1. On most major projects there is often a spectrum of cash flows. Usually, Head Contractors will seek to remain cash flow positive, but this can quickly change. Subcontractors may try their darndest but in our experience often have difficulty, particularly where a Head Contractor finds itself in a distressed position. During delivery, poor contract administration can quickly push a Head Contractor into that realm. This rarely ends well and usually presses parties into commercial positions which they’d rather avoid (read: claims and games).

2. Commonly in the infrastructure market, Head Contractors will be entitled to submit payment claims under the Contract (as distinct from under security of payment legislation), when a Payment Milestone – being a discrete scope of work – is finalised. Usually there is a process to recognition by the Principal that the Payment Milestone has in fact been achieved, with the submission of a claim for “Milestone Completion” or the like, the provision of all supporting quality documents, then followed by the Principal’s either acceptance and certification of Milestone Completion, or rejection of Milestone Completion with reasons. Sometimes there will be a requirement that the Head Contractor gives advance notice of when it expects to achieve Milestone Completion. Once Milestone Completion has been certified for a particular Milestone, the Head Contractor can then submit a Progress Claim (generally on a specific day in the month), after which the Principal must issue a Payment Schedule, identifying the amount which the Principal proposes to pay the Head Contractor. Given the Milestone Completion has already been certified by this time, usually the Principal will be scheduling the amount of that Milestone as due for payment. On the back of this Payment Schedule, the Head Contractor submits its invoice. All of these interfaces can add a significant amount of time between when the Head Contractor achieves Milestone Completion and when the Head Contractor actually gets paid for that Milestone.

3. This all takes time, and that assumes the process runs smoothly; wait till it doesn’t. Wait till the Principal asserts that some minor QA documents have been omitted. Head Contractors can quickly find themselves in a position where the substantive construction works have progressed considerably faster relative to the Head Contractor’s cash flow position. That is, the Head Contractor can find itself in negative cash flow due to contract administration delays associated with getting Milestone Completions claimed, certified, payment claimed, payment scheduled, invoiced and finally paid.

4. Then take the Head Contractor’s subcontractors. It is less common that the subcontractors will be paid on a milestone basis. Rather, the subcontractors will usually be entitled to claim, and be paid, according to a percentage of works complete. Thus a Head Contractor may be paying a subcontractor a significant portion of the works completed, on a monthly basis, so that the Head Contractor can push towards completing one of its Milestones, yet the Head Contractor does not have corresponding payment coming in from its upstream Principal client for the works being performed. Not till it has reached Milestone Completion and progressed its own claim process. Then add those unforeseen administrative delays we mentioned above.

5. The obvious workaround for Head Contractors is to front-load some extra cash flow into the first mobilisation Milestone, so the Head Contractor has some funds to manage downstream cashflows, without being in negative cash flow itself. There is only so much this can assist. The next step is to seek to have a suitable number of Milestones in the upstream Head Contract, such that the Head Contractor is not paying a subcontractor to perform significant amounts of work without getting the money in from the upstream Principal. This problem is particularly acute where the Head Contractor is not self-performing the works, but engaging subcontractors.

6. Further problems arise during the Change Management/Variation process. A similar issue can plague Head Contractors, depending on the terms of the Head Contract. That is, where the Head Contractor is instructed to perform a Variation, which also must proceed through a quasi-milestone process, only for funds to be peeled out from subcontractors on a per cent of works complete basis.

7. Such contracts require sharp management with the commercial team working hand-in-glove with the project management team. Failing this, a Head Contractor can quickly find itself cash-flowing a developer’s project.