The construction sector has inherently significant debt risks due to the complexity of projects and the involvement of multiple stakeholders. The emergence of debt not only affects cash flow but also leads to prolonged legal disputes, which can severely impact business operations. To assist clients in preventing and mitigating debt risks, in this article, TNTP presents practical solutions to help businesses manage and limit debt in the construction sector.
1. Drafting comprehensive and robust contracts
One of the keys to prevent disputes and debt issues is a thorough and meticulous contract. Businesses must focus on protecting their interests right from the negotiation and contract signing stages. Several key points to note include:
• Clear and detailed payment terms: Specific regulations on payment timelines, amounts, conditions, and methods to handle delays, and especially stipulating payment in stages, aligned with the project’s progress, helps avoid unnecessary disputes regarding financial obligations between the parties.
• Warranty and post-handover responsibilities: Clearly define the warranty period, the scope of items covered, and the contractor’s obligations in addressing any issues during the warranty period. This also includes retaining a portion of the payment to ensure the contractor fulfills warranty obligations.
• Breach of contract penalties and compensation: Contracts should include penalty clauses for late payments or failure to fulfill contractual obligations. This is an effective deterrent to ensure parties comply with the original agreement.
• Clearly defined dispute resolution mechanisms: The contract should include provisions for dispute resolution mechanisms such as mediation, arbitration, or competent courts. This helps reduce time and costs if disputes arise, allowing businesses to promptly handle outstanding debts.
Whether you are an Investor or a Contractor, thorough drafting and negotiation of contracts from the outset creates a solid legal foundation to protect the business’s interests throughout the project. This ensures a clear understanding of the financial obligations stipulated in the contract.
2. Assessing the financial capacity of partners
One of the main causes of debt accumulation is the partner’s inability to fulfill payment obligations. Therefore, TNTP advises clients to:
• Conduct a thorough financial assessment of partners: Before signing contracts, businesses should perform financial assessments to ensure that the partner has the financial capacity to complete the project and make timely payments.
• Review the payment history of partners: Before entering into contracts, businesses should carefully review the partner’s payment history and reputation through previous projects.
3. Requesting contractual guarantees and payment guarantees
Utilizing guarantees in construction contracts is a legal measure that protects businesses against debt risks. TNTP suggests that clients consider the following:
• Performance guarantees: This guarantee ensures that the contractor will fully meet the contractual obligations. In the event of a breach, the guarantor (usually a bank) will make the payment. Investors can request that contractors cooperate with banks or financial institutions to issue guarantees, ensuring that the contractor fulfills post-inspection warranty obligations. If the contractor fails to honor warranty commitments, the investor will receive compensation from the guarantor which is equivalent to the agreed warranty value.
• Payment Guarantees: This guarantees the contractor’s financial rights in case the investor encounters payment difficulties. It provides contractors with assurance regarding the investor’s payment obligations, effectively preventing debt issues, especially in large-scale and long-term projects.
4. Monitoring progress and regular reporting
• Progress monitoring system: Contractors should use project management software to track construction progress in detail and provide timely updates. This helps control the volume of work completed and accurately determine when to request payments from the Investor.
• Regular reporting: Provide periodic reports on work progress, execution costs, and any additional expenses to give the Investor a comprehensive overview of the project’s financial status. Transparent reporting helps minimize misunderstandings and fosters trust from the Investor, thereby promoting timely payments.
5. Applying legal measures when necessary
In cases where negotiation or mediation solutions are ineffective, businesses may consider initiating legal action against the partner in competent courts or arbitration centers if overdue debts remain unpaid according to the contract’s commitments.
The application of legal measures requires thorough preparation and support from legal experts. Therefore, TNTP advises businesses to seek advice from lawyers to ensure debt recovery is conducted efficiently and legally.
Debt in the construction sector is a pressing issue, but it can be controlled and mitigated through appropriate legal and financial management solutions. TNTP believes that with measures such as drafting robust contracts, effectively managing cash flow, utilizing payment guarantees, and closely monitoring project progress, businesses can prevent and reduce debt risks.
This concludes the article ” Solutions to limit the occurrence of debt in the construction sector” from TNTP. We hope this article proves helpful to our readers.
Respectfully,
