In the face of ongoing economic turbulence, the construction industry’s approach to dispute resolution (DR) is more critical than ever. A recent survey by the Construction Industry Collaborative Voice (CICV) put a spotlight on the ongoing payment issues in the Scottish construction industry and the cash flow problems with which contractors continue to grapple to keep their businesses afloat.

In carrying out the survey, the CICV’s aim was to better understand the challenges around payment and cash flow in the industry and to develop a plan to address the problems.

We are all aware of the hurdles faced by contractors: the timing of notices, retention payments, the quality or scope of work, delays, and unfavourable contract terms. Issues that arise from these normal contract-governed activities can accumulate if not dealt with, often creating a domino effect where cash flow problems for one contractor lead to delayed or no payments to subcontractors and suppliers, potentially causing problems including insolvency throughout the supply chain.

Unsurprisingly, the CICV survey confirmed that financial pressures and poor payment practices continue to affect Scottish construction businesses. It is a timely reminder to DR professionals that we can provide plenty of support to our clients to help them minimise contract and supply chain risks by adopting dispute avoidance strategies.

In particular, DR professionals can play a key role in ensuring clients across all jurisdictions: understand their contract obligations; take steps when contractually required to do; engage promptly in dialogue when issues arise; and, when needed, understand how best to access/use available ADR tools. Dealing as we do with multiple DR processes in any one day, it can be easy for us to assume that clients who are experts in their field know how and when to initiate negotiations or when it is appropriate to consider ADR or litigation.

It will be interesting to see how the CICV address challenges caused by poor payment practices to “improve cash flow and foster sustainable practices” in Scotland’s construction sector. In the meantime, there are various strategies through which contracting parties can minimise the risk of cash flow problems and avoid the need for adjudication or more formal DR processes:

• Contract review: ensure that the terms are understood, fair and the obligations can be met from the outset.
• Clear payment terms: negotiate payment terms with clear definitions.
• Effective project management: implement robust project management practices to ensure projects stay on schedule and within budget.
• Invoicing: invoice accurately and regularly in accordance with the contract.
• Substantiation: ensure payment applications include all the information required under the contract.
• Communication: maintain good relationships and open communication with clients and suppliers.
• Variations: manage variations effectively by ensuring they are documented, priced and agreed before the works are carried out.
• Risk management: identify and manage risks including market fluctuations, labour shortages or supply chain disruptions.
• Legal advice: obtain legal advice when drafting contracts to minimise disputes and to protect rights when a dispute occurs.

Experienced DR professionals understand only too well what goes wrong on construction projects, particularly in an economic climate affected by price increases and materials shortages. We can share that experience to good effect before DR instructions land and underscore the importance of well-drafted contracts, proactive cash flow management and effective dispute avoidance strategies like those above – all of which are critical to mitigating payment issues and avoiding the worst-case scenario of insolvency.

This article was first published by Construction Law magazine on February 1, 2024.