IN THE KNOW —
Why you and your customer’s bank don’t always see eye to eye If you’re a builder, then the basic business model is pretty simple. You add up the cost of providing the building materials the project requires, the cost of hiring the specialist subtrades who do the work you’re not qualified to do, the cost of providing your and your employees’ labour, and the costs of simply being in business, which are known as your overheads. Then whatever that total comes to, you charge your customer more than that, and the difference is your profit – what you feed your family with.
That’s all going to work out fine if your customer pays you. But that doesn’t always happen. Building projects cost a lot of money and take a long time. Homeowners often get caught by surprise when the project ends up costing way more than they thought, or they form the impression that the builder is ripping them off. Developers often overestimate the volume of sales they will be able to achieve off the plans and underestimate the project costs, or they finance their lavish lifestyles by not paying their creditors. Either way, those factors frequently result in the client not paying one or more of the builder’s invoices. Which means the builder can no longer pay his suppliers and subcontractors, let alone put food on the table. To counter those risks there are a number of things the builder can do. He can refuse to do building work on credit and insist on being paid in advance. After all, there is no logical reason why the builder should provide the building work first and hope to
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be paid later. It is just as logical for the property owner to make a payment first and hope that the corresponding building work is done later. If the builder can’t negotiate that kind of arrangement, then at least he can protect himself in other ways. In his building contract he can reserve the right to suspend work if he isn’t paid, and he can get a second mortgage over the property in case the customer goes bust or is just blatantly dishonest. And he can use payment claims under the Construction Contracts Act to force customers to either pay up or explain in rational terms why they are not going to. But just as importantly, the builder wants disputes resolved rapidly and fairly so that property owners don’t win them by unfair advantage – by taking the benefit of the building work and then simply withholding payment for it. For that reason, the builder wants the disputed funds paid into trust so that both parties are deprived on it and both have an equal
