Payment delays


July 29, 2013

Payment delay is a concern which has been expressed by many in the business community for a long period of time. It is appreciated that efforts are being made to address this but still many service providers, particularly in the construction sector, are of the view that this is an ongoing problem.

The issue is that when quoting for work, many do not factor the costs of payment delays. Some would wish to see the day when an invoice for work certified as completed is paid on time.
In December last year, I had the privilege of taking part in a seminar organised by bank muscat which focused on promoting small and medium enterprises (SMEs).

Dr Mahateer Mohammed, the ex-prime minister of Malaysia, was invited as guest speaker. In his speech, he outlined specific initiatives adopted by his government to promote SMEs. There were a lot of good ideas floating during the seminar, including the In-Country Value initiative which is currently been promoted by the oil and gas operators in Oman. I spoke about the importance of SMEs and the lessons learnt from other regions such as the EU where SMEs are regarding as the engine for growth and a specific strategy has been adopted in this regard.

In my presentation, I raised what seemed to be a controversial point at the time, namely what would be the market condition in Oman if we all paid each other on time? What if all clients (including government) adhered to the payment terms agreed upon in their respective contracts?

Let us take an example of the construction industry. I think many would agree with me that regular and timely payment to consultants, suppliers, contractors and sub-contractors represents the lifeblood of that industry. Despite this we still find payment default a regular occurrence and on many occasions such delay or default is difficult to explain or justify.

The fact of the matter is that payment delays have a negative impact on the execution of the work, in addition to financial challenges for a service provider or a contractor in terms of cash flow and ability to procure materials and pay employees. In my view if an invoice is certified or if there no dispute over the work done or a service rendered, then there should be no reason for delaying payment.

I am not an economist, but I believe that there will be a tremendous positive impact on the economy if we promote the culture of prompt payment, and clients appreciate the fact that timely payment of invoices is vital to the survival of any person providing goods, services or undertaking any work.

In my view, it is not acceptable for a contractor or service provider to wait for a long period of time to be paid for work they have already completed to the satisfaction of the client. If there is a dispute over an invoice, the client should pay the undisputed amount, but in many cases this is used as the basis for not paying all outstanding payments. This creates a huge challenge for contractors, but more so for the sub-contractor who may have agreed to a back-to-back arrangement, which means that the main contractor would not be required to pay the sub-contractor until such time that money is received from the client.

Although the back-to-back arrangement is common in construction and other industries, it particularly puts a lot of strain on small companies within the supply chain which have no means of financing their activities or securing overdraft from financial institutions. As a result, such small companies find it difficult to operate or plan (both for the short and long term) for their business given the lack of certainty of payment.

Obviously, there are many factors which have been raised as reasons for delaying payment. Lack of funds, bureaucracy, decision-making process within an organisation could be cited as some of the reasons. However, I tend to think that it is fundamentally a cultural issue. One could just delay to pay his counterpart knowing well that nothing will be done about it. The question is therefore, how we instill the urge to pay each other on time. It is really frustrating that clients want the work to be done urgently and on time, and if not, there will be legal and commercial consequences. But when a client delays payment, no such equivalent measures exist. This is apart from saying, "I will not work for that client again!"

This problem is compounded by the fact that there seems to be no speedy way of resolving disputes relating to late payment either during the execution of the work or after satisfactory completion thereof. The existing laws and court procedures make it difficult for any parties claiming unpaid invoices.

If Oman is to address this problem, it will require the introduction of new laws and regulations on prompt payment and fast-track adjudication. In other countries, such laws have proven to be very effective and successful, the latter being regarded as a good alternative to court and arbitration as the primary means of resolving dispute in the construction industry.

Countries such as Malaysia, Australia and Singapore have all enacted laws to allow the parties to initiate adjudication proceedings in the event of a dispute relating to late payment. It is high time that we do the same.