The construction industry can be a minefield for disputes as there are so many things that can go wrong. And if there is a problem with a project, the client is likely to hold the main contractor responsible, regardless of whether it was the fault of a subcontractor.
So what happens in this scenario? Would the subcontractor be expected to compensate the contractor or can they force payment?
If you believe a subcontractor has breached the terms of your agreement, you might want to withhold payment. But unless payment can specifically be withheld under the contract, failing to make payment according to the contract could result in a breach.
In other words, make sure your contract contains clauses for withholding payments; otherwise, you could face legal action.
Is late payment or non-payment a breach of contract?
There are various circumstances in which a contractor may want to pay a subcontractor late or not at all. For example, the end client may be late making payment to the main contractor which has caused cash flow problems.
Unfortunately, this is not justification for withholding payment (unless it has been previously agreed that you will pay when you are paid). If you delay payment to a supplier without prior agreement, a valid reason, or legal justification, then you are in breach of contract as you are not meeting your contractual obligations.
However, in cases where work has not been completed or has not been completed to an acceptable standard, you might have a case for withholding pay or reducing the amount paid to the subcontractor.
This will depend on your contract – does it contain a clause that the subcontractor must remedy defective or incomplete work before payment is made?
Can a contractor withhold payment for defective work?
Can a contractor withhold payment for substandard or faulty work? The answer depends on what’s in the contract. If you try to withhold payment when you have nothing in writing that says you can, your subbies could threaten legal action for unlawful deductions.
However, if your contract contains a clause along the following lines, you’ve covered yourself:
“Should this Agreement be terminated for any reason, the Contractor reserves the right to retain any final payment due to the Subcontractor for a period of 28 days. Both parties agree that this is to be held as a retention and should any defects in the services provided by the Subcontractor arise during this period, then the Subcontractor shall at his own expense return and make good such defects as soon as reasonably practicable after receiving notification from the Contractor.
Should the Subcontractor not comply in making good such defects within a reasonable period of time, the Contractor shall be permitted to deduct any costs incurred in rectifying such defects from any final payment held and due to the Subcontractor.”
Unless payment can specifically be withheld under the contract, failing to make payment according to the contract could result in a breach.
How can you avoid legal action over contract disputes?
Construction contracts get disputed all the time – arguments over workmanship, project costs, or a delay to the schedule are not uncommon. Sometimes those arguments escalate and end up in court but most contractors and subcontractors would prefer to avoid that if possible.
Disputes over commercial debts and payment terms are also common. If you don’t pay your subbies or suppliers on time for completed work, you could find yourself in the small claims court for breach of contract. You may also be liable for interest on the original money owed.
Needless to say, most people would rather settle a dispute outside of the courts rather than incur the cost of a solicitor. So how do you avoid getting taken to court over a breach of contract or withheld payments?
Communicate effectively with subcontractors
The best way to avoid problems is to deal with small issues before they turn into big ones. You can do that by communicating effectively with your subcontractors.
If you feel they have breached their contract with you or failed to meet their contractual obligations, talk to them about it. They might be happy to rectify the problem without you having to withhold payments or end your arrangement with them. After all, it’s in their interest to resolve the problem.
And if a specific situation arises that means you can’t meet the payment terms outlined in the original contract, have a conversation with your subcontractors. There may be certain circumstances in which your subbies are prepared to amend their payment terms slightly.
It’s better to come to a new arrangement than to breach your contract.
Ensure your contracts are watertight
It’s worth noting that a construction contract doesn’t have to be written – it can be verbal. However, trying to prove the terms of a verbal agreement can be tough, as if both parties claim different things. When you have a written contract that clearly documents your terms, it’s easier to prove a breach of contract if one occurs. Plus, it ensures all parties are clear on their obligations.
Make sure your contract contains clauses that protect you. Make appropriate provisions for withholding payments in circumstances where it might be necessary (such as failure to complete a project or deliver services to the required standard). Contractors shouldn’t have to pay for a subcontractor’s substandard work.
If you have withheld a payment in accordance with your contract terms, then your subcontractors can’t dispute it.
Protect your business with HardHats
HardHats specialises in creating watertight contractor-to-subcontractor contracts for the construction industry.
All our contractor-to-subcontractor contracts are underwritten by an international insurance company called Markel. They specialise in ‘hard-to-place’ risks that the standard insurers generally avoid and have a history of successful self-employment cases against HMRC.
This means that should HMRC ever claim that your subcontractors should be employees, we’ll handle the enquiry on your behalf.
And we’ll even take on the responsibility of getting your subcontractor contracts signed via email or text using our online system.
Book a call to get started.