Cashflow and the Contract. Dominic Mondino

Cashflow is essential for business.

Everyone will be well familiar with the well-worn trope, “cashflow is the lifeblood of the industry”. As well-known American businessman, Chris Chocola once said, “balance sheets and income statements are fiction, cashflow is a reality”.

So, what can we do to improve and maintain cashflow, ensuring suppliers and staff can be paid and the business remains solvent?

Some Key Points to Remember

Firstly, and fundamentally, read and understand your contract.  Remember that with standard form of contracts, amendments are very common and if not considered correctly, are likely to trip you up.  Understand your contract, make notes, and schedule out any pertinent clauses.  Particularly, clauses relating to dates, durations, timeframes for submission of notices and payments.  Timeframes are critical no matter what contract you are working under or the location of your project.

It is important for you to understand the type of contract you are signing up to. Check the contents, the supporting appendices, the extent of amendments to the contract and the impact these may have on cashflow.

Typical Contract Risks and Elements to Consider

Looking at standard forms of contracts, they will typically advise of similar obligations. These will include:

  • Key personnel and their responsibilities.
  • A requirement to state a starting date, a completion date, access dates and any sectional completion.
  • Provisions for the price to be payable in the form of a BQ or Activity Schedule.
  • A variation mechanism, and timeframe for notification and response.
  • Options for employer design or contractor design responsibility.
  • A mechanism for making the contractor responsible to provide quality and workmanship in accordance with the contract.
  • A process for accepting any contractor’s defects.
  • Valuation mechanisms for payment and timeframe for notification and response.
  • Various options to suit the size, complexity, type of work.
  • A process for dealing with defects and resolution of disputes.

All these elements need understanding. If understood correctly, this can assist with maintaining effective cashflow. If you miss or misunderstand any element, payments may be delayed and costs incurred.

With regard to payment periods and notices timeframes – be particularly vigilant.

What you have agreed on one contract with a particular employer, although it may be the same standard form of contract, may have been subject to amendments. Therefore, be mindful of this, allow time for review and consideration, and to become familiar with the amendments and their impact, before they are agreed.

Change and Variation in Contracts

With regard to Variation Notification Timelines on projects, different contracts take different approaches. Some examples of that are highlighted by the following example clauses (this is by no means a comprehensive list):

  • In the JCT form of contract, most popular in the UK:
  • 3.5 – deals with changes by the employer.
  • 3.6 – the time for confirmation of change by the contractor.
  • 3.7 – the time for confirmation of verbal changes.
  • 3.9 – the instructions that require formal agreement.
  • 5.2 – valuation of change and the rules around other forms of change.

And for the NEC contract:

  • 6 – deals with variations (or ‘compensation events’).
  • 61.1 – compensation events from the project manager.
  • 61.2 – the requirement to issue a quotation.
  • 61.3 – requirements for compensation events from the contractor.

And for FIDIC (based on the 2017 Yellow Book):

  • 3.3 deals with instructions from the engineer
  • 13.1 deals with the right of the Engineer to vary the contract.
  • 13.4 deals with payment and subsequent clauses deal with different elements of cost on a project.
  • 13.7 tackles the issue of costs arising from changes in the law of a country.
  • 20.1 addresses the requirement to give notice of delay or additional costs.

Concluding Points

In conclusion, there are a few key points to take away:

Where variations arise, try to agree these promptly. Remember vesting: off-site storage of materials may qualify for claims in the valuation. Check the timing of deliveries in terms of notices and notifications / responses to any changes. Liaise closely with your project teams on valuation cut off dates in order to avoid disappointment.

Depending upon your local legislation, you may need to look to the local law and how it interacts with the contract. If something is not covered by your contract, local law may take precedence. Even where something is covered by the contract, local law may overrule it. This is particularly important in the Gulf region as a result of the civil code systems of law.

Effective communication and maintaining good relationships is key.  Ensuring valuations are accurate is a result of good communication with your suppliers and with the person paying the bills. Good communication may smooth the way for prompt payment.

Remember to check any contract amendments.  Amendments may shift risk from places it may be expected, to places it may both be unexpected and unwanted. They can also conflict with existing standard clauses, so be sure to watch out for those and if unsure, seek advice – our team of consultants will be happy to chat.

Dominic Mondino, based on a talk delivered February 2021