Caught Between the Lines: The Burden of Project Undervaluations

As I reflect on the past year, alongside my work in commercial advisory, dispute resolution, and providing expert support for legal clients, I’ve had the pleasure of building relationships with contractors of all sizes, from the smallest firms to the largest Tier 1. Without a doubt, one of the most common issues they raise is undervaluation of their work. “What can I do when the work is done, but I’m being underpaid? The financing is hitting my bottom line, and I don’t know what my options are. I don’t want to spend more on lawyers right now,” is a question I hear regularly. And often, contractors share how issues have dragged on for months—“This matter has been going on for 4 periods, hampering our cash flow and stifling periodic numbers.”

Undervalued payments continue to be one of the most persistent and damaging challenges for contractors in the construction industry. And here’s the thing—this isn’t just a small, isolated issue that happens once in a while. It’s something that affects every contractor, whether big or small, and impacts cash flow, project timelines, and business relationships. Despite the protections available through mechanisms like the NEC suite and the Housing Grants, Construction and Regeneration Act (HGCRA), many contractors hesitate to assert their rights. But why? Because they fear what will happen next. “What if this harms my relationship with the client? What if I lose future work?” These are legitimate concerns, but the cost of not addressing undervaluation can often be even greater.

This year, I’ve seen this issue worsen. More contractors are coming to me, expressing that undervaluation isn’t just a minor bump in the road anymore; it’s becoming systemic. It’s not just about a few disputed payments here and there—it’s something that’s increasingly becoming a norm, with significant financial consequences. And here’s where the real question lies: why are we still having these conversations? Why is this happening in 2024, when there are clear mechanisms in place to protect contractors?

The Reluctance to Challenge Undervaluation

Undervalued payments are more than just a financial inconvenience—they can threaten the very existence of a business. So why do so many contractors hesitate to raise the issue? The answer is simple: fear. Fear of damaging relationships with clients, fear of losing future opportunities, and ultimately, the fear that raising the issue might cost them more than it’s worth.

“I don’t want to burn bridges,” one contractor shared with me about a multi-million-pound infrastructure project. “We’re being shortchanged, but we’re too afraid to rock the boat. We don’t want to risk losing future work, but it’s making us carry a heavy financial load.”

Does this sound familiar? I can’t tell you how many times I’ve heard similar sentiments. But when contractors choose to absorb these shortfalls without challenging undervaluation, they risk not just their cash flow but the long-term health of their business. We’ve all heard the old adage, “You don’t bite the hand that feeds you,” but what happens when that hand isn’t paying you fairly?

And what’s the risk of staying silent? 41% of construction insolvencies are linked to cash flow problems, and those problems are often worsened by undervalued applications and delayed payments (Build UK). By not asserting their rights, contractors only exacerbate the issue, leading to even larger financial problems down the line.

The Cost of Adjudication: A Necessary Investment?

When undervaluation issues arise, contractors have options. One powerful tool at their disposal is adjudication—a process under the Housing Grants, Construction and Regeneration Act (HGCRA) that allows disputes to be resolved quickly, typically within 28 days. But I hear it often: “Isn’t adjudication expensive? Isn’t it better to just absorb the loss?”

On average, contractors spend between ￡5,000 and ￡20,000 on adjudication referrals, depending on the case’s complexity (Construction News, 2020). But consider this: 70% of contractors report that failure to pursue dispute resolution results in project delays or additional costs in the long term (Construction News, 2020). What’s the cost of NOT addressing undervaluation? In my experience over the last 25 years, it’s far more expensive than the upfront cost of adjudication.

It might seem like a lot to invest, but think about the bigger picture. Adjudication isn’t just about winning a dispute—it’s about protecting your business, ensuring timely payments, and maintaining long-term cash flow. Can you afford not to take this step?

Case law, such as ISG Construction Ltd v Seevic College [2014], reinforces the power of adjudication in ensuring contractors aren’t left at the mercy of delayed or undervalued payments. The case highlights that payment disputes must be settled fairly and promptly, with the contractor’s rights being paramount in the face of non-compliance.

The Uneven Playing Field

Undervalued payments often arise from a disconnect between what is actually happening on the ground and what is being assessed in the boardroom. Here’s the truth: many commercial teams don’t have enough on-site experience. And that’s not their fault—they often operate in an office, far removed from the day-to-day realities of the physical build. But it’s an issue that can lead to inaccurate assessments and, ultimately, undervaluation.

What’s the solution? A more engaged, hands-on approach to project valuation. I always encourage contractors and clients alike to take regular site walks, get on the ground, and assess the work firsthand. Whether using modern technology like laser measurement tools or the good old tried-and-tested measuring wheel, it’s essential that commercial teams truly understand the scope of the work being done.

The courts have consistently held that a contractor is entitled to a fair evaluation of the work completed—this was highlighted in Amec Group Ltd v. Secretary of State for Defence [2011], where it was stated that a fair assessment of the work is critical to avoid disputes. So why aren’t more teams doing this? If clients want to avoid these disputes, they need to take that extra step: ensuring there’s full understanding and visibility of the work before issuing any final payment.

The Real Cost of Not Engaging

When payment issues go unaddressed, it’s not just the contractor who suffers. 63% of contractors say that delayed payments are the leading cause of project delays, with 52% reporting that it disrupts their ability to manage cash flow (CIOB, 2021). So, what does that mean for clients and stakeholders? The ripple effects of a delayed payment or undervaluation don’t just impact the contractor’s bottom line—they also cause disruptions for suppliers, subcontractors, and even the project itself.

And here’s the kicker: 61% of contractors report that payment disputes lead to damaged client relationships, reducing the likelihood of repeat business (CIOB, 2021). So, when contractors hesitate to challenge undervaluation, they’re not just hurting their own finances—they’re also putting their professional reputation at risk.

Practical Steps to Address Undervaluation

Undervaluation of payments can have a substantial impact on a contractor's business, making it essential to address the issue early to prevent more significant and costly disputes. In the following seven points, I share my insights on how contractors can take proactive measures, incorporating key contract mechanisms like the NEC and JCT:

1. Submit Clear, Well-Documented Applications

Ensure that all payment applications are comprehensive, clear, and well-supported with progress reports, cost breakdowns, and any other documentation required under the contract. For instance, under the JCT Standard Building Contract (Clause 4.12), contractors are required to submit a detailed statement of the work completed, including the valuation of the work. The more detailed the application, the harder it is for clients to undervalue or dispute the payment.

NEC Reference:

• Clause 30.1 of NEC3/NEC4: Contractors must submit a payment application that is properly detailed, including progress reports and breakdowns of the costs, ensuring that payment applications are clear and supported by appropriate documentation.

JCT Reference:

• Clause 4.12 of JCT: Requires the contractor to submit a payment application, accompanied by a statement of work completed and a valuation, which should be clear and well-documented to avoid disputes over payments.

2. Engage Early and Often

Proactively communicate with both project managers and commercial teams to address any issues before they escalate into full-blown disputes. In the NEC3/NEC4 Engineering and Construction Contract, Early Warning Notices (Clause 16) are essential for raising issues as soon as they arise. These notices trigger a requirement for both parties to collaborate and attempt to resolve issues before they affect the project's cost or timeline.

NEC Reference:

• Clause 16.1 of NEC3/NEC4: Contractors must raise Early Warning Notices for any issues, including potential undervaluation, to ensure that both parties can address these matters promptly before they affect the project’s schedule or cost.

JCT Reference:

• Clause 4.2 of JCT: Encourages ongoing dialogue between the contractor and employer to address payment issues early and ensure that both parties are aligned on valuations and payment expectations.

3. Use NEC Collaborative Tools

The NEC3/NEC4 contract is specifically designed to promote collaboration between contractors, employers, and other stakeholders. Raising an Early Warning Notice under Clause 16 of the NEC contract is a proactive step to address potential undervaluation issues. It encourages transparency and ensures that all parties are aware of potential issues before they escalate into disputes, making it easier to adjust forecasts, budgets, and valuations early on.

NEC Reference:

• Clause 16.1 of NEC3/NEC4: The Early Warning Notice process allows for open communication and collaborative problem-solving, ensuring that undervaluation and other issues are addressed promptly and collaboratively.

JCT Reference:

• Clause 4.12 of JCT: Encourages communication between the contractor and employer regarding payment issues, helping to prevent misunderstandings that can lead to undervaluation.

4. Understand Your Rights Under the HGCRA

Under the Housing Grants, Construction and Regeneration Act 1996 (HGCRA), contractors have the right to issue payment and pay-less notices. This is critical for contractors when facing undervaluation, as the act requires the client to issue a payment notice within five days of the payment due date (Section 110). If a pay-less notice is issued, it must detail the reasons for the deduction. Understanding these rights can empower contractors to challenge undervaluation and protect their financial interests.

NEC Reference:

• Clause 30.3 of NEC3/NEC4: This clause allows contractors to issue a payment notice if the employer fails to do so within the time frame outlined under the HGCRA, ensuring payment rights are maintained.

JCT Reference:

• Clause 4.9 of JCT: Provides the contractor with the right to issue a payment notice if the employer fails to issue one, ensuring that undervaluation issues are identified and addressed in a timely manner, in accordance with the HGCRA.

5. Keep Detailed Records

Proper documentation is crucial in supporting any claim or dispute. Up-to-date site diaries, correspondence, and daily progress reports are essential to substantiate claims of undervaluation. Under both JCT and NEC contracts, detailed records help ensure that both parties are aligned with the work completed and the corresponding valuation. In disputes, these records will be key in proving the work completed and justifying payment applications.

NEC Reference:

• Clause 31.3 of NEC3/NEC4: Requires contractors to maintain detailed records of the work completed, the resources used, and the progress of the project, which are essential for substantiating claims and avoiding undervaluation.

JCT Reference:

• Clause 4.12 of JCT: Stipulates that contractors must maintain accurate records of work completed and costs incurred, ensuring a clear record that can support payment applications and prevent disputes over valuation.

6. Pursue Adjudication if Needed

When undervaluation persists, adjudication is often the most effective way to resolve the issue quickly and cost-effectively. Under the NEC and JCT contracts, adjudication provides a mechanism for resolving disputes within a short timeframe—typically within 28 days. While it can come with costs (typically in the range of ￡5,000 to ￡20,000 depending on the complexity of the dispute), it’s often more efficient and less expensive than protracted litigation. As the NEC and JCT contracts require payment within a specific time frame, adjudication is a valuable tool to enforce these terms.

NEC Reference:

• Clause 93 of NEC3/NEC4: Specifies that disputes, including those regarding payment and valuation, must be referred to adjudication for resolution within 28 days, ensuring a prompt and efficient resolution to payment disputes.

JCT Reference:

• Clause 9.2 of JCT Design and Build Contract: Provides that any disputes over payment, including undervaluation, must be referred to adjudication for resolution within a specified time frame, ensuring timely enforcement of payment terms.

7. Provide Regular Cost Forecasts

It’s vital to keep clients updated with regular cost forecasts throughout the project. Under the JCT Design and Build Contract, contractors are required to provide periodic updates on the cost of the project, allowing both parties to stay aligned on financial matters. Clear, frequent updates not only help with project cost management but also reduce the likelihood of disputes over undervaluation by setting realistic expectations upfront. In NEC3/NEC4, regular updates on the cost and progress of the work are essential to maintaining transparency, which can prevent undervaluation and other payment issues.

NEC Reference:

• Clause 32.1 of NEC3/NEC4: Requires contractors to submit regular cost forecasts, keeping the client informed of any changes to the financial position of the project and helping prevent undervaluation issues from arising.

JCT Reference:

• Clause 4.12 of JCT: States that the contractor must provide regular updates on project costs, helping ensure that the client understands the financial position and avoids misunderstandings that lead to undervaluation.

My Final Thought

Undervalued payments represent more than just a financial issue—they reflect systemic problems in the construction industry. Contractors are caught between the need to protect their cash flow and the desire to preserve relationships, often at great personal and professional cost.

By adopting a proactive approach and embracing collaboration, contractors can better protect their businesses without compromising their professional relationships. And clients must recognise that competence, transparency, and fairness are not aggressive tactics—they are necessary practices that benefit everyone involved.

As one contractor said, “If we can’t rely on the contract, what are we building on?” True collaboration goes beyond buzzwords—it’s a commitment to mutual success. By fostering open communication and tackling undervaluation head-on, both contractors and clients can ensure that projects stay on track, relationships remain intact, and financial stability is preserved