Companies should act now to protect their cashflow

This problem has prompted the government to proceed with project bank accounts. Almost £2bn-worth of work is now going through PBAs and the Chancellor said in his autumn statement that he intends to double this figure in the next couple of years.

The government has also ensured tier two contractors on public sector works should be paid within 19 days of the due date under the main contract (23 days for tier three contractors).

A mystery shopper service has been set up to deal with complaints about poor practice.

The new Construction Act provides firms with an improved array of weaponry to minimising losses from upstream insolvency. It applies to contracts entered into on or after 1 October 2011 (1 November for Scotland).

Here is my checklist to help firms keep on top of cashflow:

• Always read your payment provisions. If these are not to your liking you can safely ignore the rest of the contract.
• Operate the new statutory payment notice procedures, which are aimed at defining the amount due at the date for payment.
• Be aware that any withholding of your cash must now be fully justified in any such notice issued before the final date for payment.
• Make full use of the more flexible statutory right of suspension, which enables you to suspend any or all of your obligations.
• Seek payment bonds/bank guarantees whenever possible, although they could be hard to obtain.
• If you are denied payment because of the insolvency of a third-party payer then challenge any pay-when-paid clause on the ground that it is an unreasonable exclusion clause under the Unfair Contract Terms Act 1977.
• Remember that pay-when-certified clauses and cross-contract set-off are outlawed under the amended Construction Act.
• Be aware that the new Construction Act outlaws provisions that make release of your retentions conditional on the issue of some certificate under another contract.
• Watch out for lengthy payment periods - they increase your exposure to upstream insolvency.
• Consider alerting credit reference agencies if your payer seeks to extend payment periods. They will downgrade its credit rating, which may dissuade it.
• Always be alert to payment problems being experienced by others on the project.

Statutory insolvency protection must also remain on the agenda. Millions of pounds worth of construction works continue to be purchased by firms whose liabilities far exceed their assets.

As a first step there should be a statutory requirement that purchasers provide evidence, before construction work can start, that they can fund it and will retain the necessary funds in place over the duration of the project.

Professor Rudi Klein is chief executive of the SEC Group