Construction industry cashflow is ‘snagged’ up in fund retention
Award-winning business recovery specialists Gibson Hewitt are warning members of the construction industry to keep on top of snagging lists to prevent business distress.
Snagging lists have been an issue for the sector for a long time and can create real cash flow issues within a business when payment for a project is delayed because of them, which can ultimately lead to a business’ failure as they usually represent the profitability of the job.
Also known as Schedules of Outstanding Works, they are a regular feature of most modern builds and while many projects reach practical completion i.e. the level at which the works are reasonably ready for their intended use, there are often “snagging” items.
Under the terms of the Joint Contracts Tribunal (JCT) these items should be dealt with during a rectification period and a build should technically not reach practical completion without them being resolved.
This creates a period of liability, which some have compared to an unofficial guarantee period and it is usually the contractors’ obligation to remedy defects appearing within this time –at their own expense.
During this time the business behind the project may impose a retention of funds’ until work is completed and formally signed off, which often leaves builders struggling to get paid once a project is complete.
This can be further complicated by other specialist snagging contractors being brought in by developers to complete unfinished works, which often leaves many businesses reliant on another company’s schedule of work for final payment.
Lynn Gibson, Director at Gibson Hewitt, said: “Snagging lists have become the bane of many a construction company, especially in cases where the rest of the work is completed and only a few niggly items hold up final payment.
“It is fairly common practice these days for architects and developers to hold funds until a project is fully completed and JCT contracts make it fairly clear that these should be dealt with under a rectification period, which often specifies that this work is completed free of charge.
“This often leaves businesses in a very difficult position and can constrict a company’s cashflow significantly, which may delay work on future projects.”
She said she knew of several examples where a building firm was left for months without full payment due to ongoing snagging lists, which were often left to the discretion of developers.
“Construction companies must keep on top of their snagging lists and act quickly where issues are identified or else they may face the prospect of payments being held up, which may ultimately place their business in distress,” added Lynn.