SETTING UP & RUNNING A CONSTRUCTION COMPANY
According to the Department for Business Innovation and Skills, the UK construction sector contributes a whopping £90 billion to the economy, making up 6.7% of our total GDP. It’s one of the fastest growing industries, accounting for 10% of the total employment, with 280,000 businesses creating nearly 3 million jobs nationwide. But that’s enough of government stats for now. At the end of 2016, we did our own research, commissioning a YouGov survey and hiring the brains of the Centre for Economics and Business Research (Cebr) to analyse it. We found that the Construction Sector is losing over £1.4 billion annually through not taking care of their legals, with each business encountering around 8 legal issues annually, at a cost of £13,160 (see full report here). This comes as no surprise for a contract-heavy, dispute-prone industry that has necessarily tough health and safety regulations surrounding it. But! There is hope. Having all your legal ducks in a row, your contracts crystal clear and watertight, knowing your rights during a dispute and how to avoid them and understanding what laws apply to you (and putting safeguards in place to make sure you don’t fall foul!) are sure-fire ways to not becoming another stat – LawBite, government or otherwise… Whether you’re wanting to go solo with your skill, start a residential construction company with your dad or even growing a big commercial enterprise, every business could use a helping hand. With this in mind, welcome to Part 3 of our 3-part ‘LawBite Legal Construction Guide’ series. Keep these useful guides handy and if you’re not sure whether something applies to you or you need legal advice from one of our expert Construction lawyers just ask!
Dispute resolution – and dispute avoidance
There is no doubt that disputes are very likely to arise in a construction project. To start with, very often the employers change what they envisage getting from the construction works. One more bedroom here, less square feet there, another color for the walls. Then comes the unexpected: a pipe that was not in the original drawings, weather conditions more severe than usual, delays in obtaining the required permission and so on. On top of that you have the usual problems in the services sector: complaints about quality and delayed payments. Even when you have planned extensively the works don’t always run as intended to run for one reason or another so you need to make sure you’re covered. Who is liable for what goes wrong – or at least different from the plans? Hopefully you will have a well written contract in place to guide you (see Part 1 ‘Setting Up’ for more on this). If not, figuring out what has been agreed will be your first challenge (see how to navigate this area in the section below). But knowing who is liable theoretically is only the beginning. You will have to prove this liability. You will need evidence of who caused the problem and what problems – in particular extra time and extra costs – it has caused to the works.
Because of that, when we talk about disputes in the construction industry, the first thing to consider is that you should keep tight control of how you monitor the performance of the contract. Make sure you register in writing of what happens not only when things are not going well, but also on a day-to-day basis. Believe: day to day records will be very useful if problems arise. Comply with the notice provisions in your contract and the payment notices in the Construction Act 1996 (as amended by the Part 8 of the Local Democracy, Economic Development and Construction Act 2009) and in the Scheme for Construction Contracts. Be careful what you say and write to the other parties involved in the construction project, and put your best efforts to avoid starting any work or variation to works previously requested without written instructions and clear agreements about scope, price and time. If a dispute has arisen and you decide to settle, make sure you put this settlement in writing and that the settlement document for that specific dispute addresses any potential impacts in other areas of the contract and the works. All of that together is what is usually called contract management and it is key if you want to avoid disputes or, if disputes are inevitable, have a strong case with strong evidence. Question the notion that good contract management causes more harm than good. The cases that go to Court show a different scenario and many cases are surrounded by poor contract management practices.
What if there’s no written contract?
It goes without saying that when setting up and operating your own small business, pulling in the work and clients is a top priority. One of the key facets of small business law, therefore, should be the contract – a point of reference for the terms on which you are engaged which includes (importantly) how and when and how much you will be paid. However, you would not be alone if you have in the past operated without a contract. You may be in a rush to get your services up and running or you may be working with a loyal and trusted client or customer. You may consider that a letter or email with some aspects of business is enough. There are a plethora of reasons why your small business might be operating without the safety net of contract, often without mishap.
Imagine the scenario however when a dispute arises – your client refuses to pay you, or there is an argument about quantity or quality of work provided. You started work with your client in good faith but you do not have a contract. Where do you go from here?
- Is there any agreement in place at all?A contract does not have to be ‘signed, sealed and delivered’ to be effective. If you have previously sent terms and conditions to your client or a purchase order then refer to these. If your client has never sought to dispute them or provided an alternative, you have a decent argument that they were aware of the terms.If not, what other documents exist to show that you did the work and how you did it? Chains of email correspondence can be useful, as can other contemporaneous notes from meetings for example. The idea is that you build up a picture of you and your client’s ‘course of conduct’ to demonstrate what the reasonable expectations were of each party. By way of example, have you regularly invoiced your client and they have paid in full in a timely manner until now? If so, they can be said to have affirmed the agreement between you.In any case, you will need to have some documents to prove that you had an agreement and what were the terms of this agreement. The fewer documents you have, the harder it is to build your case. The more structured and organized your documents are, the easier.And when you are working on a construction contract (see part 2 of practice guide) – even if it is verbal or construed from the documents you have, make sure your payment notices are sent, received and replied in accordance with the Construction Act 1996 and the Construction Contracts Scheme (see part 2 of Practice Guide). Otherwise, if problems arise and your notices are completely incompatible with the statutory provision, you will possibly be in a weaker position.
- InvoicesDepending on the circumstances, your main objective may be that you just want to get paid for the work already done. If this is the case, send a hard copy invoice detailing in full the work completed or products provided. Follow up with further late payment notices if it remains unpaid and don’t forget to have the payment notice provisions of the Construction Act 1996 and the Construction Contracts Scheme (see part 2 of Practice Guide) in mind. If you then pursue a claim, you will be able to demonstrate to a court that you have given notice to your client that payment is required.
- Be reasonable and consider a settlementHowever, pursuing a claim at court – or even starting arbitration – can be expensive and stressful, particularly if the victory is only likely to be a moral one. It may be that you even want to maintain as much goodwill as you can with the client in question and limit reputational damage to your small business, however galling that may be. Attempting to reach a settlement with your client might be the best option and may even mean you engage with them again (with a contract in place!). And although you hadn’t a contract in place before, try your best to put the terms of your settlement in writing in crystal clear words. After all, you don’t want anyone claiming in the future that “this is not what has been agreed for our settlement”.And for some final advice, keep in mind that the contract should be central to your understanding of small business law. It is supposed to be your friend and not your enemy. Do not be rushed into commencing work without a written agreement in place – they protect both parties and your best clients will expect to engage with you on that basis. And if it is written in plain English with the objectives, risks and particularities of your business in mind, you will see it as far beyond a legal document – you might even feel enthusiastic about spelling it in a power point presentation to be shared with everyone in your business!
If you have a construction contract – which you will possibly do if you are a SME in the construction industry and you don’t deal with oil and gas and mining (see Part-2 of the Construction Sector Guide to check), you will be subject the statutory adjudication procedure introduced by the Construction Act 1996 (as amended by the Part 8 of the Local Democracy, Economic Development and Construction Act 2009).
Essentially, it is a fast-track procedure (although in practice, depending on the complexity of the dispute, the parties and the adjudicator (usually an expert in the field of the dispute) can agree a longer time frame) where any difference between the parties can be submitted to an adjudicator who will decide it with binding effects until a final decision is reached in Court or arbitration. The idea is to provide an interim solution for the dispute so that the works can continue without long delays that judicial and arbitration proceeding may cause. It is important that you are familiarized with this type of dispute resolution because there are chances that you end up in an adjudication or in some of them.
You know what that means: going to Court. All the hassle, costs and pain of a legal dispute that should not be underestimated. Of course, it can be worth it. If you think this is the case, make sure you contact a disputes lawyer to assist you in the analysis of the strengths and weaknesses of your case and the robustness of your gathered evidence. They will also explain to you the procedural routes available, the estimated costs and time required and be with you during your battle.
What is different in litigation in the construction sector is the Pre-Action Protocol for Construction and Engineering Disputes. The Protocol introduces certain negotiation requirements and other steps aiming at amicable settlement and alternative dispute resolution that must be followed before you start court proceedings. The idea behind the Protocol is an attempt to reduce the number of cases that end up in courts
Alternative Dispute Resolution (ADR) – Ways outside the court room
Arbitration is a non-judicial process for the settlement of disputes where an independent third party – an arbitrator – makes a decision that is finally binding. The role of an arbitrator is similar to that of a judge, though the procedures can be less formal and an arbitrator is usually an expert in their own right. Arbitration is actually one of the best cross-border ways to resolve disputes, which is particularly meaningful in light of Brexit.
Arbitration is really really flexible. For example, did you know that the Arbitration Act 1996 is unique? It is unique because it is the most flexible UK Act of Parliament. Sure, it has mandatory provisions, but most of it is non-mandatory and can be amended by agreement between the parties. This means the parties can tailor procedures to the needs of a particular dispute so they have more influence over procedure than is possible in court proceedings – imagine that!
Arbitration is also private – hearings (if needed, a lot of disputes for SMEs can be dealt with on a documents-only basis) are held in private and the fact that a party is involved in arbitration proceedings is confidential along with the arbitration submissions and content of documents such as the statements of claim, defence, comments and so on – right through to the award itself. In contrast, the fact that a party is involved in litigation is very much a matter of public record and could be hugely damaging for a whole list of reasons, even if they win the court case.
And as arbitration awards are generally confidential, to the parties they do not give rise to any binding precedent on other parties.
Arbitration can be quick (taking fewer than 90 days from receipt of all relevant information from the parties), it can be inexpensive (from £1,350 per party for disputes of up to £250,000 / €250,000) and it is final. Alternatively a court decision can take a year or more, it can be more easily challenged and the cost is unlimited.
But you can only solve a dispute via arbitration with you and the other parties agree to it. If there is no express agreement about using arbitration for dispute resolution, the default method is litigating in court. So, before you starting thinking of going down the litigation route, think if you wouldn’t prefer using arbitration.
Mediation is a vital tool in your disputes toolkit and not many people know about it. Mediation will help you settle disputes quickly, in private (which means confidentiality and lower reputational risks), and at a lower cost than going to court or even arbitration. It saves you valuable time and money so you can get on with running your business.
Mediation isn’t about saying who is right and who is wrong, it is about trying to find a solution to a problem. The role of the mediator is to assist the parties in reaching an agreement that works for everyone and keeps the commercial relationship alive.
Mediation is successful 75% of the time, saving you time and money – let’s face it, for small businesses, time is money, so anything that has a 75% chance of resolving your dispute and removing the need for you to go to court and spend money on litigation has to be good.
A mediation can be set up in a matter of hours and cost a fraction of the price of going to court. Not only is it cheaper in terms of money you have to spend but also in terms of time away from your business. You can mediate by phone, online or in person at a meeting with the other party and the mediator. Either way, time away from running your business is kept to a minimum.
As it happens with arbitration, mediation can only be used if the parties to agree to it – and it is usually easier to agree on that on the beginning, during the negotiation process rather than on after the problem has arisen.
Marketing and Advertising: Promoting Your Business
So you’re the best of your trade, have a lucrative market and a great team raring to go and now you’ll want to get your name out there as widely as possible. Whilst carrying out these activities, there are certain legal considerations you should think about – most are common sense but certainly worth mentioning.
The government website quite plainly states what you can and cannot do. All marketing and advertising collateral (e.g. flyers, online ads, business cards etc) must be:
- An accurate description of the product or service. To elaborate further, to provide an ‘accurate’ description’ means that you are easily able to prove what you say. This also includes the price of the product, so if you’re charging VAT but fail to mention that in the pricing, that’s not accurate.
- Socially responsible (not encouraging illegal, unsafe or anti-social behaviour).
With regards to ‘direct marketing’, there are rules you must comply with if you will be contacting your database via phone or by email (e.g. you are collecting this information from your website):
- Consent is the new issue that the regulators are keen on. It is crucial that if you ask someone if they consent to being contacted, that you record that consent. Consent is supposed to be clear, informed, unambiguous and specific. So just because someone ticks a box on a web page to be contacted with marketing material, does not mean that they consent to you passing your information onto someone else. Be careful if you purchase a list of names from a third party agency, as the people may not have consented to their information being sold to others.
- Cookies: As mentioned before, if you have a website, you must have a cookies policy which is easily understandable and states what you intend on using them for.
- As a general rule, you must check to see if the person you are trying to contact is happy to be contacted by phone/fax/post/email and also give them the chance to object. If someone does object, make sure you alter your database. Remember that if you keep personal information, you have a duty to review it from time to time to ensure that it is accurate and still current.
- When you do collect their details and would like to send them other offers and promotions you must get permission.
- If another organisation e.g. an affiliate partner would also like to promote offers, in an email perhaps, you must make sure they are happy for you to share their information to a third party.
- They should also be able to ‘opt-out’ if you are sending too many emails or texts, for example. It should be easy and obvious to do so.
- A point to note is that if you are buying or renting databases, do ask the supplier if you have the right to use it based on the above criteria. The person or business must have specifically opted-in to use it, otherwise it’s not legal.
Remember: If a person is unhappy about receiving unsolicited correspondence from your business, they could submit a formal complaint and you’re likely to get fined.
Another effective way in which you could market and advertise your business is through an affiliate network or ‘partnerships’. These are people or businesses who don’t directly work for your business but would be happy to recommend the service if they feel their friends or customers could benefit. Sometimes there is a referral fee for the recommendation. If you intend on marketing in this way it is sensible to draw up an affiliate agreement or partnership contract which will clearly set out the parameters of the relationship and how the partnership will operate in practice. It doesn’t have to be complicated, just so everyone is clear about how it will operate, particularly when it comes to any monetary exchanges for referrals and understanding any activity that is planned.
At the beginning of your venture you’re going to be the director, sales exec, marketer, accountant, administrator, client handler and everything in between but at some point there’s a rather large chance you’re going to need other people occupying these roles. There are different ways in which people could be hired. The most obvious of these is as an ‘employee’ either full-time or parttime. You can also hire ‘casual or zero hours workers’ or agency staff. There is also the option of hiring consultants or contractors, who can help you with specific projects or strategic decisions. In general, if you’re hiring staff, there are several practical matters you should be aware of but in short:
- If you have ‘employees’ then you must have employers liability insurance.
- You will need to set up payroll and ensure that people are paid on time and taxes are deducted (though this doesn’t apply to agency staff as they will be paid by the agency, who you will pay).
- It is recommended that they have clear contracts in place.
- You have to provide certain information to an ‘employee’ about their employment within two months of the beginning of their employment. It is recommended that all employees sign contracts of employment containing this information and other terms that protect your business.
- You should also ensure you comply with health and safety legislation.
- A commitment to equal opportunities when hiring staff means that you will attract the widest pool of talent; there is credible evidence that this will benefit your business in the long-run.
- It is recommended to have a range of well-drafted policies to provide sensible and appropriate guidance as to how people should behave within the organisation. ‘Employees’ Here are some of the issues to consider with employees;
- Have a contract in place which states the conditions of the employee’s employment e.g. rate of pay, other benefits, working hours, holiday, maternity/paternity leave, Term, notice period, location, confidentiality, any post-term restrictions etc.
- There is a raft of legislation affecting employees which you need to be aware of, including; Legislation on the National Minimum Wage (as of June 17, £7.50 for 25 & over and specific scales for under 15, but you should check for updates).
- The Equality Act 2010 prevents discrimination on the basis of age, disability, gender, race, religion, sex, sexual orientation, marriage and civil partnership, pregnancy and maternity.
- Legislation protecting against ‘wrongful dismissal’, when you are in breach of contract, or ‘unfair dismissal’ (including constructive dismissal). Certain dismissals are automatically ‘unfair’ including those in cases where you dismiss someone for a reason relating to Health and Safety, asserting a statutory right, pregnancy or maternity leave. Making people redundant or dismissing them for poor performance can also count as unfair dismissal if not properly handled.
- Generally, it is more difficult to dismiss an employee after two years of employment.
- Legislation on holiday pay, flexible working, statutory sick pay
- The Working Time Regulations.
- The Health and Safety at work Act 1974.
- The Management of Health and Safety at Work Regulations 1999 (which govern risk assessments).
- Legislation on shared parental leave.
New pension guidelines
One point to highlight here would be the recent pension legislative changes. Following on from the Pensions Act, 2008 ‘auto-enrolment’ means you must now develop a pension scheme for your workers/employees (though employees can opt-out). You also have to contribute an amount up to 3% of their qualifying earnings to that pension. This has been a phased process since 2012 and it is now catching up with smaller businesses too. Do not underestimate how much planning is needed to successfully do this. Importantly, you will have to account for the fact you are contributing into the scheme in your budgeting.
‘Self-employed’ or ‘Contractor’
If you take on someone who is ‘self-employed’ or a ‘contractor’ they do not have a contract of employment with your organisation, but need their own agreement to provide a certain service. This will specify the length of time and for what fee they are working, and the nature of the task they are asked to carry out.
They do not have as many automatic rights as an employee, but do have some legal protection. For example, they have the right to not be discriminated against and are entitled to a safe and healthy environment to work in.
IR35 – don’t get caught out!
We hear a lot about what IR35 is and who is liable for it. In short, it targets contractors who might be avoiding paying the tax they should be paying by presenting themselves as self-employed rather than as employees. Contractors are technically self-employed and as such are not taxed in the same way as general employees; they take dividends from their company and pay less in NI contributions. HMRC sometimes sees these people instead as disguised employees who should be taxed in the same way as a general employee. The legislation looks here to stay and it is vital for contractors and businesses alike to be aware of it and stay compliant to avoid financial penalties. Contractors need to stay within the all-important definition of ‘self-employed’ to beat the IR35 rules, but this is not always as easy as it sounds. So first of all, consider whether IR35 applies to you. You can do this on the government website. In essence, the more your contract looks like a contract of employment, the less likely your service-provider will be regarded as a contractor. Here are some give-aways;
- Is the person working exclusively for you?
- Do they have a choice of whether to do the work or not?
- Do they have a choice of how to do the work?
- Can they appoint a substitute?
- Do they receive employee benefits like paid holidays and sick pay?
- Are they on an indefinite or rolling term?
In general, however you choose to hire someone, make sure you have contracts in place that clearly defines this relationship. Trust us, it will save yourself and your business a lot of future headache!
Mitigating against common risks
Operating in a sector fraught with potential risks means you should take out adequate insurance to ensure you’re covered. Here are a few options you need to take into consideration:
- Public liability insurance. This is very important as it ensures you are covered for someone getting injured or if property is damaged.
- If you have employees, you must take out employers’ liability insurance to cover claims made against you by employees who get injured or ill through working for you.
- Professional indemnity insurance is also a consideration if you are giving advice to other businesses as it will cover you for incorrect advice should financial loss occur for the other party.
- Personal accident insurance covers both lost earnings and medical costs that came about from your construction work.
- Finally, there is also a range of business equipment insurance, tool insurance and machinery insurance that you might want to consider too.
Credit Control & Cash Flow
It’s important to have an in depth view of the credit profile of any business you work with or rely on, so that you can protect your business from financial risk. Understanding the financial status of your potential customers or business partners is absolutely key when it comes to credit control and consequently, cash flow. Services such as Experian Business Express allow you to credit check both UK and international companies to assess if they will meet their financial commitments and lending requirements. You can also gain insight into the individuals who run the business.
The sort of information and data can you access includes:
- Check and monitor any UK companies & directors
- Reduce exposure to potential bad debt
- Qualify prospects and suppliers and set realistic credit limits
- Take action when faced with payment delays
- Check to see if your customers and suppliers have CCJs
- View detailed financial payment trends
- In-depth credit history
- View bankruptcy filings
We hope you’ve enjoyed our brief guide to running your construction business, keeping the organisation’s legal needs in mind. We would recommend you seek professional advice if you’re confused about any of the above – don’t get bitten! LawBite can assist with your organisation’s legal queries for around half the price of a standard law firm, with relevant documents and advice. If you’re unsure of what you need, we offer a free 15-minute consultation with one of our Construction experts too!!
Carla Caroli, Corporate and Construction LawBrief (LawBite lawyer)