One of the critical challenges in construction is managing the risk of not getting paid. During our recent Risk Workshop, Holmes & Hills tackled essential aspects of construction contracts, particularly payment risks. In the construction industry, having a solid understanding of payment mechanisms, such as due dates, final date for payment, and Pay Less Notices, is essential for safeguarding your financial health.
1. Understanding Payment Mechanisms
A construction contract must have a clear and adequate payment mechanism, which outlines how interim and final payments are made. The due date is crucial as it’s the point from which all other important dates (like the final payment date) are calculated. Contractors often confuse the due date with the final date for payment, but they are distinct. While the due date is the starting point, the final date for payment is when the contractor can expect actual payment.
Timing is critical: if payment applications are submitted late or to the wrong recipient, it could invalidate the entire process, leading to non-payment. Contractors must follow their contract terms strictly and ensure applications for payment are submitted on time and in the correct format.
2. The Importance of Payment Notices
The client is expected to issue a payment notice after receiving an application for payment. This document outlines what the client considers is due to the contractor by the due date. If no payment notice is issued, contractors may issue a default payment notice, allowing them to determine what is owed. Timing again plays a role—if notices are not served on time, they may be invalid.
Moreover, Pay Less Notices are often dreaded by contractors. If a client disputes the amount to be paid, they can issue a pay less notice specifying the amount they believe is due. Contractors should remain vigilant and respond promptly when issued with one, as it can drastically affect cash flow.
3. Managing Disputes: Tools for Contractors
When faced with delayed or missing payments, contractors have legal recourse. One powerful tool is the ability to suspend work under the Construction Act. Contractors can suspend work after giving seven days’ notice if a notified sum remains unpaid. This legal right prevents employers from terminating the contract due to non-performance and ensures contractors maintain a strong position in negotiations.
4. Payment Schedules and Variations
Another area of risk stems from expired payment schedules. Contractors must ensure payment schedules are kept current and updated if projects overrun. Failure to do so can leave contractors waiting for payment for months, as the schedule would no longer apply. The Grove v. Balfour Beatty case highlighted the consequences of such lapses, where Balfour Beatty had to wait a year for payment after a schedule expired.
In Summary: Staying Compliant and Proactive
Navigating construction contracts can be complex, but understanding these key risks and actively managing your payment processes can make all the difference. Contractors should be aware of the terms governing payment applications, payment notices, and schedules. By remaining proactive, following proper procedures, and leveraging tools like the Construction Act, contractors can minimise the risk of non-payment and protect their financial interests.
To view the presentation in full, watch the video on YouTube: https://youtu.be/APmZ1T5HPNI
With thanks to Homes & Hills Solicitors for delivering the Construction Contract Risk Management part of our workshop. Holmes & Hills Solicitors are the national legal partners to the NAS. They offer NAS Members benefits including free initial consultations and preferential legal fees. Visit their website if you’d like to get in touch with them: https://www.holmes-hills.co.uk/
For a full list of NAS Member benefits, click here: https://www.shopfitters.org/membership/
