Payment in construction contracts – compliance is key!

The requirements for payment arrangements in construction contracts are very prescriptive and can actually replace the arrangements parties have in place if they are not compliant.  We look at this in more detail and set out what you need to know in this article.

What are the rules?

The payment provisions in the Housing Grants, Construction and Regeneration Act 1996 (the “HGCRA”) apply to all construction contracts as defined in s104. Parties are advised to check whether they have a construction contract as a first priority, to see if the HGCRA applies.  For example, following Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23, most collateral warranties will not be considered construction contracts under the definition in s104.

Part II of the Scheme for Construction Contracts 1998 (the “Scheme”), included in the HGCRA, sets out a payment strategy which will apply as a default mechanism (provided that the work lasts 45 days or over) in the event of non-compliance.  Some important rules are below:

1. A construction contract must have an adequate mechanism for determining what payments become due and when, as well as a final date for payment. The Scheme will apply instead if the mechanism is deemed to be inadequate. (An example is the case of Hirst and others v Dunbar and others [2022] EWHC 41 (TCC), in which the court found that a lack of arrangement for payment process was lacking despite the parties agreeing that the contractor would be paid a reasonable sum)
2. A pay-when-paid clause is prohibited, unless the party from whom payment is originally sought is insolvent. (s113, HGCRA)
3. The paying party must pay the amount specified in the payment notice by the final date for payment, unless they have served a valid payment notice or effective pay less notice. (Placefirst Construction Ltd v Car Construction (North East) Ltd [2025] EWHC 100 (TCC)).

What are the timings?

The relevant dates for payment notices/dates can be arranged between the parties, provided that they are an adequate mechanism for payment, but the Scheme sets out some deadlines which is mostly followed by standard form contracts.  Our graphic below illustrates the Scheme deadlines:

Compliance with the payment provisions in the HGCRA is essential to avoid the Scheme being implied and disputes arising. If you would like our assistance with understanding these provisions, please feel free to get in touch with our construction team.