Payment problems and how to avoid them

Payment problems and how to avoid them
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How can construction businesses minimise the risk of getting it wrong when grappling with payment mechanisms, asks Rowan Turrall?

Cashflow is the lifeblood of the construction industry, particularly in times of economic uncertainty. Unlike other industries, the sector has its own statutory mechanisms to help push cash down the supply chain, predominantly through the use of interim payments.

Standard form contracts have different interim payment mechanisms which comply with the statutory requirements of the Housing Grants, Construction and Regeneration Act 1996 (“The Act”). This requires that payment notices are issued. It’s important to understand and comply with these provisions to ensure they work in your favour and to avoid the pitfalls.

Who is responsible for preparing payment notices?

This will vary from contract to contract so you need to be clear who is responsible for doing what and when. Although referred to as a “payment notice” in the Act, many standard forms use different expressions such as “Interim Certificate”. Sometimes, the contractor will be responsible for preparing an interim valuation before the certificate/payment notice is issued. For example, with the JCT Design and Build 2016, the contractor is obliged to issue a payment application.

By contrast, using the JCT Intermediate Contract 2016, the contractor can (but does not need to) submit an application. A payment notice (certificate) still needs to be prepared by the architect/contract administrator on time regardless of whether the contractor makes an application. If not, and the contractor has submitted a timely application, the employer will have to pay the amount in the application unless they issue a pay less notice on time.

It’s easy to see how confusion can arise and why it extremely important to understand what the trigger is for the payment cycle in your contract. 

What are the key things to watch out for when dealing with payment?
  • Work out what the “due date” is for each payment, as this is usually the starting point for all of the other payment dates.
  • Make sure you know the date at which any valuation has to be calculated as a valuation/payment notice/pay less notice must be based on a valuation at the correct date.
  • Check if there are any amendments to a standard form that affect the payment provisions or if there are additional requirements that need to be included as part of a contractor’s application. For example, the JCT DB 2016 requires an interim payment application to include any further information specified in the Employer’s Requirements. 
  • Diarise the relevant dates for your part of the process and watch out for bank holidays, which will alter the dates.
  • Where a contractor is submitting an application it needs to be set out with proper clarity and be clearly identifiable as a payment application. If there is a dispute about whether an application is valid the court will take an objective approach and consider whether the recipient would have realised the document was a payment application.
  • Payment notices and pay less notices must clearly set out the sum that is due and/or to be deducted and how the sum has been calculated.
  • Be clear and unambiguous when submitting applications – a number of cases which have ended up in court have centred around documents with potentially misleading headings, incorrect valuation dates or incorrect numbering. This is a risk, particularly if a spreadsheet is updated each month and one or more of the headings does not get amended.
  • Although a pay less notice does not have to state that it is a pay less notice, it helps add clarity if it does.
  • A payment notice needs to be given even if the payer considers that the amount to be paid is £0.
  • Don’t forget the provisions of the Act apply down the supply chain, so a contractor will need to ensure it follows the correct procedures with its subcontractors.
  • Follow final account processes carefully to ensure that all necessary documentation is produced within the time scales specified.
What can go wrong?

Contracts with amended payment provisions can also cause issues, particularly when a schedule of payment dates is added to a contract. These can be helpful to keep track of the various dates but, if the project overruns and the schedule does not provide for further dates to be added, a contractor may find they are not entitled to further interim payments.

If payment provisions are not followed correctly, the payer may end up paying a sum they think is more than is due. If the payer fails to pay, the payee can start an adjudication. The payer will usually be unable to contest the amount if they have not served a pay less notice at the appropriate time. Instead, the payer will have to pay and may have to start a separate adjudication to determine what the correct valuation should have been.

Rowan Turrall is a partner and head of dispute resolution at Boyes Turner.

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