Cause and Effect of Conditional Payments Provision to Subcontractors

Abstract

Subcontract practices are commonly applied in construction projects when the activities are enormous and require certain subcontractors who specialize in their fields. Subcontractors work for a main contractor under separated contracts from the main contract. However, subcontractors are often affected by problems between the main contractor and project owner. Problem of late payment by the owner to the main contractor is the problem that directly impacts the subcontractor. The disadvantage is due to the clause in subcontracting known as conditional payment that arranges a subcontractor’s payment after the main contractor is paid by the owner. This problem is often experienced by subcontractors in the Indonesian construction industry. This study is conducted in order to understand the cause and effect of conditional payment practices in Indonesia. Following a literature review, 22 cause factors and four effects are established and developed into a questionnaire. The questionnaire was distributed to subcontractors in some cities in Indonesia. Data is analyzed using frequency index. The result of the analysis indicates that the most frequent factor causing conditional payment is the subcontractor’s inclination to avoid dispute. Subcontractors try to maintain long-term working relationships in order to sustain their company, which becomes the main reason for entering into a conditional payment agreement. The analysis also shows that the effects of conditional payment are subcontractors’ cash flow and performance. Interestingly, cash flow difficulties experienced by subcontractors are instigated from the owner’s financial problems, which affects contractor’s cash flow. Consequently, contractors compensate subcontractor’s work with installments. This research provides potential underlying reasons for the practices of conditional payments in Indonesia’s construction industry.