John Kolesidis
REUTERS | John Kolesidis

Dangers of direct payments

You have let a construction contract. All seems to be going well, albeit progress is a bit slow.  A couple of subcontractors then come to see you: they say that the main contractor has not paid them for a while and they are thinking of suspending or leaving the site.

The subcontractors will stay if you pay them directly including the arrears.  You have already paid the main contractor for the work they have done.  You look at your contract and the law and you find that if you pay the subcontractors you won’t be able to deduct that money from the main contractor.  Don’t you wish you had a direct payment clause?

A direct payment clause says that if you have paid the main contractor for work done by subcontractors and your money is not passed on to them, you can pay the subcontractor directly and deduct the payment from any other monies due to the main contractor.  There is an exception where the main contractor has a legitimate right to withhold the money.

This is very controversial:

  • You can get caught up in all sorts of insolvency issues which may scupper the whole arrangement.
  • If what you are doing becomes widely known the main contractor’s commercial standing may fall to the point where no subcontractor will take on any new work and the main contractor (and your project) may collapse.
  • The very existence of a direct payment clause will materially change the relationship between the main contractor and the subcontractors. This is to say nothing of the statement you are making to the main contractor when you explain why you want the clause. They say that if you have so little confidence you might be better using construction management, where the main contractor is in effect a project manager and you let all the trade contracts directly.

The fact is that employers are using these clauses and (after being assured that these are regarded as a nuclear weapon rather than a first option) some main contractors are agreeing to them.

What’s your experience? Have you been caught out by direct payments, or have you used them to great effect?

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