Payment in the Construction Industry
This article provides a practical overview of payment within the construction industry and is applicable to contracts entered into after 1 October 2011.
The construction industry has its own set of rules that govern how and when payment under a “construction contract” should be made. These rules are set out in the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “Construction Act”).
A “construction contract” is a contract for the carrying out of construction operations subject to certain exceptions such as contracts with residential occupiers, finance agreements and contracts relating to drilling and/or extraction of natural gas*.
The Construction Act
The Construction Act provides that a construction contract must:
- provide for regular interim payments throughout the duration of the contract (if the duration of the works is to be more than 45 days);
- contain procedures to enable the parties to calculate the amount, the due date and the final date for payment of any payments falling due under the contract (the parties are free to agree the amount and dates between themselves);
- require the payer (e.g. the Employer) or the payee (e.g. the Contractor) to give a notice to the other no later than 5 days after any due date (the “Relevant Date”) which states:
(a) the amount the payer/payee considers was due on the due date; and
(b) how that amount has been calculated
(a “Payment Notice”).
The amount claimed in the Payment Notice becomes the “Notified Sum” which must be paid on the final date for payment.
In the absence of a Payment Notice being issued by the payer by the Relevant Date, the Construction Act allows the payee to give a notice to the payer which:
- specifies the amount the payee considers was due on the due date; and
- the basis *on which that amount has been calculated
(a “Default Payment Notice”).
The amount in the Default Payment Notice becomes the “Notified Sum” which must be paid on the final date for payment.
The payee cannot issue a Default Payment Notice if it has already issued an application for payment in accordance with the terms of the contract. In these circumstances, the payee’s application for payment will automatically become the payee’s Payment Notice in the event that the payer fails to issue a Payment Notice by the Requisite Date. Consequently, the sum claimed in the payee’s application for payment becomes the Notified Sum which must be paid on or before the final date for payment. It is therefore very important that any application for payment issued by the payee complies with the requirements for a valid Payment Notice as set out above.
If the payer wants to pay less than the Notified Sum in a Payment Notice or Default Payment Notice then the payer must issue a notice to the payee no later than the period specified in the contract or if no period is specified within the contract then no later than 7 days before the final date for payment. The notice must:
- state the amount that the payer considers to be due on the date that the notice is served; and
- state how that amount has been calculated
(a “Pay Less Notice”).
If the payer fails to issue a Pay Less Notice by the requisite date then the payer must pay the Notified Sum in the Payment Notice or Default Payment Notice on or before the final date for payment.
Issuing a Default Payment Notice extends the final date for payment of the sum claimed in the Default Payment Notice by the number of days that the Default Payment Notice was issued after the earliest date that it could have been issued (i.e. 6 days after the due date), for example:
In the event that a construction contract fails to comply with any of the payment provisions set out in the Construction Act then the relevant provisions of Part II of the Scheme for Construction Contracts (England and Wales) Regulations 1998 are implied into the construction contract.
For more guidance on payment within the construction industry, please contact Partner and Head of Construction and Engineering, Andrew Perry on 01332 226488 or email firstname.lastname@example.org
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