New regulations will change construction industry

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These new proposed regulations, governing payments and dispute management under construction works contracts, are expected to profoundly change the way the South African construction industry operates.

The regulations address a crippling constraint to effective infrastructure development by introducing processes to ensure the life blood of the industry, cash flow, actually flows. They legislate a standard set of payment provisions and introduce adjudication as a mandatory first step for resolution of disputes in both the public and private sectors. Home building contracts, as contemplated by the Housing Consumer Protection Act No. 95 of 1998, are however excluded from application of the regulations.

Statutory intervention

Similar payment regulations have been introduced by statutory intervention in the United Kingdom, Singapore, Hong Kong, New Zealand, Australia and most recently Malaysia. This statutory intervention was necessary to overcome problems related to non-payment of contractors and sub-contractors in the building and civil engineering industries. Wherever these regulations have been applied internationally, they have made a fundamental difference by freeing up cash flow.

"Delayed payment has a destructive effect on the sustainable development of the construction industry," says Vaughan Hattingh, director and adjudication practitioner with MDA Consulting. "The proposed regulations prevent withholding of payments without going through a defined procedure. They give contractors a statutory right to suspend works, to charge interest on late payments and they introduce a mandatory form of statutory adjudication to resolve disputes."

Euan Massey, director and adjudication practitioner with MDA Consulting, notes that the practice of withholding payment due to employer budget constraints or linked to performance or until completion of a project and delays in resolving disputes have resulted in contractors financing projects. "The new regulations will compel parties to resolve disputes through adjudication within 28 days. Importantly the 28 day window may only be extended by 14 days in prescribed circumstances. These proposed interventions will have profound consequences for the South African construction industry."

Enforcement is critical

Massey explains that enforcement of the adjudicator's decision is critical to the success of the prompt payment regulations in realising the primary objective of freeing up cash flow. "For several years, South African courts have supported the adjudication procedure by implementing a robust approach in enforcing adjudicators' decisions repeatedly; determining that adjudicators' decisions are enforceable as a matter of contractual obligation and that furnishing notice of dissatisfaction does not prevent enforcement. Parties are required to comply with and promptly implement the adjudicator's decision. In this way, disputes will be dealt with cost effectively and expeditiously," he says.

Hattingh, together with Professor Maritz, head of the department of Construction Economics at the University of Pretoria has designed, developed and currently facilitates the Certificate Programme in Construction Adjudication presented by the Centre for Continuing Education at the University of Pretoria. This certificate programme, now in its third year, will continue to produce skilled qualified adjudicators into the South African construction industry.

The Construction Industry Development Board undertook extensive research to institute these changes and responded to issues such as:

• Chronic problems of delayed payment in the construction industry with many organs of state failing to adhere to the PFMA/MFMA. There are no consequences for failure to comply.
  
• In an extensive survey of almost 900 construction projects, 43% of payments to contractors were made more than 30 days after invoicing.