HOW TO KILL A CONSTRUCTION COMPANY

The modern contractual environment is usually extremely disadvantageous to the Contractor. Most tenders require bidders to simultaneously:

1. Waive the Contractor’s Lien (i.e. waive their collateral against non-payment by the Employer), and
2. Provide an On-Demand Performance Bond (i.e. agree that the Employer can dip into their bank account for any breach alleged by the Employer without requiring the Employer to prove that allegation in a dispute process), and
3. Provide an Unlimited Product Warranty (i.e. agree that the Employer is entitled to consequential damages in the event that there is a defect in the installed product. This means that the Contractor may be liable not only to rectify his own work but to also pay for any and all consequential losses that the Employer may suffer including, for example, loss of profits due to delayed occupation), and
4. Agree to Delay Damages (in the form of a financial penalty which the Contractor is liable to pay for each day that the project is late), and
5. ?Accept a Payment Retention (which the Employer later often tries to seize by refusing to sign a Completion Certificate and/or by demanding a Final Settlement Discount), and
6. The Employer typically refuses to provide a Payment Guarantee. This notwithstanding clauses in certain standardized Conditions of Contracts (such as 2.4 in the FIDIC Red Book) which require the Employer to be able to demonstrate that he has sufficient funds available to complete the Works.

The Contractor must swallow all of this on the back of paper-thin margins as well as all the normal contracting risks like fuel and materials prices, industrial action, the weather, local content requirements and so on and so on.

Frankly, it’s nuts.

Taken together, these circumstances effectively mean that Contractors are required to provide unsecured credit to the Employer who can then pull the Performance Bond (seize the Contractor’s money) at any time without following a dispute process, and hold the Contractor liable for unlimited costs, now and in the future, for any default that can be ascribed to the Contractor.

It’s a crazy set of risks which no Contractor who wishes to stay in business should blindly agree to. I call it SATAN’S TRIANGLE OF CONTRACTING because so many of them, big and small, have been swallowed up by it, never to be seen again:

So, what can you as a Contractor do to protect yourself?

Here are a few thoughts…

1.????GET A PAYMENT BANK GUARANTEE

Always request a Payment Bank Guarantee from the Employer for the full contract value. This should be a mandatory requirement if any one of the following is true:

• You are required to waive Contractor’s Lien,
• You are required to provide an On-demand Performance Bond,
• The Employer refuses to agree to a payment cycle that keeps you cash-positive at all times,
• If the project is less than 60 days in duration (which is typically the payment cycle from when you have to start shelling out money to suppliers and when your first invoice to the Employer becomes due).

Projects where you are required to waive the Contractor’s Lien AND the Employer requires an On-Demand Performance Bond AND the Employer refuses to agree to keep you cash positive should be considered HIGH RISK. This is even more serious if the project is of a short duration. Any deviation from the requirement for a Payment Bank Guarantee under these circumstances must be approved in writing by the chairperson of your Risk Committee (who would have to be very brave). Alternatively, walk away and live another day!

2.????LIMIT YOUR LIABILITY

• Delay Damages (penalties or liquidated damages) should be minimized as far as possible and capped at (say) 5% of your contract value.
• Total liability (howsoever arising) should be limited to an amount that should never exceed your contract value, less if it's a big contract that could put your existence in jeopardy.
• NEVER accept unlimited liability or undefined consequential damages. Never ever, ever. If you do, then sooner or later your company will be slaughtered. It’s just a question of time.

3.????QUALIFY PERFORMANCE BONDS

Many Employers want an “On Demand” performance bond. This will typically include wording to the effect: ”The Guarantor [Contractor] will pay on demand, without regard to any claim or dispute of any nature which any party may allege and without verifying:

1. The validity of the demand; or
2. Any alleged non-compliance / or default; or
3. the correctness of the amount demanded”

?Effectively wording like this puts the Employer in a position where he can take money from you even if he is contractually in default. For example, if you stop work for his non-payment, you run the real risk that the Employer will successfully demand the bond. So,

• Never provide an On-demand Performance Bond without a Payment Guarantee being provided by the Employer. This is a simple and equitable quid pro quo that you should insist upon.
• Make the pulling of a Performance Bond subject to a dispute process.

4.????MINIMISE PAYMENT RETENTIONS

Most Employers want to hold back a portion of every invoice that you submit. Typically, this is 5%, or even up to 10% of the invoice value. Their rationale is that this retention can be used to ensure that you rectify any defects at the end of the project. Fair enough. But of-course some Employers are never satisfied. They deliberately and unreasonably find every reason not to release the retention because they know that you are very unlikely to sue them for it. They know that they can drag out a payment dispute for years. And so they bet on you preferring to negotiate a "settlement" which involves you settling for a reduced payout and them getting another layer of cash straight to their bottom line. It's a game many clients like to play.

• Always negotiate to reduce the retention amount as much as possible. Introduce a cap. Introduce interim retention releases for phases of work that have been handed over or beneficially occupied by others.
• Negotiate to provide a retention bond in lieu of a cash retention (to help with your cash flow)
• Always negotiate for a Payment Bank Guarantee.

?5.????GET CREDIT INSURANCE

You should develop and implement a credit insurance policy which ALL projects must comply with:

For example, if the project will ever be in a position where you are owed (you fill in the appropriate numbers on the dots):

• > ?$.....??????????????? : ????????????You must get credit insurance on the Employer
• < ?$…. but > $.... :?????????????You must get a credit check on the Employer
• < ?$.... ??????????????????:?????????????No requirement

If no credit check is available or no credit insurance can be procured, then you should insist on upfront payments or a payment guarantee. No exceptions.

REMEMBER: The first rule of business is to stay in business. You’ll never regret gifting bad customers to your competition.

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