FAQ: Construction

Q: I am unhappy with my architect’s assessment of how much I am due to pay the contractor this month, as things seem to be quite a long way behind. What should I do?

A: It sounds as though you have a fairly typical building contract, under which your architect has taken on the role of Contract Administrator. A Contract Administrator must apply the terms of the contract, including those that deal with the monthly valuation of the sums due to the contractor.

As Contract Administrator, they are under a duty to act “fairly and impartially” between the parties. They must apply the valuation rules to the letter of the contract, even if they may share your concerns over any issues with the contractor’s progress. A formal building contract will also set out how the delays are dealt with, which will depend on what periods of delay are the contractor’s responsibility and which are at your risk (for example, if there have been variations to the works that your contractor is to undertake).

Your building contract should have a mechanism that allows you, in certain circumstances, to issue a formal notice of your intention to pay less to your builder than the sum that has been certified. This could, for example, be because the works are running late and you have an entitlement to deduct pre-set (liquidated) damages for the period of the delay that is the contractor’s responsibility.

In the first instance, you should ask your architect to explain why they have got to the valuation that they have, and whether or not they have considered any sums that you may be entitled to deduct.

If the amount of money is significant or if you are concerned that the contractor may not be willing or able to complete your project, it will be worth seeking legal advice. If there are grounds on which to withhold a significant sum, it will be important to ensure that the notice is properly prepared and validly served within the required timeframes, as the consequences of getting it wrong will put you in breach of contract, and can be severe. This is particularly so where relations may already be strained and an incorrect deduction could spark a formal legal dispute.

Often, interim payment disputes resolve themselves to an extent, because matters will largely be superseded by the next application and valuation cycle, by when things will have moved on. However, if matters escalate or the works come to a halt, it is worth taking advice so you understand your position and the options available to you for resolving disputes. This may well include a contractual right for either party to refer a dispute to adjudication, even though residential occupiers are excluded from the scope of the statutory right to adjudicate under the Construction Act.

Q: I agreed a fixed price with my contractor for a loft extension, the cost has now exceeded this due to a design change and the work is not finished. Do I have to pay the extra costs, as my budget does not allow for this?

A: In this case the costs have overrun because you changed the design which has caused more work for the contractor. Your contract would allow for the price to be varied under such circumstances, e.g. where a change is not the fault of the contractor, so he is entitled to the extra cost. Regarding your budget you will need to pay, despite the agreed price being the maximum you could spend. When embarking on a project it is always advisable to allow a contingency of 10% – 20% to cover inevitable cost overruns which the customer will be liable to pay.

Q: My house is being completely refurbished – I am concerned I am being overcharged by my contractor. What should I do?

A: Instruct an independent quantity surveyor who will inspect the works, review the contract documents, particularly the specification and how the contract sum was calculated, and advise you as to what the cost should be to date. You will then be able compare this to the amount your contractor is charging to get an idea of whether you are being overcharged or not.

Q: I am building a new house for a client, which is about three-quarters complete. The client is refusing to pay my last invoice which has been certified as due. This is not the first time and I wish to terminate the contract – how do I do this?

A: You must check the termination provisions in your contract carefully and follow the procedure set out to the letter. Failure to do this properly will put you in breach of contract (called a ‘repudiatory’ or fundamental breach) allowing the client to sue you and recover damages for any loss suffered (although it would have to take into account any sums properly due to you). In your case you have contracted under an industry standard contract (a JCT Intermediate form), which sets out that in the case of failure to pay the full payment of a certified sum by the final date for payment, you should give a 14 day notice of your intention to terminate, if full payment is not made. If the client does not pay in full by the end of 14 days, serve a further notice within 21 days terminating your employment. If the client pays up within time, the contract remains in place and you have to continue. If you terminate your employment, you can then seek to recover the money due through legal channels.

There is an option short of termination to persuade the client to pay, and in your case you can suspend the work until full payment is made. You give the client 7 days to pay and if full payment is not made you suspend the works until it is. You are entitled to any reasonable costs you incur (including de- and re-mobilisation costs) and an extension of time for the whole period of suspension.

Q: My contractor has sent me a letter for an extension saying that the construction will take five months and has attached a specification divided into separate headings with a price against each and an overall total. Is this sufficient?

A: You should ensure that the specification is properly detailed, with each section properly broken down with descriptions of all the various elements showing what materials are being used and what the quantity of each is and where applicable its unit price. Be as specific as possible (e.g. the make/colour of kitchen tiles, paint, flooring, door furniture etc.). Then there is less (hopefully no) room for argument over what is or is not included, and consequently whether or not something is an extra you have to pay for.

You need a formal written contract which, among other things: sets out agreed start/finish dates; attaches the agreed specification to show the scope of works and the price; allows the contractor extra time to finish if you have to make changes to the project (which they are not the cause of); allows for changes to the works or materials; obliges the contractor to have and maintain proper insurance cover; sets out the circumstances under which the contract can be terminated. This is by no means an exhaustive list.

This will benefit both you and the contractor as each will know where they stand legally if a dispute occurs, but will lessen the chances of one arising in the first place. There are suitable standard form contracts for this which just need tailoring to the project specifics without reinventing the wheel.

Q: I am about to have the whole house renovated and will move out into rented accommodation. What happens if the contractor does not finish by the agreed date?

A: Make sure your contract provides for what happens if there is a delay. If it is because you have made any changes (which the contractor is not responsible for), or if something is beyond either’s control, then the contract should allow the contractor a reasonable extension of time to complete. You have to take the risk in that case.

If however the delay is the contractor’s fault (which includes any delay caused by any subcontractor or supplier they use) then the contract should provide that you are compensated for the period of delay. Usually this is achieved by payment of what are known as ‘liquidated damages’ – these are expressed as a specific sum to be paid on a daily or weekly basis.

This sum should be a measure of the loss that will be incurred – in your case a good starting point for calculating the applicable level will be the extra rent and storage charges you incur. If no specific rate is included you can still recover damages but you will have to prove you actually suffered the loss and how much; with ‘liquidated damages’ you only have to prove that the delay is the contractor’s fault. The benefit to the contractor is that they know the maximum they will have to pay in those circumstances. Another benefit to you is that with a proper contract in place, you can offset those damages against payments due to the contractor, helping cash flow at a pressure point in the build.

If you would like to discuss the issues detailed above, please contact Chris Whittington on 01322 623706 or chris.whittington@ts-p.co.uk. Alternatively please visit our construction page.