Review of methods for mitigating payment risks in construction: the case of New Zealand
Traditional payment methods in the construction industry create risk of payment delays and losses. The issue has been persistent since the early 1960’s, with constructions parties suffering dire consequences. Many legislative & contractual, and administrative solutions are in use but these measures have not adequately addressed the payment losses experienced by lower tier parties due to the insolvency of upper tiers, especially losses to contractors due to client insolvency. This paper reviews some of the solutions that could be used to protect against client insolvency.
It is revealed that legal provisions in security of payment Acts cater for losses due to deferred payments but not for insolvency payment losses. Acts provide adjudication for non-payment which is not effective in cases of insolvency when a company goes into liquidation because claimants may not be able to recover monies due. Some of the Acts have abolished contingent payment provisions’ while some have counter clauses with similar objectives. However as a contractual solution, the conditions of contract in New Zealand (NZS 3910:2003) enables contractors to obtain payment bonds from clients as security. If a client fails to provide the bond, contractors could terminate the contract at inception.
Other security mechanisms such as Buildsafe security scheme and direct payments are in practice; while potential solutions like bonds and guarantees, payment default or insolvency insurance; registration and prequalification of upper tiers; are in consideration. Further study is needed to assess these solutions in terms of their costs and benefits as viable solution(s) to payment losses.