‘Can we terminate our contract if the client always pays late?’

We’re a subcontractor on a residential project in the North West of England. Our client has repeatedly paid their bills late which causes us problems with cashflow, is there anything we can do and can we terminate our contract?

As Lord Denning, and then Sir Michael Latham observed in his oft-quoted report, Constructing the Team, cashflow is the lifeblood of the construction industry. As a result of the complexity of the construction supply chain, timely payment is essential to maintaining project momentum and financial stability.

The consequences of late payment often extend far beyond a single outstanding bill or invoice.

Late payments can disrupt the cash flow of both contractors and subcontractors. However, the impact is not just financial. Late payment may be perceived as a sign of financial instability, poor administration, or a disregard for contractual obligations. Discussions that should focus on project delivery, and quality can end up being dominated by concerns over payments and contractual rights. The result can be damaged working relationships, which in turn can lead to costly disputes.

This break-down in relationships can also affect project performance. Subcontractors who have experienced payment delays may be less willing to progress the works, accommodate variations, or commit resources to a project. In some cases, they may also prioritise other projects. Such behaviours can reduce productivity, and have the potential to contribute to delays in project delivery.

Late payment can also divert valuable management time and resources away from project delivery. Project teams may be forced to spend significant time pursuing overdue payments, responding to legal letters, or engaging in formal dispute resolution processes.

Dealing with late payment is fraught with risk and requires careful consideration. One recent case highlighted the challenges posed by this issue. In Providence Building Services v Hexagon Housing Association, the dispute reached the highest court in the land.

The claimant contractor had terminated its involvement in a project following multiple late payments by the housing association. The contractor relied on specific clauses in the JCT Design & Build contract form, to end their contract. Ultimately the court decided the clauses did not give them an entitlement to terminate the project despite several late payments.

The contractor in the above case is now listed as having entered voluntary liquidation. Though liquidation is not necessarily a direct result of the legal action, this case highlights the risks associated not only with late payment, but with interpreting and terminating construction contracts.

The reputational effects of late payment can also be damaging. Contractors and clients known for poor payment practices can quickly develop an unfavourable reputation in the industry. Suppliers and subcontractors may become reluctant to tender for future opportunities or make additional risk allowances within their pricing.

Additionally, construction operates through a complex and connected supply chain. As a result, one overdue payment can trigger a cascade of financial difficulties. A contractor awaiting payment may, in turn, delay payments to subcontractors and other suppliers. This ripple effect can result in material shortages, labour reductions and delayed deliveries.

Many of these risks can be mitigated through good contractual and commercial management practices. Well-drafted construction contracts should clearly define payment mechanisms, valuation procedures, payment periods, retention provisions, interest on late payments, and dispute resolution processes.

Strong working relationships are fundamental to successful project delivery. Construction projects rely on collaboration, transparency, and effective communication between the different parties involved.  Equally important, is the proactive management of commercial relationships throughout the project lifecycle.

Open communication, transparent valuation processes, and early engagement regarding potential payment issues can help maintain trust and prevent disagreements from escalating. Have you picked up the phone and spoken to the client to explain the impact of their late payments? Is there someone senior who can assist?

Ultimately, prompt payment is not merely a contractual obligation; it is a fundamental contributor to project success.  Conversely, late payments can damage reputations, strain commercial relationships and disrupt project delivery. In an industry built on collaboration and trust, ensuring timely payment remains one of the most effective ways to protect both current projects and future opportunities.

Tom Stonehewer is graduate consultant at Decipher.