Speaker: Russell Kenley
The payment system is a critical component of project governance, yet little attention has been paid to improving the rigour of this system. Governments have introduced security of payments processes in an attempt to protect SMEs on major projects and have even considered or introduced project banks. This reflects a desire to improve the payment system. However, none of these systems have targeted the actual payment system directly.
In Australia, payment systems generally rely on monthly lump-sum progress payments, based on estimates of work completed. This retrospective method for validation of site-work can be subject to significant error. First, it is very difficult to assess the value of partial work completed. Secondly, there is a disconnect between the payment to the prime contractor and subsequent payments to sub-contractors and suppliers. Indeed, contractors may legitimately arrange lengthy payment terms to subcontractors to farm the cash flow provided by major projects.
Improving client confidence in the payment system requires a rethink in the way cash flow is managed. Two interventions are suggested in this paper. First, that projects be broken down into micro-milestones (usually based on locations) with payments being made solely on the basis of certified completion of the milestone. Secondly, that the payment system use pre-registered (and agreed) interests to distribute client funds directly to stakeholders. This would be via an extension to the concept of project banks, whereby the project bank would take and distribute the payment.
Payment by project micro-milestones would not only reduce payment risk, but would also provide much greater project progress estimation and project control.