Improving Security of Payment Building and Construction Industry

5. Proof of Payment Page 69National Public Works Council IncImproving Security of Payment in the Building and Construction Industry5.8.3 The problem of cash flow being held up because either a dispute exists between thePrincipal and the Head Contractor or the Head Contractor and a SubcontractorAs a result of the contractual framework upon which most building projects are based,ie where payment at one level is dependant on the provision of a statement to theeffect that payment at a lower level has been made, any dispute as to whetherpayment has been made or should be made will have repercussions up and down thecontractual chain.The use of proof of payment approaches should provide for alternative disputeresolution to "quicken up" the resolution of the dispute and accordingly, "quicken up"the flow of monies through the contractual chain. Alternative dispute resolutionwould provide a mechanism for sorting out disputes of this nature. The critical andprobably most fundamental point concerning the implementation of alternativedispute resolution is that the mechanism must settle the dispute as soon as possible,bearing in mind the cashflow problems that would otherwise result. Thus, the quickerthe dispute is identified and referred to alternative dispute resolution, the quicker itwill be resolved and cashflow restored. Essentially, this will be determined by theadministrative efficiency of the framework adopted to conduct the alternative disputeresolution.5.8.4 In the Queensland Build Approach if the Head Contractor advises the Principalthat certain Subcontractors have failed to sign acknowledgments, two possibilitieshave been posed:(i)(ii)the Principal advises the Subcontractor that payments to the HeadContractor are to be made and the Subcontractor is free to take whateveraction he sees fit; orthe Principal withholds monies due to these Subcontractors until thedispute is resolved ie until the Subcontractor signs the acknowledgment".The first possibility would appear to be a laissez-faire approach, allowing thePrincipal to extricate itself from the dispute. Furthermore, the approach seems to bein direct conflict with presumption that no payment is to be made by the Principal tothe Head Contractor until the acknowledgment is received.We do not believe such an approach should be adopted.The second possibility appears to be more in accordance with the presumptionbehind the acknowledgment mechanism. Nonetheless, it would be still necessary tosort out the dispute as soon as possible, bearing in mind the ramifications ofcashflow problems should payment not be made. With the Principal withholding themonies or with the use of an escrow mechanism, where security of the monies ismaintained whilst they are in dispute, monies will not end up in the Subcontractor'shands either at all or within any satisfactory time limits unless the dispute isresolved.