Interim payments in construction contracts – your questions answered


Cash is king for all those involved in construction projects, so whether you’re claiming or making a payment, there are steps you need to take to protect your business. Here’s everything you need to know to smooth the payment process.

What does the law say?

The law requires a mandatory payment regime to form part of all “construction contracts” (a term which is defined by legislation) if the work is specified, or estimated to take, more than 45 days. This may include instalments, stage payments or other periodic payments. The payment regime must set out a process for determining what payments become due and when and provide for a final date for payment.

The law covers payees and payers in the construction supply chain, including building owners, developers, main contractors, sub-contractors, sub-sub-contractors and consultants.

What dates should my contract include?

Make sure your contract includes the Due Date and the Final Date for Payment. Before you do anything else, make sure these dates are imprinted on your mind and put them in a calendar to remind you during the contract.

The Due Date and Final Date for Payment create a timeline for each payment which both parties need to adhere to.

How do I ensure my Payment Application is valid?

Most standard forms of construction contract expressly provide for a Payment Application from the payee. This usually starts the payment process and should be submitted in strict accordance with the contract.

To ensure that a Payment Application is valid:

  • Value the works on the date specified in the contract
  • Submit your Payment Application within the deadline specified in your contract
  • Set out the sum considered to be due and the basis of the calculation
  • Include a summary sheet which breaks down the calculation for the amount considered to be due.

Also title the Payment Application using the language of the contract, for example, if the contract refers to an “Interim Payment Application” then use the same title so the payer is in no doubt what you’re submitting.

When should a payer provide a Payment Notice?

The payer must give the payee a Payment Notice no later than five days after the Due Date. A day is a calendar day, not a working day, so weekends are included.

To ensure that a Payment Notice is valid:

  • Submit your Payment Notice by the deadline not later than 5 days after the Due Date
  • Specify the amount considered to be due and the basis of the calculation.

The amount specified in the Payment Notice becomes the “Notified Sum” which must be paid on or before the Final Date for Payment. If it isn’t, the payee can adjudicate or suspend the performance of work.

What if the payer fails to issue a Payment Notice?

If the payer doesn’t give a Payment Notice and the contract expressly provides for the giving of a Payment Application and a valid Payment Application has been submitted then the amount stated in the Payment Application becomes the “Notified Sum” and the payee is deemed to have agreed to pay the amount stated in the Payment Application.

If the contract doesn’t expressly provide for the giving of a Payment Application, the payee is entitled to issue a Default Payment Notice as soon as the payer defaults.

In each case, the payer can rectify the issue by sending a Pay Less Notice to the payee.

When should a payee issue a Default Payment Notice?

A payee should issue a Default Payment Notice if the contract doesn’t expressly provide for the giving of a Payment Application and the payer has failed to issue a Payment Notice.

Alternatively, it may be that you have already issued a Payment Application even though it wasn’t expressly permitted by the contract. If so, you should still give a Default Payment Notice.

A Default Payment Notice should be in the same form as a Payment Application i.e. specify the amount considered to be due and the basis of the calculation. The amount stated in a Default Payment Notice becomes the “Notified Sum” which must be paid on or before the final date for payment. It is always a good idea to give the document an appropriate title such as “Default Payment Notice”.

Don’t delay in giving a Default Payment Notice as the Final Date for Payment gets postponed accordingly. For example, if the payment notice was due on the 5th of the month, and the Default Payment Notice issued on the 7th, the Final Date for Payment will be postponed by two days.

The payer can respond to a Default Payment Notice by sending a Pay Less Notice to the payee.

What’s a Pay Less Notice?

The Pay Less Notice is the payer’s final opportunity to pay less than the Notified Sum. The contract should include a deadline for giving a Pay Less Notice. If it doesn’t, then the default deadline is seven days before the Final Date for Payment.

A Pay Less Notice must specify the amount due at the date the notice is given and the basis of the calculation. The amount stated becomes the Notified Sum which must be paid on or before the Final Date for Payment.

What happens if the payer fails to pay by the Final Date for Payment?
If the payer fails to pay the Notified Sum on or before the Final Date for Payment then the payee has two options:

Smash and grab adjudication:

This is an effective way for a payee to get paid the Notified Sum, which is based on a procedural failure by the payer to serve a valid Payment Notice.

If the payee has issued either a valid Payment Application or Default Payment Notice but the payer fails to issue a Payment Notice or Pay Less Notice, then the payee is entitled to the Notified Sum stated in the Payment Application or Default Payment Application. This can be recovered by a smash and grab adjudication which can result in a payment windfall for the payee.

Alternatively, if a valid Payment Notice or Pay Less Notice has been given (i.e. there is no procedural failure by the payer to serve a valid notice) then the payee is entitled to the Notified Sum stated in the Payment Notice or Pay Less Notice. This can also be recovered in a smash and grab adjudication if not paid.

The consequences can be equally as draconian for the payee if they have failed to issue the correct notices either in the form of a valid Payment Application or a Default Payment Notice. If either is deficient, then the payee will not have the grounds for a smash and grab adjudication.

Suspension:

If the payer fails to pay the Notified Sum by the Final Date for Payment, the payee has the right to suspend part or all of the works. To do so, the payee must give the payer at least seven days’ notice.

The payee is also entitled to recover the costs and expenses reasonably incurred as a result of suspending the work. Furthermore, they are entitled to extra time for the consequential delays that may be required to return the payee’s operations to full capacity.

How do I find out more?

Download our simple payment checklist for payees and payers or to discuss your needs or queries, contact Matthew Cocklin on 020 7065 1813.


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