Cost impact of " security of payment act" to the Sri Lankan construction supply chain

Abstract

Construction industry supply chain is a pyramid. Due to its complexity of contracting and sub-contracting, the construction industry is set apart from other industries. For a large construction project, this pyramid can have number of different levels below the sub-contractors also as sub-sub- contractors and so forth down the pyramid. As such, a delay in payment from the employer will freezes up the flow of funds below level of the pyramid. The Act of Security of Payment comes in to action in other countries to prohibit contingent payment clauses in contracts, to minimize unnecessary delays in progress payments and then protect the downstream payments. Accordingly, it has been identified that such Act would be very important to be implemented in Sri Lankan construction context also due to that the same situation is being undergone by Sri Lankan industry too. Since the importance of Act has already been identified, it was decided to identify the potential provisions of a security payment act, identify the parties in the construction supply chain affected by the Act and synthesize the nature of potential cost impact to each party under different situations subjected to the Act. Accordingly, a comprehensive literature survey was carried out to identify the potential provisions of the Act and parties affected by the Act. In order to synthesize the cost impact to each identified party, a semi structured interview was carried out to identify the current grounded phenomenon of payment issues. The professionals were selected from the identified group of levels of employers, main contractors, sub-contractors and suppliers to conduct the interviews. They were mainly questioned about financing the gap in between the progress payment request and receipt of money, delay of payments, back to back payment clauses, prompt payments and Security Payment Act. It was identified through the interviews that no additional premium is added to the contract price in order to finance the payment gaps. But according to the nature of the employer, markup will be adjusted concerning the past experiences with that particular employer. Delay payments have been a common issue in the industry and back to back payment clauses are usually included in sub contracts due to this. Therefore, actually, there is a real request emerged from the industry to take necessary actions to minimize this issue. Further, the potential cost impact to the each party was evaluated under the situations come across under the Act as identified in literature survey. It was recognized that the there is a potential positive cost impact to the contractors, sub-contractors and suppliers who are down below the pyramid and though initially the employer has to bare additional cost, the system itself get balanced once the Act implemented resulting positive cost impact to the employer too.