Interim payments for construction works – ignorance is most definitely not bliss

Whilst familiar territory to those engaged in the construction industry, many other businesses who may occasionally have construction works carried out (whether for a new build, extension or re-fit of existing premises) may not be aware of the statutory minimum requirements that apply to construction contracts. To the unwary, these can create significant (and potentially very costly) pitfalls.

Cash flow has long been the greatest pain in the construction industry, to such an extent that the express statutory purpose of the Construction Act was to introduce minimum provisions for interim payments (on all but the smallest, shortest of jobs) during the course of a project. If the parties do not have a written contract or have agreed contract terms that fall below those minimum provisions, then the contract is non compliant, and default provisions (under the Scheme for Construction Contracts) will be implied into the contract to create those interim payment rights. Very deliberately, the Construction Act provides that parties cannot “opt out” of its provisions.

The Scheme for Construction Contracts is a “light touch” regime – it will only interfere with the terms of the contract to the extent necessary to bring them up to the minimum standard.

In practice, a non compliant construction contract can, at best, be a recipe, for confusion or, at worst, a very costly dispute – particularly where the contract becomes, as a matter of law, a hybrid between what the parties agreed between them, and provisions of the Scheme to bring it up to the minimum statutory standard.

What must a construction contract include?

In general terms, a construction contract must provide, as a minimum, for a compliant mechanism by which the contractor is entitled to interim payments. The parties can, subject to certain statutory minimum standards, agree their own timeframes for the procedure below. What follows is the default position under the Scheme.

• A “relevant period” triggering the contractor’s entitlement to an interim payment falls every 28 days;
• Each interim payment will become due either 7 days after the end of the relevant period, or upon the contractor making a claim for payment (“the due date”);
• The final date by which that interim payment must be made is 17 days after the due date;
• Within 5 days after the due date, the paying party must serve a formal notice specifying the amount they are paying and the basis upon which it is calculated (“the payment notice”). If the paying party does not agree with the amount of the interim payment the contractor seeks then, not later than 7 days before the final date for payment, the paying party must serve a pay less notice setting out what it intends to pay the contractor (“the pay less notice”).

For the unfamiliar or unwary, this is hardly intuitive – but sign up to a seemingly “simple” construction contract which is not compliant, and some or all of these rules will apply.

What are the consequences of not serving a payment notice?

Get this wrong, and the consequences have sharp teeth. If no payment notice is served, the contractor can serve a notice of its own, by which its amount applied for will by default become the amount to which it is entitled to be paid. That notice may look innocuous, but can be a “wolf in sheep’s clothing”. Fail then to serve a pay less notice in time, and you must make the full payment – even if you disagree with the amount of the interim payment the contractor seeks, or there are items you wish to set off or counterclaim against, you will have missed the boat.

This has teeth because the Construction Act also confers on the parties to a construction contract (other than residential occupiers) a non-excludable right to refer disputes arising to adjudication. Adjudication is a very fast procedure, which can be as little as 28 days from start to finish. There is no scope to introduce a set off or counterclaim within it.

The statutory philosophy is, in so many words, “pay now, argue later” – after all, the purpose of the Construction Act has maintaining cash flow in the industry at its heart. So in this example, as you are liable to pay the whole sum on the interim application, absent a technical defence then that is what the adjudicator will order, regardless of the underlying merits. If you end up over paying, any adjustments will have to be made in later interim valuations or at the final account stage.

In a properly drafted and administered construction contract, there is little to be feared by these provisions. But to embark on construction works without considering these non excludable requirements, or failing to adhere to them once works are underway, can represent a major risk for your business and its cash flow.

If you would like any further information, please contact Chris Kirby-Turner in the Construction team at Thomson Snell & Passmore, on 01322 623705.