By Dr Samer Skaik
Cash flow is the lifeblood of the construction industry, and timely payments are essential for maintaining a healthy financial ecosystem. In the UAE, delayed or non-payment by employers has become a significant issue, leading to severe cash flow problems for contractors and their supply chains. These disruptions not only impact the construction companies but also have broader implications for the UAE’s economy, where construction contributes significantly to the GDP.
Traditionally, contractors claim payments upon completing specific project milestones, with payments made on a monthly basis or as specified in the contract. However, various factors can jeopardize this smooth cash flow, causing delays that ripple through the entire supply chain. Delayed payments can lead to project delays, disputes, and reduced profitability, and in extreme cases, even push contractors and subcontractors toward insolvency.
Causes and Impacts of Payment Delays
Several factors contribute to payment delays in the construction industry. Some employers intentionally postpone payments to finance other projects, exacerbating the cash flow issues faced by contractors. Given the small profit margins in construction, any delay in payments can lead to significant financial strain, sometimes even resulting in bankruptcy.
Empirical research based on extensive literature review highlights these causes and explores their impacts in the UAE construction industry. The research identifies the most significant factors behind payment delays and assesses the effectiveness of existing safeguard measures designed to address these challenges.
Legal Framework and Contractual Provisions
In the UAE, the legal framework offers some protection to contractors regarding late payments. Articles from the UAE Civil Code, such as Article 247, allow contractors to withhold performance if the employer fails to fulfill their payment obligations. Additionally, Article 879 permits contractors to retain property until payment is made, provided the work benefits the property. However, these provisions lack clarity, especially regarding payment mechanisms and timelines, leading to potential risks for contractors.
FIDIC (International Federation of Consulting Engineers) contracts, commonly used in the UAE, provide detailed payment provisions that are generally fair to both parties. However, the “pay when paid” clause, particularly in FIDIC subcontract 1999, can be problematic, linking subcontractor payments to the employer’s payment to the main contractor. FIDIC also outlines rights for contractors in the event of payment default, including slowing down or suspending work, terminating the contract, and claiming interest on overdue amounts. Nevertheless, legal advice is recommended to navigate these options effectively, particularly for those inexperienced in contractual matters.
Proposed Safeguards and Recommendations
In addition to the existing measures, industry experts have proposed several additional safeguards to improve payment practices in the UAE:
- Ensure timely agreement and communication of variations between the Engineer and Employer.
- Assign dedicated staff to follow up on and chase due payments.
- Adopt a collaborative approach that meets the employer’s needs and ensures work is delivered as planned.
- Reduce project resources and expenses where possible.
- Implement faster, cost-effective dispute resolution mechanisms outside of litigation.
- Secure payments through third-party entities like banks or government agencies.
- Utilize escrow accounts for payment security.
- Use post-dated cheques or letters of credit to ensure payments align with project progress.
- Consider allowing contractors to take a stake in the development project, with the option to recover shares and profits once the project is sold.
Conclusion and Further Research
The study underscores the critical importance of timely payments for the prosperity of the UAE construction industry and the broader economy. It highlights the need for legislative reforms to provide greater protection for contractors and subcontractors, particularly by prohibiting problematic contractual provisions like “pay when paid” clauses.
To address these challenges, the introduction of stringent legislation similar to the “Security of Payment” regimes in countries like the UK, Australia, and Singapore is recommended. These regimes include rapid statutory adjudication processes to resolve payment disputes effectively. Further empirical research is necessary to consult industry stakeholders on the need for and potential effectiveness of such a scheme in the UAE.
By addressing payment delays and improving cash flow, the UAE construction industry can continue to thrive, contributing positively to the nation’s economic growth.