architects of Ireland (“RIAI”). The basic form has been issued in agreement with the Construction Industry Federation and the Society of Chartered Surveyors in the Republic of Ireland. There are a number of other standard forms of RIAI contract.

The Government Contracts Committee (“GCC”)  launched standard forms of contract to be used for Government work. As these forms are new, and are perceived to place more pressure on the contractor, there is considerable anxiety within the industry on their use. However, if the GCC forms are perceived by private sector developers to work, then the existing RIAI forms may cease to be used.

The RIAI standard forms of contract are well understood within the industry, and Case Law has developed to interpret many of the clauses, unlike the GCC forms of contract whose provisions may have to be clarified by the High Court! The RIAI contracts protect both the employer and the contractor. However, we consistently come across cases where a contractor has not exploited all of the terms and conditions to his advantage, whereas the employer has exploited the contract to its advantage. While this article assumes that contractors have signed a RIAI contract, many of the issues raised would apply to GCC contracts.

Contract Disputes

It is common that once a contract has commenced that an employer decides to vary the plans. The standard form of contract provide for procedures on how such “Variations” should be valued. Every time an architect issues an “instruction to vary the works”, it should be costed without “undue delay” by the architect or the quantity surveyor. The practice of not valuing such instructions until the conclusion of the contract can be a mistake, as the employer may attempt to obtain a discount on the cumulative instructions given. In particular, the employer may attempt to exploit any cash flow difficulty facing a contractor at the end of the contract.

In some cases the employer may ask a contractor to do additional works, and may not ask the architect to issue an instruction. In these cases, the contractor should follow the procedures laid down and serve notice on the employer within the stipulated periods stating that a Variation has been requested.

Some aspects of the contract may be ambiguous which may lead to disputes e.g. a conflict between the drawings and the specifications. Contractors should be aware of the principle of Contra Proferentam which provides that any ambiguous clause will be construed against the party who prepared the document.

Delay and Disruption Claims

It is not unusual for a contractor to commence work on site, only to be delayed by other contractors employed by the same employer. In some cases some of the contractor’s work will be damaged by other contractors. In such cases, the contractor should maintain detailed records of the Delay and Disruption caused, and notify the employer, by letter, on a daily basis that these delays are occurring, and notifying the employer that the contractor will seek additional payment pursuant to the provisions of the contract. In cases of damage caused by other contractors, photographs should be taken as evidence. To facilitate the preparation of such claims, contractors should maintain a daily record of labour and machinery employed on the site.

Obtaining Payment

In order to avoid a bad debt if the employer becomes insolvent, we would advise the contractor to carry out a detailed credit assessment on the employer, if it is not a Government Department or Local Authority. The credit assessment procedure should include discussion with other colleagues in the industry to obtain their views as to whether an employer is good at paying debts.

The standard form of contract sets out precise procedures as to how the contractor should be paid, and the contractor should ensure that these procedures are followed.

If the architect certifies that the work has been done, but the employer does not pay, what options are open to the contactor? Any non-payment of sums certified by the architect is a serious matter and needs to be addressed immediately. The employer should be contacted immediately to establish why they are not releasing payment. It is important that all of the vague delaying excuses e.g. “our quantity surveyor is looking at it”, “I will sort it out next week” etc. be drilled through to determine the real reason.

In some cases the reason why the employer is unable to make further payments is because the funding bank may have declined further funding given the uncertainty in the housing market. In such cases, the contractor should seek legal advice as to whether they should “Determine” the contract and exit the site. We would suggest that the contractor does not do any further work unless there is a cast iron guarantee that they will obtain payment. In such cases, the contractor may obtain personal guarantee from the directors of the employer directly. We handled one case where the only way for the contractor to obtain payment was to arrange for some of the title deeds for some of the houses to be transferred into the contractor’s name, so that the contractor could sell the houses itself in due course. Obviously, such a “barter” type transaction is expensive in terms of legal costs and stamp duty, but at least the payment is secured.

Construction Contracts Act 2013

The need to ensure prompt payment was a key driver for the enactment of this legislation. The Construction Contracts Act 2013 imposes statutory obligations and prohibitions on parties in relation to payments and provides rights for parties seeking payment. Regardless of whether the contract is bespoke or in a standard form or whether it is a private or public sector contract, the provisions of the  Construction Contracts Act 2013 will apply.

  • Irrespective of the provisions of the subcontract, subcontractors are entitled to be paid the full value of work completed every 30 days.
  • The paying party must respond to a payment claim within 21 days of the payment claim date. If it fails to do so, it runs the risk of having to pay the full amount of the claim, irrespective of how inflated it may be.
  • Any dispute relating to payment may be referred to an adjudicator at any time. The adjudicator must give a decision within 28 days, and the amount awarded by the adjudicator is payable immediately, irrespective of the fact that the dispute may then be the subject matter of arbitration or litigation.
  • Pay when paid provisions are no longer permitted.

Dispute Resolution

If agreement cannot be reached between the parties as to how a contract should proceed, the parties are obliged to refer the matter to Dispute Resolution procedures (Conciliation/Arbitration). In our experience, contractors are too slow to invoke conciliation/arbitration clauses, partially because they do not understand the process. If the employer has no proposals to settle the matter, then the only alternative is avail of the Dispute Resolution procedures.

An unfortunate consequence of the compulsory Dispute Resolution procedures is that contractors are unable to refer claims in excess of €1 million to the Commercial Division of the High Court, with its expedited procedures.

Nominated Sub-Contractor

It is generally accepted that sub-contractors are at the bottom of the food chain in the construction sector. The employer pays the main contractor first, who then pays the sub-contractor, if it does not become insolvent! The best way for a sub-contractor to move themselves up the food chain is to have themselves appointed as a nominated sub-contractor. As a nominated sub-contractor, they are entitled to demand payment from the employer if the main contractor does not pay them.

Negligent Advice?

Smaller contractors will usually rely on the services of an outside firm of quantity surveyors in submitting a tender. In some cases, the tender price calculated by the quantity surveyor may actually generate a loss, as a result of negligence on the part of the quantity surveyor in costing the tender. Sometimes, the negligence can be as simple as an arithmetical error. In such cases, the contractor should obtain legal advice as to whether they should issue legal proceedings against the quantity surveyor. Contractors should be aware that there is a Code of Practice to the effect that the Employer should notify the contractor of obvious errors in the contractor’s tender document before accepting such a tender.

Reckless Trading

If a contractor is experiencing cash flow difficulties as a result of a contract, they should seek professional advice as to whether they are trading recklessly. In particular, the directors need to assess if the cash flow difficulties are caused by their own mismanagement of the contract leading to non-recoverable costs. Directors of a Company which trade recklessly may be held personally liable for the Company’s debts.

How can we help?

As up to 40% of our cases involve the construction sector we have developed strong expertise in the area. We regularly advise developers, main contractors and sub-contractors on the issues facing the sector.

We provide practical and commercial advice on all aspects of dispute resolution, including mediation, conciliation, arbitration and adjudication under the Construction Contracts Act 2013.

We can advise on the “rescue” options open to a company which is in financial difficulty, such as informal schemes of arrangement, a formal schemes of arrangement under sections 450 of the 2014 Companies Act, or Examinership.

For further information please contact Jim Stafford, Tom Murray or Andrew Henfrick on 01 661 4066 or jim.stafford@frielstafford.ie  tom.murray@frielstafford.ie andrew.hendrick@frielstafford.ie