Several of my Contractor’s Subcontract Agreements include a 5% “discount” for payment on time (in accordance with their Subcontract Agreement payment terms). On several occasions the Contractor has failed to pay Subcontractors on time and therefore the opportunity has been lost. Can I legitimately challenge these increased costs?
I appreciate it’s not relevant, but on all occasions we have paid the Contractor on time.
Presumably you’re using main Option C, D, E and I will answer on this basis.
Firstly you are right to expect the discount to be passed on to the Employer, clause 52.1 refers to “Defined Cost … with deductions for all discounts, rebates …”.
If you want to exclude something from Defined Cost then the cost would have to be classed as Disallowed Cost which is defined at clause 11.2(25). Reading through the bullet points the only one mentioning Subcontractors is the second one “should not have been paid to a Subcontractor …”. However the Contractor was only entitled to the discount if payment was on time, which it wasn’t therefore you can’t argue that it shouldn’t have been paid.
The breach of contract (non payment on time) doesn’t sound like it’s between the Contractor and the Employer, but between the Subcontractors and the Contractor and so it’s up to the Subcontractors to dispute this with the Contractor.
From the Employer’s point of view you need to make sure that amounts due to the Contractor are being assessed correctly. The Contractor may be including forecasts of Defined Cost in the application (see clause 11.2(29) definition of Price for Works Provided to Date) knowing that the Subcontractor’s won’t be paid before the next assessment date and therefore creating a positive cashflow position which is not the intention of the contract.
Check previous assessments to understand if this is happening and if so ensure that these forecast costs are not included in future assessments. The idea of paying on forecast was to improve the Contractor’s cashflow and speed up payments to the supply chain not to slow them down!