Analysis: Late payments
Issues over late payments have touched all parts of the industry
Issues over late or withheld payments have touched all parts of the construction industry in recent years. Semra Jalil speaks to those affected
Dubai, the mega-city with the glittering skyscraper-laden landscape dotting the once desert-ridden coastline, should be a builder’s dream.
It has accomplished groundbreaking engineering and architectural feats and offers a myriad of opportunities for the starry-eyed developer, the eager contractor and the enterprising supplier.
Together, they set out to assemble – working in sync like Lego in a tower. They are mutually dependent, which can sometimes make for a tricky relationship – particularly in the GCC.
Grievances are often aired between parties in the supply chain, with the most common one being payment. These grievances seem to be aired more loudly at the lower order of the supply chain.
The hierarchy of the order appears to be indirectly proportional to the level of risk involved when it comes to economic frustration. In other words, the risk of a defaulted payment seems to increase as you progress down the chain.
Afridi & Angell, a law firm managing ‘countless’ non-payment cases in the sector at any given time, cite sub-contractors and suppliers as particularly vulnerable. This susceptibility paradoxically relates to their business acumen, suggests the firm’s partner, Shahram Safai.
“For instance, I am a sub-contractor/supplier and I do tiles or ready-mix concrete. The contractor hasn’t paid me. I’m not going to sue him because I am aware that he is doing two more towers and I want to do the tiles in those towers. He hasn’t put those up for tender yet,” explains Safai.
Developers are seen by those in the lower order of the chain as the most secure by virtue of their embryonic status in projects.
Once contractor who spoke to Construction Week, but did not wish to be named, said: “For a developer, the sooner he makes a building, the sooner he will let it out for rent and the sooner he will make money off it. Any delays for him will add to his own disadvantage.”
However, the causes of delayed projects – and the reasons for delaying payments – can be murky, and the knock-on effect can trigger off a chain reaction, causing cashflow problems among all project partners.
In terms of the law, the rules of the construction trade are set out clearly within each GCC territory, and fall within the confines of typical contract laws.
“The laws that the (UAE) government has made declare that you are free to enter into contracts, and that your contracts are valid,” Safai said.
As per the law, the UAE government guides its citizens to ‘pay when due.’ However, the nature of the staged payment processes typically used in construction contracts can lead to difficulties.
For instance, quality control, an imperative in structure and design, can be used as a reason for withholding payment.
The contractor who spoke anonymously said: “A developer in Abu Dhabi I worked with hires a contractor on a payment structure that coincides with the progress of the work done. Work starts and then about 30% into the project the developer decides he doesn’t like the progress, cancels the contract and saves 20-30%.
“Then he goes and hires another contractor, resuming the work and again decides to cancel the contract citing quality control reasons, terminates the contract and saves another 30%.
“In total, he has saved about 60% worth of unpaid work.”
Safai said: “There is a dispute mechanism within the contract with respect to payments. For instance, a contractor sends you an invoice for AED200,000 ($55,450). I see the invoice and realise that you need to be paid, but do not agree that you have done the work.
“An engineer then inspects the site to decide on this and propose a settlement based on his findings. However, that is not the end of it. The parties, if not satisfied, take it into arbitration.”
Construction often has to continue while the case makes its way to arbitration – with or without the contractor in dispute. However, it is unfair to pin payment problems solely at the door of developers.
In recent years, they themselves have had issues relating to payment delays from clients and end-users – or from people who put down deposits to buy properties, but cannot afford to see them through. It is a problem that impacts all parts of the chain.
Gulf Leisure owner Calvin Platfoot holds out four defaulted cheques from a single project when asked by CW how this issue has affected his firm, which supplies BBQ grills and related items.
“It took me six months to claim AED 60,000 ($16,335) from a contract to supply grills to a local sub-contractor.
“Sometimes, the signature would be incorrect; sometimes it would be something else. If you can’t pay your men wages then you should not be running a business.”
The contractor who spoke anonymously said that it stopped work on a major shopping centre in the region because the main contractor claimed they couldn’t gain client authorisation for payments.
“Halfway through the project and with only 10% payment received contrary to the agreed 40%, we stopped work. The developer’s management intervened, citing a cashflow issue. Work resumed and completed. However, I am yet to receive a full payment. It’s been one and-a-half years.”
Even those that take claims to court face the same legal obstacles in the GCC as in other parts of the world, with busy courts sometimes struggling to cope with the volume of claims.
Main contractors higher up the construction chain often have their hands forced as their payments are withheld.
Some, like Al Shafar General Contracting CEO Bishoy Azmy, advise contractors to conduct their own risk management and assess potential clients and tenders before taking on work.
Speaking at Construction Week’s Leaders in Construction UAE event in September, he said: “During the tender stage, the level of risk a developer wants a contractor to bear is transparent.
“Some developers are more forthright in offloading risk to the contractor. It is up to the contractor to select what he is comfortable with.”
His firm may be an established player in the UAE with a strong trackrecord, but even it has faced payment issues.
“We have worked on projects where we were not paid for over a year,” said Azmy.
“We were in discussions with the developer. As long as there is honest dialogue on a payment issue between both parties a conclusion can be reached.”
He said ASGC has dealt with delays either by slowing down on a project until payment issues have been resolved.
“But we have never been in a position where we have been at loggerheads with a developer. That is something we are proud of.”
An escrow account can provide off-plan developers and contractors a cushion against payment defaults. However, in an escrow agreement in the UAE, the owner or developer can take out at any point in time, an amount equivalent to the value of the land.
Informal statistics suggest only 5% of properties are being escrowed in the UAE. In KSA, however, the developer and the contractor cannot exercise any authority over the funds in the escrow account before completion of a project , or as otherwise decided.
A defense liability period (DLP) that dictates a 5% amount to be retained by the developer after the completion of a project, is seldom recovered.
Conditions for the immediate future of the region’s construction and property markets look promising. But in the UAE in particular, there is still a hangover of stalled projects and withheld payments, which means the subject is still at the forefront of the industry.
“From my perspective it’s like having one foot in the recession and foot in a boom,” says Safai. “That means I get dragged back by some recession-related issues and pulled forward by some boom recoveries,” he said.
There are contracting companies that have suffered and recovered.
Summing up the current market, Azmy said: “There was a crash and subsequent liquidity problems, most of the outstanding credit recovered later.
“What we have learnt from the recession is to ensure project feasibility, working with a developer who has a certain background, reputation and a methodology of working that suits us in what we think is sufficient risk.”