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?
5 thoughts on “Dangers of direct payments”
We have published Practice note, Direct payment to sub-contractors on a construction project: risks and alternatives.
Direct payment clauses are very important for employers to get their money’s worth. If the workers are not being paid, then they cannot do quality work.
Direct payments to subcontractors clause may be used by Employer’s staff. Payment directly to SCs will lead to several corrupt practices. It is my experience. Local contractors will never allow the main contractor to work. Main contractor will get the contract, by paying security deposit; and sub contractor’s will enjoy the works, without any risk.
Further when Employers encourage direct payment by billing in their names, it will become ‘contracts in contract’ and ‘contracts without a contract’.
it is nothing but taking away of the work from main contractor.
When taxes also booked to the SCs account directly, the same will become a big contractual dispute.
“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.”
I think this is about when you already take action as the main contractor already paid no money to subcontractors.
But by adding the article, it’s to make the main contractor aware of the case the remaining amount may be deducted if they dont pay the subcontractors. Thus, it’s mainly TO PREVENT the case to happen.
and so, in the most prevailing case, there would be highly unlikely for us to witness the collapse, or a change of the relationship between the main contractor and the subcontractors.
But in the worst case, of course, I agree with your comment on the risk.
Let me know what you think.
Direct Payments to SC’s must be applied only if and only if there is adequate budget balance with the Main Contractor (Work Done against Invoice Value), or some sort of Direct Payment without Work Done. Although tricky, this must be in agreement with the Main Contractor and presented with the Direct Payment Recovery Plan at a rate safe for the Client to execute. They may request further Bank Guarantees in order to cover the risk should the Contractor become insolvent.