The new regulations on payment bottlenecks will not be much help to the construction industry

The amendments to the regulations on limiting payment bottlenecks that take effect at the start of next year won’t bring with them any significant improvement in liquidity for infrastructure construction companies. To help them collect payments for their services, we should look at streamlining the documentation process for construction work and changing the regulations on mutual services.

One of the key changes to the recently adopted ‘Act amending certain legislation for the purpose of limiting payment bottlenecks’ is that there will be a shortening of payment times. In construction contracts where the payer is a public entity, payments have to be made within 30 days of the invoice issuance date. When the payer is a large enterprise and the payee is a micro-enterprise – a small or medium-sized company – the deadline cannot exceed 60 days. While the cutting of the payment times is a positive change, it won’t bring a significant improvement to companies’ liquidity, because most contracts with public entities, such as the GDDKiA roads authority and PKP state railways, already have 30-day payment terms.

The problem isn’t the date due on the invoice, but the practice of prolonging procedures for accepting work, and the documentation of additional work (outside the scope of the contract) that’s billed on it. Such documentation is negotiated after the work is completed, and if the buyer has any doubts, the contractor can only file a claim on the basis of the contract. Such situations can be avoided by using FIDIC standard contracts. In such contracts, partial settlements are reached through calculating both the amount of work done and the unit price for the estimated work. To gauge the progress of the work, the contractor is required to maintain a measurement registry, based on which the contract engineer prepares a transitional payment certification, which then forms the basis for issuing an invoice.

Further changes introduced by the amendments include higher interest rates for delayed payments and greater compensation for creditors related to the costs of recovering receivables. But this harsher regulatory environment won’t be much help in limiting bottlenecks, because it only applies in situations where the contractor has already issued the invoice. While the higher compensation quotas will improve the situation of creditors, they can do this only at the stage of pursuing claims, which can take years, and the debtor may then not have any assets that can be seized.

One novel solution that could theoretically help smaller entities is the ban on excessive delays in payments by corporate entities. An excessive delay is when, in a three-month period, the sum of unpaid receivables and receivables paid after 60 days from the invoice date reaches or exceeds PLN 2 mln. Proceedings in such cases are to be undertaken by the competition regulator, UOKiK, which can impose fines on the debtor. But it’s doubtful whether this change will significantly improve companies’ positions, because if, as a result of the proceedings, it turns out that a company isn’t paying because it hasn’t received payments from its debtors or as a result of a force majeure, UOKiK may decline to impose a fine.

The legislators have the right intention in imposing fines on companies that use their strong market position to extend their credit at the expense of smaller players. But the problem is that UOKiK, a public administration body, is taking on competences that were previously left to the courts. The new law doesn’t specify what happens when the payment is the subject of a dispute, or whether when carrying out the proceedings UOKiK will resolve the dispute before imposing a fine.

So what solutions could help the construction industry? The liquidity of companies could be improved by contracts that include price adjustment clauses for when circumstances beyond the control of the contractor result in significant spikes in material and labour costs. It would also be necessary to streamline the construction work acceptance process in measurement contracts. FIDIC-based models should be incorporated into the act to ensure the equal positions of the parties to a contract. One effective solution would be to change the provisions of the Civil Code on mutual agreements, introducing a specific regulation on the turnover between companies. A company should have the option of suspending the performance of mutual services or to withdraw from the contract when the other party is not paying on time – but the current legislation does not permit this. While the amendment does foresee allowing creditors to withdraw from or dissolve an agreement if the payment terms foreseen in the contract exceed 120 days from the invoice issuance date, this is too long a period for this change to play a significant role in curbing payment bottlenecks.