Management, Procurement and Law Proceedings of the Institution of Civil Engineers

Volume 169 Issue MP5
Strategies to minimise the effects of
delayed payments
Francis, Ramachandra and Rotimi
Management, Procurement and Law 169 October 2016 Issue MP5
Pages 199–207 http://dx.doi.org/10.1680/jmapl.15.00038
Paper 1500038
Received 22/07/2015 Accepted 15/06/2016
Published online 18/07/2016
Keyword: contracting/contracts & law/developing countries

ice | proceedings ICE Publishing: All rights reserved

Strategies to minimise the

effects of delayed payments
Mathusha Francis BSc James Olabode Bamidele Rotimi BSc, MSc, PhD
Lecturer, Department of Building Economics, University of Moratuwa, Senior Lecturer, Auckland University of Technology, Auckland, New
Moratuwa, Sri Lanka (corresponding author: mathushaf@yahoo.com) Zealand
Thanuja Ramachandra BSc, MPhil, PhD
Senior Lecturer, University of Moratuwa, Moratuwa, Sri Lanka

Delayed payments to parties in the construction supply chain are due to cash-flow difficulties of upper-tier parties.
The phenomenon is common in the construction industry, and in Sri Lanka most government-funded large-scale
projects experience payment delays. This research therefore investigates the effects of delayed payments and
possible strategies that could help minimise their effects. A survey approach was adopted where an equal sample
(N = 10) of contractors and subcontractors, drawn through purposive sampling, were interviewed. The sample is
justified through ‘saturation’, which determines the credibility of research findings in qualitative research. Solicited
views were grouped under themes, with NVivo 10 software used to organise the responses. The research found that
over 60% of main contractors and subcontractors have experienced the effects of cash-flow difficulties and project
delays. They are generally affected by irregular progress payments. Contractors and subcontractors strategise, other
than by using contractual provisions, to help maintain their business relationships with upper-tier parties and to
survive industry competition. Main contractors (70%) depend on bank loans, while subcontractors (40%) tend to
negotiate feasible payment plans and use fund transfer mechanisms in delayed payment situations. The research
suggests proactive actions that will ensure the effective implementation of contractual provisions.

1. Introduction payment problems are generally widespread in both developing

In construction contracts, project owners and contractors are
legally bound by terms and conditions where payment is
considered as a reward for the work performed (Balamuralithara
et al., 2011). Payment here refers to the sum of money paid to
contractors upon the successful completion of certain works, to
which both parties to a contract have agreed (Ansah, 2011).
Survival of construction parties, particularly subcontractors, is
contingent on the timely receipt of the amount agreed between
parties to the contract. Contractors and subcontractors are
reimbursed the money expended on materials, labour, plant,
subcontractors’ services, preliminaries and general overheads
during the progress of works (Frics and Smith, 2012).
Payment malpractices, particularly by upper-tier parties, cause ill
effects within the construction industry. It is not uncommon to
find financial claims by contractors and subcontractors withheld
unreasonably, partially settled or completely unpaid. Therefore,
payment issues are present in the form of delayed, incomplete and
non-payment of amounts owed to lower-tier parties (Ye and
Rahman, 2010). Hasmori et al. (2012) suggested that contractors
experience payment issues not only on government-funded
projects but also on privately funded projects. Similarly, the
National Construction Association of Sri Lanka (2009) has found
that contractors experience unsatisfactory payment practices
regardless of whether issues arose from contracts financed by the
government, the World Bank, the Asian Development Bank or
any other organisation. Further, Hou et al. (2011) explained that
and developed countries. Ye and Rahman (2010) therefore
concluded that payment issues are endemic in construction
industries and need to be recognised explicitly as they recur
project after project.
Delayed and non-payment issues affect other parties to
construction contracts: client, contractor and consultant. Reeves
(2003) found that delayed payments are usually due to incorrect
claims submitted by contractors, including payment applications
from contractors without adequate supporting documents,
inaccurate quantities and failure to follow the right procedures for
preparation and submission of claims. This requires contractors to
resubmit their payment claims and hence delay in payment by
project owners. On a different note, Hasmori et al. (2012) stated
that a major cause of delayed payments is the paymasters’ poor
financial management.
Amoako (2011) suggested that payment delays result in higher
cost of capital from banks, delayed completion of projects, lower
quality of works, an increase in project cost, disputes, bankruptcy
of construction firms and loss of productivity. On a similar note,
Kaka et al. (2003) were of the opinion that many construction
companies have negative net cash flows due to improper payment
practices and become bankrupt due to the lack of liquidity for
supporting their day-to-day activities. The practice of inefficient
and untimely payment in construction projects is a major factor
contributing to unsuccessful projects (Danuri et al., 2012).

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 Management, Procurement and Law Strategies to minimise the effects of
Volume 169 Issue MP5 delayed payments
Francis, Ramachandra and Rotimi

Further, the chain-payment culture within the construction
industry, where payment flows from upper tiers to lower tiers,
makes payment to lower tiers dependent on the upper tiers
(Khosrowshahi, 2000). Therefore, when there is a payment delay
to the upper tier, it cascades down to the lower tiers.
Researchers have explored ways of minimising payment problems
in different countries. For example, Ramachandra and Rotimi
(2011) found that strategies used to minimise payment problems
in New Zealand include placing of charging orders and registering
caveatable interest over properties, lodging bankruptcy and
liquidation proceedings, holding money in trust accounts and
direct payment by sureties. In support of this, Amoako (2011)
found that the ‘right to lien’, to take and hold or sell a property of
a debtor as security for a debt until payment is made, is being
practised in countries such as the UK and Canada to minimise
the effects of payment problems. On a different note, a study
conducted in Malaysia revealed that contractual provisions in the
standard forms of a contract, including the right to regular
periodic payments, the right to a defined time frame for payments
and the right to a speedy dispute resolution mechanism, could
minimise payment issues to a certain extent (Danuri et al., 2012).
However, despite these efforts, construction organisations still
experience payment problems on construction projects.
and the strategies adopted by construction parties to minimise
their effects.
2. Literature review
Several publications have identified the different ill effects of
unfair payment practices on construction projects to contractors
and subcontractors. Some solutions have also been suggested by
these publications. Table 1 provides a summary of the effects of
delayed payments as collated from different authors.
As observed from Table 1, cash-flow difficulties are the primary
concern of many authors, as it is considered the lifeblood of
construction projects. In this sense, cash flow is described as the
inflow of cash to the contractor from clients and also the outflow
of cash to suppliers and subcontractors, and is used for procuring
resource inputs. Generally, many construction projects have
negative net cash flow until the very end of construction activities,
when the final payment is received. Unless an advance payment
is received before the project’s start, the cash-flow situation will
most probably be negative until project completion. Any delay
in monthly progress payments could exacerbate the cash-flow
pressure, since most contractors rely on progress payments to
procure their resource inputs. This means that irregular payments
will impact directly on the contractor’s cash flow.

The National Construction Association of Sri Lanka (2009)
viewed payment delay to contractors as one of the most
significant concerns of Sri Lankan contractors. Uninterrupted
progress payments could enable contractors to maintain their
cash flow and thereby ensure the smooth running of projects
(Jayalath, 2013). Yet uninterrupted payments are becoming a
mirage. Despite significant concerns with delayed payments
within the Sri Lankan construction industry, there is little credible
research that could provide evidence for the necessary
performance improvements. Therefore, this research addresses this
knowledge gap by investigating the effects of delayed payments
Many authors opined that irregular cash flow within construction
projects causes a chain reaction down the supply chain. Longer
payment periods result in other participants in the downstream
supply chain becoming cash starved, forcing their greater reliance
on borrowings. Usually, upstream main contractors will seek to
impose longer payment periods on downstream subcontractors
and suppliers (who have limited financial capacities). Therefore,
payment issues have relatively more impact on parties down the
supply chain. Contractors are expected to manage their financial
affairs, knowing that they may need to pay a subcontractor prior
to receiving payment for work done from owners. However,

Effects of delayed payments Authors

Cash-flow difficulties
Negative chain effects down the supply chain
Delays in completion of projects
Disturbance in day-to-day construction activity
Increase in contractor’s creditability, additional cost
incurred for interest paid for bank loans
Abandonment of projects, unsuccessful projects
Disputes among parties
Insolvency of contractors
Atout et al. (2008); Danuri et al. (2012); Hou et al. (2011); Sambasivan
and Soon (2007); Ye and Rahman (2010)
Ang (2006); Balatbat and Carmichael (2010); Brand and Uher (2008);
Khosrowshahi (2000); Pettigrew (2003); Tran and Carmichael (2012)
Atout et al. (2008); Bibi et al. (2011); Mohammed and Isah (2012);
Sambasivan and Soon (2007)
Atout et al. (2008); Sambasivan and Soon (2007)
Wilder (2007)
Amoako (2011); Ansah (2011); Danuri et al. (2012); Wilder (2007)
Amoako (2011)
Amoako (2011); Ang (2006); Ansah (2011); Odeyinka and Kaka (2005)

Table 1. Summary of the effects of delayed payments

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 Management, Procurement and Law
Volume 169 Issue MP5
experience shows that some contractors delay subcontractors’
payments to improve their own cash flow, particularly when
payments from the owner are late or incomplete. Payments to a
subcontractor are, therefore, not only subjected to a contractor’s
payment behaviour but are also affected by the owner’s payment
behaviour. Moreover, subcontractors’ financial and professional
resource limitations may mean they are unable to recover
payment claims through formal dispute resolution mechanisms.
Therefore, subcontractors are exposed to more financial risks
associated with payment uncertainties.
As observed in Table 1, uneven flow of cash within construction
projects can have a major impact on a project’s progress.
Construction work involves huge amounts of money, and
most contractors find it very difficult to manage day-to-day
construction expenses when payments are delayed. Work can
be delayed because there is inadequate cash flow to support
construction expenses, particularly for those contractors who are
not financially well resourced. Many authors are of the opinion
that disruptions to work in progress would ultimately cause delay
in project completion.
Delayed payments indirectly increase contractors’ debt burden
as indicated in Table 1. Contractors tend to borrow additional
capital to improve cash flow in late or non-payment situations.
This could create an unfavourable situation and put pressure on
contractors. Also, there will be additional costs in the form of
interest on borrowings. Payment problems result in disputes
among key construction parties. A construction dispute resolution
process can become prolonged, leading to cost and time overruns
and eventually abandonment of projects. At particular thresholds,
the capacity to absorb payment irregularities is eroded, and unless
funds are injected into a project, it runs the risk of being
abandoned. Worse still, contractors may go into liquidation due to
failure on their part to honour trade creditors such as bankers,
subcontractors and suppliers.
The insolvency of upper-tier parties in the payment chain could
cause severe impacts on parties down the chain. The main
contractor at the apex of the procurement structure is the conduit
for significant sums of money. Where this is not forthcoming,
then other parties in the project chain become insolvent.
3. Research methodology
The current study undertook an investigation into strategies that
could minimise the effects of delayed payments within the
Sri Lankan construction industry. This study adopted an
interview-based survey approach to investigate the effects of
delayed payments on main contractors and subcontractors and the
strategies used to minimise those effects. The research sought the
views of participants (main contractors and subcontractors) who
have experienced construction payment issues on their projects.
The survey approach employed enables researchers to collect data
by using interviews, questionnaires or a combination of both
(Kothari, 2004).
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Strategies to minimise the effects of
delayed payments
Francis, Ramachandra and Rotimi
In this study, interviews were conducted with ten main contractors
and subcontractors. However, a saturation point had been reached
after eight interviews. Sandelowski (2007) had recommended ten
interviews when purposive sampling techniques are used for
participant selection. Sandelowski (2007) suggested that the
adequacy of sampling in qualitative research is relative, a matter of
judging a sample whether small or large. Further, Guest et al.
(2006) indicated that data saturation guides the sample size for
interviewees selected using purposive sampling. Solicited views
were organised under subthemes on effects of delayed payments and
strategies by using the NVivo 10 software program. NVivo results
were used to compute the descriptive statistics of the findings.
4. Research findings
4.1 Profile of research participants
The semi-structured interviews sought the participant’s profile,
which included the position of the interviewee in the organisation,
years of experience, the nature of the work performed by the
organisation and the Institute for Construction Training and
Development (Ictad) grading of the contracting and subcontracting
organisations interviewed. Table 2 provides a summary of the
interviewees’ profile information. Participants in the research were
selected from major industry groups: main contractors and
domestic and nominated subcontractors who have experienced
payment issues in the Sri Lankan construction industry.
As observed from Table 2, by profession all participants are
quantity surveyors and hold different positions in the organisation.
Sixty per cent (12 out of 20) of the participants hold the positions
of quantity surveyor and project manager, who handle payment
claims with clients and contractors. The remaining 40% are
directors, general managers and owners of construction companies.
The selected organisations are involved in both buildings and
civil engineering construction works for public and private clients.
The contracting organisations that have an Ictad grading of C1
to C9 were considered for this research by selecting at least
one participant from each organisation. The contractors and
subcontractors are graded by the Ictad based on their financial
capability; technical ability with the staff, plant and machinery;
and experience in relevant fields. Accordingly, contractors who
undertake work in building construction, highways, bridges, water
supply and drainage, irrigation and land drainage, dredging and
reclamation, storm water drainage, groynes and revetments and
reclamation are graded as C1 to C10. Trade contractors, those
involved in electrical and mechanical services and specialised
construction such as aluminium fabrication, waterproofing and
finishes, are given grades of EM1 to EM5 and SP1 to SP5. In
terms of experience, 40% (eight out of 20) of the participants have
more than 20 years of experience, while the remaining 60% have
10–15 years of experience in the relevant field. The research
collated the views of different subtrades: aluminium fabrication,
plumbing, fire, electrical installation, glazing, waterproofing and lift
installation. All representatives of the subcontracting organisations
interviewed have more than 10 years of work experience. These
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Francis, Ramachandra and Rotimi

Interviewee Position/profession Years of Nature of the work provided by the Ictad

code experience organisation grade

Main contractors (MC)

MC-I01 Chief quantity surveyor 21 Construction of buildings and infrastructure C1
projects
MC-I02 Chief quantity surveyor 20 Construction of buildings and infrastructure C1
projects
MC-I03 Project manager/quantity 23 Construction of infrastructure projects C2
surveyor
MC-I04 General manager/quantity 42 Construction of infrastructure facilities C3
surveyor
MC-I05 Director/quantity surveyor 20 Construction of infrastructure projects C4
MC-I06 Director/quantity surveyor 20 Construction of building projects C5
MC-I07 Owner/quantity surveyor 10 Construction of building projects C6
MC-I08 Owner/quantity surveyor 10 Construction of building projects C7
MC-I09 Owner/quantity surveyor 12 Construction of building, roads and culverts C8
MC-I10 Owner/quantity surveyor 10 Construction of roads and culverts C9
Domestic subcontractors (DSC)
DSC-I01 Project manager/quantity 15 Aluminium fabrication and installation F1
surveyor
DSC-I02 Senior quantity surveyor 10 Plumbing, fire, electrical works EM1
DSC-I03 Senior quantity surveyor 10 Electrical installation EM1
DSC-I04 Senior quantity surveyor 35 Construction of infrastructure facilities —
DSC-I05 Senior quantity surveyor 20 Waterproofing SP-2
Nominated subcontractors (NSC)
NSC-I06 Director/quantity surveyor 14 Glazing —
NSC-I07 Senior quantity surveyor 12 Plumbing, fire, electrical works EM1
NSC-I08 Senior quantity surveyor 10 Electrical installation EM1
NSC-I09 Senior quantity surveyor 10 Waterproofing SP-2
NSC-I10 Senior quantity surveyor 15 Lift installation EM1

Table 2. Profile of research participants

participants’ information profiles, taken altogether, affirm the
reliability and validity of the findings.
4.2 Nature of main contractors’ payment issues
The views of the participants were collected on the nature of
payment issues: types of payment issues, clients, payments and
types of industry groups. The majority of the respondents (95%)
were of the opinion that payment delays occur much more
often than losses and non-payment. One interviewee (MC-I03)
indicated that contractors experience loss of payments in variation
works, and disagreements about variations are resolved in the
final payment certificate. According to 90% of the participants,
non-payment is experienced rarely within the Sri Lankan
construction industry. Therefore, subsequent research focused
mainly on delayed payments.
All participants representing contracting organisations, except
MC-I03, indicated that payment delays mostly exist in projects
fully funded by the local government. The majority of the
respondents (90%) disclosed that the government does not have
enough money in the treasury and there is a long procedure to be
followed in making payments to contractors. Understandably,
70% of the interviewees opined that private clients are good
paymasters compared with local governments. MC-I02 and MC-
I06 indicated that corporate clients are financially stable and
establish proper budgets at the outset. Private project owners
source funding prior to initiating projects, while individual clients
entering into contracts do so with partially arranged funding.
Seventy-five per cent of the participants agreed that there are
delays in interim payments, which are increasingly delayed as the
work progresses, due to the cash-flow difficulties of clients.
Interviewee MC-I04 stated that many trades are involved during
project execution. Therefore, the value of interim payments
increases considerably during project execution. Sixty per cent
of the main contractors’ representatives experienced delays in
interim payments when a project moves towards the later stages.
Ninety per cent of the interviewees experienced delays in final

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 Management, Procurement and Law Strategies to minimise the effects of
Volume 169 Issue MP5 delayed payments
Francis, Ramachandra and Rotimi

payment. Final payment applications include variations and all the

disputed quantities that were not sorted out in previous claims.
Therefore, the opinion is that final payments are more likely to be
delayed than other types of payments.

Fifty per cent of the main contractors agreed that subcontractors

are affected the worst by payment delays as they are financially
less stable. The next section of the research explored the
nature of subcontractors’ payment issues by interviewing the
subcontractors.

4.3 Nature of subcontractors’ payment issues

Subcontractors’ payment issues are categorised into two: domestic
and nominated subcontractors. All of the representatives of
domestic subcontracting businesses confirmed that payment
delays occur frequently, while two of the interviewees (NSC-I03
and NSC-I04) felt that losses of payments occur particularly
in variations. The majority of the participants from domestic
subcontractors opined that final payment is more frequently
delayed than interim payments and there are much fewer
problems with advance payments and retention money. However,
interviewee DSC-I05 stressed that retention money is frequently
delayed, as the work is already completed and the main contractor
takes undue advantage without paying.
The nominated subcontractors are generally of the view that they
are not experiencing the same payment problems as domestic
subcontractors. The representatives of domestic subcontractors
are in agreement with the nominated subcontractors’ opinion.
Nominated subcontractor payments come directly from the client
and sometimes through the main contractor, as per NSC-I06
and NSC-I07. If the main contractor delays a nominated
subcontractor’s payment, the client should make the payment
directly and deduct that amount from the main contractor’s
payment, according to the conditions of contract. Therefore, a
nominated subcontractor’s payments will flow smoothly and
domestic subcontractors’ payments are at risk in the construction
industry.
4.4 Effects of delayed payments
The research participants were asked to indicate their opinion on
the effects they experienced due to delayed payment from their
respective paymasters of clients or main contractors in construction
projects. The effects were drawn from the participants’ views by
using NVivo 10. Figures 1 and 2 indicate the effects of delayed
payment to contractors and subcontractors, respectively, with their
respective frequencies.
Figure 1. Effects of delayed payments to main contractors
cash flow arranged as per the payment schedule provided by
the client. When the payment is delayed by the client, it will
disrupt the cash flow, which in turn is reflected in the construction
programme. All the domestic subcontractors stressed that they
are affected badly by delayed payments from main contractors.
DSC-01 pointed out that the subcontractors’ cash flow depends
primarily on interim payments and that materials purchase also
becomes delayed because of late payments. All the nominated
subcontractors other than NSC-06 indicated that there are few
payment problems, as payments often come directly from the
client.
Delay in the completion of projects is identified as a critical effect
of delayed payments to 30% of main contractors and 35% of
subcontractors surveyed. An interviewee (MC-I05) pointed out
that the contractor is entitled to claim extension of time (EOT)
when the contractor has followed the contractual provisions for
delayed payment. The client has to pay for additional charges
only if EOT is approved. Otherwise, the contractor has to bear
any additional expenses for the delay. However, the situation is
different for subcontractors. Most of the subcontractors (90%)
found no EOT clause in their contract document. Therefore, the
subcontractor is expected to accept the situation and bear the
additional cost incurred for the delay in construction period due to
payment delays. Thus, the subcontractors’ creditability increases

As observed from Figures 1 and 2, 90% of the main contractors

and 70% of the subcontractors expressed their opinion that the
major repercussion of delayed payment is cash-flow difficulties.
Contractors’ cash flow is the major concern in the construction
industry, as without it contractors are not able to proceed with
the project. An interviewee (MC-I01) explained further that Figure 2. Effects of delayed payments to subcontractors
contractors plan the future activities of the project according to

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 Management, Procurement and Law
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and their properties remain with the banks longer than the
expected period (DSC-I02). However, there is no penalty to the
payer, the main party of contracts.
Payment delays could cause considerable effects on day-to-day
construction activities to the majority of the subcontractors,
according to 70% of participants. Few of the main contractors
(20%) concur with this opinion. It seems that the subcontractors
rely primarily on the progressive payments to procure material,
labour and plant for the upcoming construction activities. As per
interviewees MC-I03 and MC-I04, when payment is delayed, the
contractor has to find other ways to source money to purchase
materials and carry out day-to-day construction activities. Therefore,
the supply of materials for construction activities will be delayed.
The domestic subcontractor (DSC-I01) is of a similar opinion as
that of MC-I03 and MC-I04. Interviewee MC-I06 indicated that
lower-grade contractors are not capable of handling the risk of
delayed payments. In such a situation, the project will not move
further until payment can be made. On this note, DSC-I01 said that
when there is a delay in purchasing materials, it slows down the
project’s progress.
An equal percentage (20%) of main contractors and subcontractors
identified negative impact down the supply chain as another
significant effect of delayed payment. MC-I01 agreed that payment
delays from a client could lead to delay in a subcontractor’s
payment. The upper tier follows a back-to-back arrangement
in payment practices to the lower tier. Forty per cent of the
subcontractor representatives (DSC-I01, DSC-I02, DSC-I03 and
DSC-I04) agreed that they delay payment to their suppliers, staff
and labourers when there is a delay in payments from the main
contractor. Thus, the payment problem reflects up to the last entity
in the supply chain.
Some of the participants were of the opinion that delayed payment
leads to increased contractor’s creditability. They explained that
contractors generally do not keep excess money in hand. Delayed
payments drive contractors to source additional funding from
banks or any other financial institutions irrespective of their
financial capacity reflected by the Ictad grading. If the contractor
has excess money, it is more profitable to invest in another project
than utilise the money in the same project (MC-I02). Another
interviewee (MC-I04) expressed the opinion that contractors,
except C1 and C2 (Ictad grade), purchased materials on credit.
Therefore, the contractors depend heavily on timely payment for
the progress of work to honour their creditors. The situation
remains the same with the domestic subcontractors.
As observed in Figure 1, unsuccessful projects and bankruptcy are
also identified as adverse effects due to delayed payments. When
the main contractor’s payment is delayed, the main contractor will
face cash-flow difficulties that are then transferred to subcontractors
and suppliers. Consequently, parties in the payment chain will
be affected and their performance will diminish. As the payment
problem transferred to the final entities in the supply chain such
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Strategies to minimise the effects of
delayed payments
Francis, Ramachandra and Rotimi
as labourers, supervisors and staff who connect directly with the
construction works, this would reflect on their performance.
Finally, this could lead to an unsuccessful project (MC-I01). The
worst effect of payment delay is that the contractor becomes
bankrupt. According to DSC-I02, there is much evidence of
bankruptcy in the small and medium enterprises (SME) sector,
which primarily includes subcontracting firms. Large contractors
have their own strategies to tackle delayed payment situations and
thus avoid bankruptcy. However, the SME sector is less financially
stable and fails to have adequate strategies.
To maintain the reputation of the industry, contractors very rarely
practise dispute resolution methods. However, one interviewee (MC-
I05) specified that some contractors choose arbitration without being
aware of other contractual provisions for delayed payments. Some of
the subcontractors (DSC-I05, NSC-I06 and NSC-I09) are of the
similar opinion that effects of payment delays could damage the
reputation of the firm. In cases of delayed payment, the subcontractor
could even tend to reduce the quality of work (DSC-I04). This again
stressed that the project could end up being unsuccessful in terms of
quality, time and cost due to delayed payments.
4.5 Strategies to minimise the effects of delayed
payments
The research participants were required to indicate the strategies
that they had used as main contractors and subcontractors to
minimise the effects of delayed payments. The findings from the
interviews indicate that both main contractors and subcontractors
use two major approaches – the use of contractual provisions and
other strategies – to handle delayed payment situations. By using
NVivo 10 to analyse the responses, the strategies identified, with
their respective frequencies, are presented in Figures 3 and 4.
As observed in Figures 3 and 4, 80% (eight out of ten) of the main
contractors sought bank loan facilities to mitigate the effects of
delayed payments. Although this would result in additional costs, a
few of the subcontractors (three out of ten) employed this strategy
Figure 3. Strategies practised by main contractors to minimise
effects of delayed payments
 Management, Procurement and Law
Volume 169 Issue MP5
Figure 4. Strategies practised by subcontractors to minimise
effects of delayed payments
to handle delayed payment situations. Fifty per cent of the main
contractors confirmed that negotiating with clients on a feasible
payment plan is a better way of handling any delayed payment.
Forty per cent of the subcontractors are of a similar opinion. Most
of the main contractors and subcontractors believe that working
for trustworthy clients, having mutual understanding and proper
coordination would minimise the effects, rather than working in
accordance with contractual provisions. DSC-I02 pointed out that
the projects they are involved in are mainly on the grounds of
relationships maintained with main contractors, and, therefore,
mitigating problems by way of negotiation was preferred by their
organisation. This secures their survival in the industry.
Most of the main contractors (70%) indicated that a slowdown in
work pace is experienced when payments are delayed. DSC-I03
(in the subcontracting business) also agreed with this view.
DSC-I03 explained further that they usually divert purchased
materials and labour on other ongoing projects to augment their
cash flow on a project. An equal percentage (40%) of main
contractors and subcontractors identified fund transfer from other
projects as a mechanism to minimise the effects of delayed
payments. According to the interviewees, both main contractors and
subcontractors practise a fund transfer mechanism, where funds are
transferred from projects that are at their starting stages (advance
payments) to projects experiencing delayed payment.
Use of on-account payment is seen as a strategy to minimise
delayed payments by 60% of the participants representing main
contractors. The contractors who possess an Ictad grading lower
than C5 seem to be unaware of the provision for requesting
on-account payment from clients. One interviewee (MC-I03)
indicated that on-account payments are made when the client
faces cash-flow difficulties. This strategy would improve the cash
flow of clients, main contractors and the rest of the supply chain.
Only one of the subcontractors (DSC-I04) received on-account
payments from a main contractor because that subcontractor is a
leading firm and responsible for 95% of the work. When there is a
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Strategies to minimise the effects of
delayed payments
Francis, Ramachandra and Rotimi
delay in certification of payment claims by project consultants, the
consultants suggest an on-account payment. In such a case, on-
account payment is made for at least 75% of the claim amount.
A few of the main contractors and subcontractors have used self-
financing as a mechanism to compensate for delayed-payment
effects. In case of payment delays, the main contractors and
subcontractors use their own funds to procure materials, pay for
workers and pay the supply chain. Generally, the financial
backgrounds of main contractors and subcontractors are less
stable and depend on credit from financing organisations.
However, contractors with C1 grade (according to Ictad), MC-I01
and MC-I02, confirmed that they use their own money in the case
of tolerable amounts that are delayed. Other grades of contractors
generally do not have similar access to funds. MC-I01 and MC-
I02 further agreed that they prefer bank loan facilities in situations
where considerably large amounts of payment are being delayed.
This would further endanger the situation by hindering contractors
from undertaking new projects and widening their business. One
of the subcontractors (DSC-I02) opined that they use self-finance
where there is a ‘back-to-back’ payment arrangement from the
upper tier. However, if a main contractor deliberately delays,
subcontractors would blacklist the main contractor and avoid
working with them in future.
Within contractual provisions, C1-grade contractors claim interest
as a means of minimising the effects of delayed payments. Other
grades of contractors fail to utilise this payment provision so as to
maintain their relationship with the client. MC-I01 and MC-I02
indicated that contractors used to include the interest claim in the
final bill, not with interim payment applications. The majority of
the contractors consider that claiming interest with each interim
payment application would damage their relationship with the
client. This would result in contractors losing future business
opportunities with the same client. The majority of subcontractors
(90%) were of a similar opinion as the main contractors (except C1
grade). They do not charge interest for delayed payments,
preferring a continued smooth relationship with project parties. Two
of the subcontracting firms interviewed, DSC-I01 and DSC-I02, are
of the opinion that delayed payments are inevitable. Therefore, they
provision for a marginal increase in prices while tendering.
5. Discussion
From the current research findings, it would seem that payment
delays are mostly experienced on construction projects that are
fully funded by local governments, since this arm of government
usually fails to secure adequate funds prior to the start of their
projects in Sri Lanka. This is also associated with the lengthy
procedures required for processing payment claims in the Sri
Lankan government sector. By comparison, contractors that deal
with private sector clients are less vulnerable to delayed payment
problems because their clients have more secure project funds.
Thus, it is safe to conclude that payment delays vary depending on
the type of clients, although Hasmori et al. (2012) confirmed that
delayed-payment situations were common in government-funded
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Volume 169 Issue MP5
and in privately funded projects. Conclusively, untimely payments
and latter-stage payment delays occur because individual clients
start their projects without securing enough funds.
In line with accepted views, this study found that the most critical
effect of delayed payments is the contractor’s cash-flow difficulties.
Compared with the effects on main contractors, the effects of
delayed payment on day-to-day activities of subcontractors are
found to be more severe. This is due to subcontractors’ primary
reliance on progressive payments for managing their projects. Thus,
the risk of delay to project completion is high for subcontractors.
In terms of solutions, subcontractors seem to be less aware of
stipulated dispute resolution processes. The provisions for dispute
resolution are absent from most subcontractor contracts. Domestic
subcontractors are financially less stable and have less protection in
terms of contractual provisions. Subcontractors and their workers
are the people who carry out most work at site level. When they
are cash starved, it is ultimately reflected in the quality of the
project.
This research found that Sri Lankan contractors use contractual
provisions to secure delayed payments by slowing down the
work, claiming interest, suspending the work and using dispute
resolution mechanisms. Most main contractors tend to slow down
work progress until they are paid. This strategy forces the clients
to source alternative funds, since clients are keen on early or
timely completion of projects. Although there are provisions
available in construction contracts, contractors tend to avoid
exercising dispute resolution mechanisms to maintain their
continued and long-lasting relationship with clients. Subcontractors
seldom use contractual provisions.
Financially stable contractors in grade C1 and C2 categories have
access to bank loans to compensate for any delayed payment.
Unlike contractors in other countries, Sri Lankan contractors
exercise an on-account payment strategy where 75% of the claimed
amount is paid to contractors in case of delays in the certification
of their payment claims. Few subcontractors use fund transfer from
other projects, particularly advance payments received for new
projects, to be able to proceed with ongoing projects. The use of
these strategies enables subcontractors to mitigate payment risks
and survive better in a competitive industry.
6. Conclusions and practical implications
The primary focus of the current study is on two aspects: the
effects of delayed payments to main contractors and subcontractors
and the strategies used to minimise those effects. As a departure
from the existing literature, the current study determined the effects
of delayed payment from the perspective of main contractors and
subcontractors. According to main contractors, the top three most
significant effects of delayed payments are cash-flow difficulties
(80%), delays in completion of projects (60%) and negative
chain effects on other parties down the supply chain (40%). For
subcontractors, the effects are cash-flow difficulties, delays in
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Strategies to minimise the effects of
delayed payments
Francis, Ramachandra and Rotimi
completion of projects and disturbances to day-to-day construction
activities.
In terms of strategies to minimise the effects of payment problems,
contractors are more inclined to use contractual provisions, while
subcontractors are more willing to use strategies other than
contractual provisions. Subcontractors need to be facilitated with a
simplified standard form of contract for subcontracted works.
Although contractual provisions exist, the industry is reluctant to
implement strictly such provisions in consideration of the working
relationship between project participants. For example, the
suspension of work provision in the standard form of contract
entitles the contractor to suspend the work until the payment is
made. However, contractors seldom exercise the provision.
Therefore, it is recommended that professional bodies and
government agencies in Sri Lanka need to take actions to protect
and promote a balanced allocation of risk and fair contracts to all
parties in construction contracts. The subcontractors suggest that
the allocation of contingency for the risk of payment problems
could mitigate the effects to a certain extent.
The research further recommends that a security from the paymaster
through the bank in the form of a ‘payment bond’ could improve
the payment situation in Sri Lanka. This would be beneficial to all
parties: the client could receive a return on investment without any
delays because of payment problems and contractors could encash
the money through a bank; thereby, this could minimise the effects
of payment problems down the supply chain. The study further
suggests that the use of a schedule of payments as part of the
contract could ensure regular payment to contractors.
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