Payments in Construction Contracts

Mon 22nd Jul 2024
A handshake with some paperwork and set of keys underneath.

Agreements between employers and contractors to carry out construction work are often not made in writing. Employers are those who commission the construction works and contractors are the party who undertakes the work. Where a written contract does exist, it will often not specify comprehensive terms regarding payment. So how will the payee be paid for their work?

Where there is no contract, or where a contract fails to include full payment terms, contractors have statutory rights. Employers are obligated to set out how payments should be managed and provided for construction works.

Fleur Uren, Solicitor on Coodes’ Commercial Disputes team, explains the complexities of construction contracts and payments.

The Housing Grants, Construction and Regeneration Act 1996

The Housing Grants, Construction and Regeneration Act 1996 applies to construction contracts. The Act came about to improve the way payments are requested and received within the construction industry. Overall, it helps to resolve the chance of a construction dispute and expensive dispute resolution.

A construction contract means an agreement with a person for any of the following:

  1. The carrying out of construction operations;
  2. Arranging for the carrying out of construction operations by others, whether by sub-contract or otherwise;
  3. Providing labour, or the labour of others, for the carrying out of construction operations;
  4. To do architectural, design, or surveying work; or
  5. To provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape in relation to construction operations.

The term ‘construction operations’ is defined in the Act as operations of any of the following:

  1. Construction, alteration, repair, maintenance, demolition or dismantling of buildings;
  2. Installation in any building or structure of fittings including service systems;
  3. External or internal cleaning of buildings, carried out in the course of construction;
  4. Preparatory work which form an integral part of operations such as site clearing, dealing with scaffolding, laying foundations or excavation; or
  5. Painting or decorating the internal or external surfaces.

The Act provides that a party to a construction contract is entitled to payment by instalments, stage payments or other periodic payments for any work completed.  

The Scheme for Construction Contracts Regulations

The Scheme for Construction Contracts Regulations supplements the Act. It applies terms into a construction contract where the necessary payment provisions have not been noted. If a contract only contains some necessary provisions, the Scheme will supplement the contract. This means any missing provisions will be implied by the Scheme. If a contract contains no provisions at all, the entirety of payment terms in the Scheme will be implied into the contract.

Dates for payment

Payments should be made when the party carrying out the work applies for payment as set out in the contract. The payment application should then be reviewed by the paying party.

The paying party need to confirm the sum they are requesting as well as calculations made through a payment notice. When the payment becomes due for payment, there is a further period allowed for payment to be made. If a contract lacks a final date for when a payment is due, a final date is provided in the Scheme.

The payment provisions implied by the Scheme are set out below:

  • A payment shall become due on whichever of the following dates occurs later:
  • The expiry of 7 days following the relevant period; or
  • The making of a claim by the payee.

(The relevant period in absence of being specified in a contract is 28 days)

  • The final payment payable shall become due on the expiry of:    
  • 30 days following completion of the work; or
  • The making of a claim by the payee.
  • The final date for payment shall be 17 days from the date that payment becomes due.
  • A notice specifying the amount to be paid must be given within 5 days of when the payment becomes due. The notice must specify what the payment relates to and on the basis upon which it is calculated.
  • Any notice of an intention to withhold payment must be given no later than 7 days before the date for final payment.

Payment notices

The Act provides that a payment notice is required for every payment being applied for by the payee. If they fail to serve a notice outlining the sum, the party carrying out the works can serve a Default Payment Notice. If an application for payment has already been made, the application itself can be the default payment notice. The sum stated in the payment notice or the default payment notice is what is known as the Notified Sum, which is payable by the final date for payment.

If the paying party considers that a lesser sum is due to the payee, they must serve a Pay Less Notice. This must be served within the ‘prescribed period’ which can either be agreed between the parties as a contract term or in the absence of any prior agreement, the Scheme provides that it will be 7 days before the final date for payment.

Construction payment disputes

Contractors and employers in a construction contract should familiarise themselves with the payment terms set out in their contract and ensure the terms are followed correctly. In the absence of a written contract, parties should be aware of the statutory terms that will be applied.

Any failure to correctly administer payments in a construction contract can result in legal action or a referral to adjudication. The right to adjudication is also offered by the Scheme if no express provision is provided in the contract.

Coodes Solicitors act for both employers and contractors in construction disputes. If you require any assistance please get in touch with Fleur Uren and the rest of our Commercial Disputes Team. Alternatively, you can use our online contact form.

Mon 22nd Jul 2024

Fleur Uren

Solicitor

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