Barely a week passes without another significant construction insolvency. With the majority of construction contracts allocating inflationary risks to the main contractor, the ever-increasing number of business failures is of no surprise. Unfairly valued sub-contractor valuations are becoming more common.
Subcontractor interim valuations under pressure
Where the main contractor is saddled with uneconomic projects, the project surveyors will look to reduce interim valuations. It is the sub-contractor cashflows that comes under pressure.
It was therefore of no surprise to read last week in the Construction Enquirer that sub-contractors were being hammered by reduced valuations:
The Construction Enquirer said:
“Payment disputes are intensifying on site as main contractors look to hold on to as much cash as possible in the current economic climate”.
The Construction Enquirer went onto quote the Construction Leadership Council who said :
“We are also aware that, with the availability and cost of financing options increasingly limited, commercial behaviour is likely to harden putting pressure on lower tiers and SME companies reducing cash-flow capacity and making liquidity a greater challenge”.
UK Hiring falters
Although the UK may not be, as of writing, in a technical recession, in early September 2023 Reuter reported that the UK was hiring at the slowest pace since before the pandemic https://www.reuters.com/world/uk/uk-employers-curb-hiring-fastest-rate-over-3-years-rec-2023-09-07/.
Our experience of unfair interim valuations
MJD Solicitors are seeing an increased number of enquiries from sub-contractors concerned about late payment of applications and interim valuations being unfairly reduced.
The interim valuation may be reduced by a disagreements on the amount of work undertaken; disputes on the value of such work; allegations of defective workmanship; claims for delay; speculative contra-charges; withholding of retention; deliberate valuation “mistakes”; a failure to certify amounts due.
The sub-contractor’s application for loss and expense will invariably be under-valued as the main contractor seeks to argue no loss and expense is due.
The ability of the site surveyor to reduce the sub-contractors’ application has no limits.
What should the sub-contractor do to recover interim valuations?
We recently gave some tips on how to recover debts quickly and cheaply https://mjdsolicitors.co.uk/recover-debts-quickly-cheaply/.
It is imperative that those who believe they are owed money on construction contracts take advice from a solicitor who understands construction contracts and construction law. There are many traps for the unwary.
The question of whether the correct forum is adjudication, arbitration or litigation (and indeed whether the delays in the court system can be navigated) https://mjdsolicitors.co.uk/how-to-resolve-construction-disputes-construction-adjudication-or-litigation/ , can only be considered by reviewing the construction contract.
Avoid expensive mistakes of litigating where there is a mandatory adjudication or arbitration clause.
If a decision is made to Adjudicate then it needs to be appreciated costs will not be recoverable – https://mjdsolicitors.co.uk/specialists-in-construction-adjudication/.
If a decision is made to use debt collection agents, it is vital to consider the extent to which the recovery agent’s costs will be paid, if at all, from the paying party – https://mjdsolicitors.co.uk/debt-recovery-and-reasonable-costs/.
What actually is due under the Interim Valuation?
What are the entitlements under the construction contract? If the valuation of the sub-contactor’s application is being challenged, does the evidence exist to challenge the main-contractor’s valuation? If there is no evidence to demonstrate that the interim valuation of the works is wrong, then the chances of a challenge succeeding are minimal.
Is the application for payment made valid? Is the certificate rendered valid? Will the sub-contractor’s claim be met with a defence that nothing is due?
If the sub-contractor is claiming extra money, possibly loss & expense, have the conditions precedent to loss & expense claims under the Construction Contract been satisfied – see our blog post on this https://mjdsolicitors.co.uk/conditions-precedent-to-loss-expense-claims/.
What about Suspension of Works?
We are frequently asked about walking off -site and suspension of works. There is no common law right to suspend works. Wrongly suspending works can be a fundamental breach of contract.
If the sub-contractor commits a repudiation of the contract, then there is a high chance that repudiation will be accepted by the main contractor. In these circumstances the sub-contractor may have forfeited its entitlements to future payments until the main contract works are completed. Before suspending works it is necessary to consider the contractual and statutory entitlements to suspend works. Expert legal advice from a construction lawyer should be taken.
To read our blog post on suspension of works for non-payment read here.
Conclusion
The issue of sub-contractor valuations and sub-contractor cash flow under pressure is particularly relevant as we approach the end of 2023. Further insolvencies of construction contractors are inevitable as the inflationary pressures of the last 18 months work their way through the economic cycle.
To discuss unreasonable or disputed interim valuations, contact with Matthew Dillon of MJD Solicitors on 01277 280760.
Matthew Dillon LLB, Solicitor, MCIArb
MJD Solicitors
25 September 2023
This article is for information purposes, does not constitute legal advice and should not be relied upon. For terms and conditions of this article please read here
