How Developers Avoid Paying Their Contractors
Non-payment is one of the most damaging commercial risks a contractor can face.
Developers have increasingly used PropCo and OpCo corporate structures to ring-fence their assets, limiting your ability to recover what you are owed, even when your position is legally strong.
In this article we will cover the realities of failure to pay, basics of PropCos and OpCos, legal options when payments are withheld, and more.
Our construction team at Helix Law acts as specialist litigation solicitors for contractors and subcontractors across England and Wales, handling payment disputes, adjudication, and final account claims. We offer No Win No Fee (CFA) and Damages-Based Agreement (DBA) funding on qualifying disputes, subject to case assessment, typically available where disputes are valued over £10,000 with strong prospects of success. If you are a contractor or subcontractor dealing with a dispute or in need of legal advice, contact us today. We are happy to help.
The Reality of Non-Payment in Development Projects
Because development projects are typically long with multiple parties involved, most construction contracts provide for interim payments that are released at regular intervals.
Developers also build a buffer by way of retention. The full amount for the work is not released on the final account at completion until any defects are remedied. Typically, a retention is 3%-5% of the contract value.
The retention period often lasts up to 24 months on large-scale developments.
It’s easy to see how the stages of a development project may be delayed due to external factors like adverse weather or supply chain difficulties. Disputes over workmanship and defects are also commonplace.
If you are a sub-contractor, your payment may be delayed by a dispute between the developer and the main contractors which has nothing to do with you.
Consequently, non-payment in development projects is a predictable reality, not a remote possibility.
What Are PropCo & OpCo Structures?
‘PropCo’ stands for ‘Property Company’ and ‘OpCo’ stands for ‘Operating Company’.
PropCo and OpCo structures are a device where an organisation splits into two specific legal entities.
PropCo is the holding entity that retains fixed assets like real estate, land, or physical assets.
OpCo is the active trading company that runs day-to-day commercial activities like employing staff, managing operations, or generating revenue.
The two companies are linked by a commercial lease agreement where PropCo leases equipment and property to OpCo.
This type of structure is frequently seen in various industries, including manufacturing, healthcare, and retail.
Lenders on high-value developments can insist on this split to protect their interests. Consequently, PropCos and OpCos can often access commercial mortgages that carry lower interest rates and longer amortisation schedules.
How PropCo and OpCo Structures Are Used to Limit Liability
There are several advantages to the PropCo and OpCo corporate arrangement including financial strength and flexibility, the option for independent financing, and potential tax benefits.
The split allows a business group to manage capital requirements and different types of risk completely independently, protecting both assets and trading.
If the operating business experiences any difficulties in their commercial activities, there is segregation, shielding the main company from any risks associated with operational liability.
While this arrangement is undoubtedly desirable for those businesses, it can expose contractors to increased risks.
Why This Creates Risk for Contractors
The core risk is simple. You can only recover money from the company you’ve contracted with.
If that’s the OpCo, and the OpCo has no assets, a judgment in your favour may be effectively unenforceable, even if your legal position is watertight.
The valuable assets (the site, the land, the property) sit inside the PropCo. Because the PropCo is a separate legal entity, it is not liable for the OpCo’s debts. You can’t reach those assets through a claim against the operating company, no matter how strong your case is.
This matters most when a development runs into difficulties. If the OpCo starts struggling financially, it may have nothing left to pay you with. And at that point, you could win in adjudication or court and still walk away empty-handed.
It’s also worth understanding that this is not an accidental consequence of how some developers structure their businesses. The separation is intentional. It protects the developer’s underlying assets from precisely the kind of claims contractors bring. The risk that would otherwise sit with the developer is transferred, by design, to you.
By the time you discover this structure is in place, your options may already be limited, so knowing what you are contracting into, and taking steps to protect your position before work begins, is the most effective way to manage the risk.
Protecting Your Position Throughout the Project Lifecycle
Construction disputes can arise at any stage of a project, and how exposed you are when they do is usually shaped by decisions made much earlier.
We work with contractors and subcontractors throughout the entire project lifecycle: from reviewing and negotiating your contract before work begins, to protecting your position as the project progresses, to recovering what you’re owed at the final account stage. Whatever stage you are at, speak to our construction solicitors for real-time advice when considering your position.
Before Entering the Contract
The right contract provisions will make a big impact on the potential risks to a contractor throughout the project lifecycle.
Specialist advice and drafting defines the scope of works, the agreed rates and costs, plus the all-important payment schedule. Clear deadlines for both work completion and payments are also vital.
As well as statutory protections in the event of unexpected issues, delays, or disputes, your construction contract can detail preferred routes like adjudication, as well as setting out termination rights.
During the Project
Delays and disagreements throughout a long and complex project must be anticipated.
Even with sound commercial relationships, external factors like supply problems, unforeseen issues like severe weather, and even a requirement to down tools due to an archaeological discovery, can all have unintended consequences.
The right to adjudication is there to keep projects on track, so they’re not derailed by what may be a minor dispute. Adjudication is particularly ideal for payment disputes. It’s quick, cost-effective and the adjudicator’s decision is binding on all the parties.
If your contract hasn’t provided for this, then there’s still a statutory right enshrined in law.
At Final Account Stage
In our experience, most disputes occur at the end of the project, when the parties must agree on the final account. This is the point at which defects and delays leading to losses and expenses enter the reckoning.
The contract should provide a mechanism to deal with the final account process and manage any claims. Our specialist advice will support your position, particularly on the unique aspects of construction law that apply to your case.
Legal Options if Payment Is Withheld
Seek Legal Advice
We can advise on the available remedies and identify the most commercially effective route forward. The construction contract is usually the basis to start this process.
Adjudication
The contract may provide for this but, in any event, the The Construction Act, provides most contractual parties with the statutory right to refer disputes to an adjudicator.
Adjudication, a form of Alternative Dispute Resolution (ADR), is fast and designed to avoid the costs and delays of a formal court process, which can be commercially ruinous for smaller businesses. An independent adjudicator in the field makes a decision within 28 days which is binding on both parties. It’s ideal for payment disputes and protects and preserves a project and commercial relationships in many cases.
Litigation
Litigation can be lengthy and expensive. And going to court is not usually the route of first resort; there are often more commercially expedient ways to manage a payment conflict.
Of course, litigation carries risk and outcomes are never guaranteed. Your prospects will depend on the strength of your evidence, the terms of your contract, and the specific circumstances of the dispute.
Payless Notices
A payless notice is a legal device in construction law that allows a payer (typically the developer or a main contractor) to inform the payee (a head contractor or subcontractor) that a payment will be less than the amount previously applied for. It elevates the situation from non or partial payment to a legitimate reduced payment under The Construction Act to avoid disputes and delays. However, a contractor can challenge a payless notice if it is served late or is defective in terms of format or service. A valid challenge means the payer must then pay the full amount claimed to the payee.
Contractual Remedies
Depending on the unique circumstances and/or the content of the construction agreement, there are potential contractual remedies open to the contractor in the event of non-payment. These include suspension of the contract or complete termination.
If payment is withheld, it’s vital that a contractor seeks prompt, specialist legal advice. We can provide strategic guidance on the correct route, weighing all the facts and commercial imperatives.
Frequently Asked Questions
What Is a PropCo & OpCo Structure?
A PropCo & OpCo is a mechanism whereby a business can split itself into two distinct legal entities. One part retains the assets such as property in a holding company while the other is the commercial trading structure.
There are significant protective and financial benefits for a developer by adopting this corporate structure, but this arrangement may expose a contractor to more risk.
Can I Recover Payment if the Contracting Company Has No Assets?
Payment recovery is unlikely if the contracting company has no assets, as could be the case with a PropCo and OpCo arrangement. Any assets held by the non-contracting party are shielded from claim or litigation within a separate legal entity.
It highlights the importance of sound advice at the pre-contract stage and agreed provisions to help mitigate the risk of financial loss when contracting with developers.
Speak to Helix Law About Construction Payment Disputes
Developer payment avoidance is one of the main reasons contractors seek legal advice. However, this can be late in the day when a contractor’s position is already weak from ambiguous contract wording, entrenched disputes, and corporate structures designed to shield assets.
We can help you draft your contract and protect your position from the outset. When disputes arise, our construction contract solicitors handle these efficiently, avoiding the need for adjudication or litigation, if possible.
Our advice is strategic and practical and always designed to minimise risk to your business and unnecessary costs. For any construction contract queries, including disputed late payments, contact our construction law litigation solicitors today. We’d love to assist you.
