The truth about trust in supply chains

With New Zealand’s Construction Contracts Act now 20 years old, Tony Simonsen has a reminder of the ongoing issues within the sector around payments and trust.

Working with construction lawyers such as Nick Gillies, Partner at Hesketh Henry, it becomes very clear that despite the fact we’ve hit a milestone with the Construction Contracts Act, there’s still a surprising lack of understanding about what the Act requires, as well as the tangible benefits and potential detriment of it.

Ultimately, the Act is designed to benefit the entire industry right through the supply chain and support better cashflow. It aims to stop the traditional habit of withholding payment without a valid reason, and encourage better, more transparent practices between parties.

It does this in a few key methods: by protecting retention money held under contracts, creating a fair and balanced payment regime process, providing adjudication for faster resolution of disputes, and providing enforcement mechanisms to recover debts due.

Nick shares how the Act works on the ground and the phenomenon known as ‘sudden death’.

“How this works is that with each payment round, which is usually monthly, each party essentially has one opportunity to get it right,” he says. “So, if you’re the payee, say a subcontractor looking to be paid from your head contractor, you have one opportunity that month to ensure you get a valid payment claim in on time.

“This sets out what you think that you’re entitled to be paid for that month. If you don’t meet the specific requirements set out in the Act for having a valid payment claim, then you can’t get the safeguards of the Act and under your contract you may not be entitled to be paid anything for that month. So, it’s sudden death for the payee in that respect.

“For the payer, when you receive a payment claim you’re required to issue a valid payment schedule in response. If you fail to do that, you’re unable to make any adjustments to the claimed amount and are required legally to pay the full amount that’s being claimed, even if you don’t agree with the amount.  You have to pay the sum now and argue the point later.”

Nick notes that in his work he sees non-compliance on a regular basis.

“I appreciate that we often only see the worst of it, but the regularity with which we see non-compliance with the payment regime in this industry is surprising to me. And it’s not specific to any particular type of business – we see tier one contractors just as much as smaller SMEs. A lot of this seems to come down to inconsistent practices within organisations, and even month to month by the same individual processing payment claims and schedules.”

The role of Form 1 and the downside to manual processes

Recognising the number of inconsistencies and lack of compliance, in 2015 the New Zealand Government made it compulsory to include what’s known as Form 1 with every payment claim, instead of only requiring this for residential construction contracts.

The simple, pro forma explanatory note is a two-page document that includes the processes for responding to the payment claim, and the consequences of not responding to or paying a claimed or scheduled amount. It’s geared towards ensuring greater transparency and includes the most basic requirements that are commonly missing or deficient in payment claims. Without this form, the submitter can’t enforce their claimed amount.

As Nick points out, it’s common for parties to have forgotten this form or have not even realised they needed to include it. Such a recurring and easily fixable issue brings us to the downside of manual processes, and the role of software and technology.

“The preparation of payment claims, and the creation of payment schedules and processes is typically very manual, and each organisation will have its own different documentation and way of doing it,” explains Nick. “For instance, they will have their own spreadsheet that they created, possibly some years ago, which they keep reusing as a base.

“Each organisation, and sometimes each individual, will have their own base document. Because of this, there is often a huge amount of inconsistency between organisations and within organisations, as well as individuals. What often trips people up is not having a clear policy and a consistent, methodical, systemised approach.”

The lack of understanding about technology available, and resistance to change, means that organisations are continuing to use out-of-date methods such as Excel or Word docs, and haven’t moved far from carbon copies. This leaves them open to errors and means they’re unable to take advantage of the Construction Contracts Act and ensure they’re getting paid correctly. Using software that requires even basic information such as dates, and flags incomplete information, is already a significant step forward in generating better compliance and trust between stakeholders.

“The main benefit that I can see from technological improvements and using digital tools is the structure and systematisation it brings, where you must input the necessary detail,” says Nick. “This should save a lot of time, a lot of grief, and improve efficiency.

“When it comes to productivity, New Zealand is notoriously poor. And a good example of this is the time and energy that goes into creating manual payment claims and schedules, some of which can change month to month. So that’s where I see the main gains from technology.”

Construction organisations must realise that software investments have the potential to not only enhance operations but to ease simple processes where an error can be costly and detrimental to projects and stakeholder relationships.

To step away from manual methods may seem daunting, but in fact is necessary if an organisation is to thrive during uncertain times.

Nick Gillies, a Partner at Hesketh Henry law firm in New Zealand, is an independent legal expert and has not been retained by Payapps to promote their product in any way.

Tony Simonsen (pictured below) is COO at Payapps and responsible for Payapps in both New Zealand and Australia. Payapps is an Australian-based cloud-based construction software company for managing applications for payment up and down the supply chain.