Payment has long been one of the most contentious issues in the Construction Industry, so much so in fact, that in 1998 the ‘Housing Grants, Construction and Regeneration Act’ (commonly known as ‘The Construction Act’) was passed, and subsequently revised in 2011 to help contractors gain certainty and control in an area often fraught with disputes.
Simplifying the Construction Payment Flow
First up, before we dive into the process, there’s two pieces of legislation you need to know when it comes to understanding your rights and obligations in construction projects.
1 – The Housing Grants, Construction and Regeneration Act (The Construction Act)
The Housing Grants, Construction and Regeneration Act and its amendment applies to all construction contracts and entitles contractors to;
- The right to be paid in stage payments. (Applicable for construction contracts longer than 45 days)
- The right to be informed of the amount due, or any amounts to be withheld. (This should be set out in a clear payment schedule in your contract)
- The right to suspend work for non-payment
- The right to adjudication.
All construction contracts should include the above, but if the contract fails to make provision for these, or if there is no contract at all, the ‘The Scheme for Construction Contracts’ applies.
2 – The Scheme for Construction Contracts (The Scheme)
The Scheme for Construction Contracts (England and Wales) Regulations comes into force when contracts do not comply with the Housing Grants, Construction and Regeneration Act (as above).
Specifically, Part 2 of ‘The Scheme’ relates to payment (all the detail can be found here http://www.legislation.gov.uk/uksi/1998/649/schedule/made) and essentially, it gives contractors structure, a timeline and ultimately certainty when they should be paid.
Now we understand the legislation governing payment, how does the Construction Act work in practice?
The Construction Act and The Scheme set out a clear framework for managing the payment process in construction projects and here we’ll provide you with a simple, step-by-step guide to help you understand the obligations on both sides.
Please remember however, that this article has been written for information purposes only, and its contents should not be relied upon in any specific situation without taking relevant legal advice.
Let’s look at the key steps in the process
Application for Payment
The Application for Payment kicks-off the process. The application should include the value and along with a justification. (However, the required content of the Application for Payment will vary depending on contract)
Sometimes called ‘Date for Payment’ the ‘Due Date’ is somewhat confusingly, not the date when the actual payment will be made. It is however arguably the most important date in the process. The Due Date schedule should be set out in the contract (if it’s not then ‘The Scheme’ will apply) and (as you’ll see from image below) the ‘Due Date’ starts the countdown for the next step in the process.
A ‘Payment Notice’ is the document the contractor (the employer) serves the subcontractor (the employee) providing details of what’s payable and why. This is known as the ‘Notified Sum’ and this is what will be paid on the ‘Final Date for Payment’ (see below).
Key Point: A Payment Notice must be issued no later than five days after the ‘Due Date’.
Final Date for Payment
The Final Date for Payment is the date that the contractor (the employer) pays the subcontractor (the employee) and relates to the payment terms that have been agreed to in the contract, or in the event of an absence of or a non-compliant contact ‘The Scheme’ stipulates that payment should be made within 17 days after that payment becomes due. The Final Date for Payment is (fortunately or unfortunately – depending on your perspective) a moveable date and is contingent on the two final pieces below.
Pay Less Notice
If the contractor wants to pay lesser amount, they must provide the subcontractor with a Pay Less Notice. This must be served within a timeframe that is either set out in the contract or in ‘The Scheme’, which can be, for example, between 1 and 7 days before the Final Date for Payment.
Like the Payment Notice, the Pay Less Notice needs to state the basis for how this new sum was calculated. The Final Date for Payment will move dependant on whether a Pay Less Notice has been issued. For example, if you have agreed 30 day payment terms and you’d received a Pay Less notice, the Final Date for Payment will move to 30 days from the date of the Pay Less Notice.
BONUS Point: Failure to Issue a Payment Notice
If the contractor fails to issue a Payment Notice within 5 days of the Due Date, the subcontractor may issue their own payment notice (for what they consider to be payable), before the Final Date for Payment. Providing this notice is submitted to the contractor within the correct time-frame, this sum is then payable by the Final Date for Payment, which is, as with the Pay Less Notice moved back from the date of this new Payment Notice.
The Payment Process Flow
At a high-level, the payment process is not overly complex, however when you factor in the potential variances (differing contracts, the need for compliant payment notices and varying timelines) and multiplying this across a large supply chain, you can easily see where issues and disputes can arise.
Whilst the Construction Act has made significant strides in providing certainty around payment, it’s also established a number of administration processes that, if not executed correctly can carry significant risk. (Take the fact that if contractor fails to issue a Payment Notice within 5 days of the Due Date, a subcontractor can then issue a Payment Notice for what they believe to be due, as perfect example)
This makes it vital for a contractor to have a water-tight and automated administration process around payment to prevent unnecessary exposure and to maintain healthy, productive working relationships with the entire supply chain.