Payment For Construction Works

The primary benefit that a contractor / sub-contractor receives for carrying out construction works is payment. The profit margin on construction works is conventionally low. During a period of financial uncertainty or downturn, problems with payment can have a far-reaching impact on the supply chain. Therefore, payment provisions sit at the heart of construction contracts and construction law as a whole. The Housing Grants, Construction & Regeneration Act 1996 (the Act) is the key piece of law on this topic.

The Act sets out a mechanism for regular payment for works throughout the life of the project, which all construction contracts (as defined) must comply, and to the extent that they don’t, the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the Scheme) fills the contractual gaps / corrects the contract. Standard form contracts (e.g. JCT) comply with the Act.

The regular (e.g. monthly) statutory payment mechanism essentially involves a payment application by the payee, a Payment Notice by the payor (or in default by the payee) and a Pay Less Notice by the payor. This superficially simple process in practice contains a number of hidden complexities and has spawned a considerable amount of caselaw. In particular it has given rise to so-called smash and grab claims, where a payee alleges that a payor has failed to serve a valid Payment and/or Pay Less Notice, but the payee has in effect served a valid Payment Notice, and in those circumstances the payee says that it is entitled to be paid the whole sum it has applied for. So these technical default claims by payees seek and often achieve a draconian outcome. Smash and grab claims however often provoke subsequent disputes over what the true valuation of the construction works is, i.e. they don’t resolve anything themselves.

Another aspect of the payment provisions contained in the Act, is the right of the payee to suspend performance of any/all of its contractual obligations (e.g. carrying out the works) if a sum that should have been paid by the deadline, has not been paid. Such a right requires a 7-day notice of intention beforehand.

As for the final account process, standard form contracts provide for it, and it usually involves a procedure whereby each side puts forward its position, which is then agreed or not within a timeframe, so that a resolution does not drift indefinitely.

Retention in construction contracts is commonplace, namely where a small percentage of the contract sum is held on to by the employer, until its partial release at completion of the works and then full release at the end of a defect’s liability period.