The proposed amendments to the Regulations of the Construction Industry Development Board Act should have significant consequences for the construction sector.

One of the stated aims of the regulations is to deal with late payment by employers resulting in the potential for contractors and subcontractors to "fund" the employer's contruction project.

Main contractors usually insert a "pay when paid" clause in their subcontracts, which in essence makes them liable to pay a subcontractor only when they have been paid by the employer. The effect of this is that ultimately subcontractors bear a large part of the payment risk.

The proposed amendments prohibit the "pay when paid" provisions, and introduce an adjudication mechanism for the speedy resolution of all disputed.

The regulations record that:

• A contract may not contain any provision making payment to a contractor conditional upon payment from a third party (except where the payer is in business rescue or insolvent).
• A contractor is entitled to progress payments, and if the contract does not provide for ordinary progress payments, the contractor is entitled to submit monthly invoices based on the value of work comleted.
• Payment of invoices are due and payable no more than 30 days after submission, and if not paid will attract interest at the reserve bank repo rate plus 6%.
• An employer is not entitled to withhold payment unless it has been given a notice to withhold within five days of receipt of the invoice. The notice is required to set out detailed reasons for the dispute and the undisputed portion must be paid/
• A contractor is entitled to suspend the work on seven days' notice if an amount is unpaid and no notice of withhold has been deliverd.

These proposed amendments alter the common law position and:

• Exclude home building contracts from the prompt payment provisions; also relate to work performed by professionals in the built environment and those who supply materials and components as part of any building structure. 

Observations

The introduction of a compulsory adjudication process is welcome for small scale construction disputes, but may not be appropriate for large complex or technical disputes.

Main contractors would be obliged to pay the subcontractors, whether or not they have received payment from the employer.. Consequently it will be important for main contractors to ensure they have adequate security for payment from their employers.

Where the government is the employer, main contractors may have to consider making security for paymenyt oart of the tender offer, or alternatively consider payment risk far more seriously in the computation of their tender.

We may also see the emergence of credit guarantee-type cover becoming more prevalent in the sector.