Hong Kong looks to improve payment practices in construction sector with bill in works to fix cash-flow problems along supply chain

“There may be some payment disputes, which cause the payment process to be interrupted from the payer to the payee,” Undersecretary for Development David Lam Chi-man told a meeting of the Legislative Council’s development panel on Tuesday.

“This affects cash flow throughout the supply chain, which is not ideal.”

He added: “We have proposed the bill, hoping to make the payment ecology of our entire construction industry more sound, which will be more beneficial to our long-term development.”

The government said it was finalising the proposal and was seeking to submit the bill to Legco within the first half of next year, adding the legislation would apply to contracts newly signed one year after it was gazetted.

Studies by the authorities found that industry stakeholders, including contractors, subcontractors, consultants and suppliers, had long experienced payment problems.

The average outstanding payment annually accounted for 5 per cent to 12 per cent of the total business receipts, and the longest delay in payment was more than six months, according to the government.

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Causes of the problems included the common practice in subcontracts that the payee could only receive a payment after the paying party was paid from an upper-tier contract, no specified payment arrangements and disagreements over the amount involved.

The proposed law will impose restrictions over some unfair payment terms, and require the paying party to respond to a payment claim within 30 days and settle within 60 days.

It will also introduce an adjudication mechanism, under which the claiming party is entitled to initiate proceedings over the payment dispute.

Parties to the contract will be able to engage an independent adjudicator appointed by a nominating body to examine the dispute and make a determination within 55 working days.

Under the proposed legislation, the claiming party will be entitled to suspend or reduce the rate of progress of work when the paying party fails to pay the admitted amount in full on or before the payable date. The same applies if the dispute is determined by adjudication and the party fails to pay the required amount in full within the deadline.

Lawmakers welcomed the proposed bill at Tuesday’s meeting and said it could help stakeholders to secure payments in a timely manner, but some questioned the selection of adjudicators and the duration of adjudication.

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Lawmaker Doreen Kong Yuk-foon said the adjudication mechanism was an essential part of the proposed bill, and asked if there would be enough adjudicators and how they would be selected.

She also said the proposed 55 days for an adjudicator to make a determination might be too long when claiming parties were waiting for payments.

Lam said the proposed duration consisted of 23 days for parties to submit documents and 22 days for an adjudicator to reach a determination, but he added that the latter process could only take one to two weeks.

He said authorities would work with adjudicator-nominating bodies to formulate qualifications and requirements as well as a code of conduct.