Payment in the construction industry has been a hot-topic for many years. Whether it’s payment between Employer and Main Contractor, or among Main Contractors and Subcontractors, the chance of a dispute remains higher in construction than it does in most industries.
In response to this, the UK Government enacted the Housing Grants Construction and Regeneration Act 1996 (often referred to as “the Act”). A primary objective of the Act was to ensure that cash flowed through the industry from the project client down to the smaller suppliers. The Act ensured that every contract contained an effective payment mechanism that enabled the parties to know what they were to be paid and when.
Since its inception in 1996, every construction contract must include payment conditions that comply with those in the Act. If they do not, the statutory conditions of the Act will be introduced to the contract.
The Act was updated in 2009 by the Local Democracy, Economic Development and Construction Act. However, the payment mechanism – making provisions for prompt payment throughout the Supply Chain – remained the same, which is why the 1996 Act is referred to here.
How does it work?
Standard contract conditions are for payment to be made in monthly intervals, over several months, while the works are undertaken either on or off site.
The company completing works (the Payee) assess the works completed at the end of each month and submit an Application for Payment to their client (the Payer). The client reviews the progress and confirms its agreement or disagreement to the value of the Application for Payment. This is done by submitting a Payment or Pay Less Notice confirming how much they will pay.
We’ve created an example of the stages below based on a contract between a Main Contractor and a Subcontractor:
||30th of the month
||The Subcontractor applies for Payment to the Main Contractor stating the amount due to be paid
7 days later
||The Due Date is not the date the money is paid. The Due Date is a Legal Term to start the next more complex stages of the payment process. It is a line in the sand for Lawyers to use at a later stage and is important simply for calculating the Payment Notice, Pay Less Notice and Final Date for Payment.
||5 days later
||Main Contractor issues a Payment Notice stating the amount they intend to pay.
||14 days later
||Final Date for Payment
||The Main Contractor pays the Subcontractor the amount stated in the Payment Notice.
The above is the typical monthly procedure. However, the Main Contractor is entitled to issue a Pay Less Notice after they’ve issued their Payment Notice if they wish to reduce the value they want to pay for a valid reason.
In this case they must issue a Pay Less Notice 5 days before the Final Date for Payment as below:
||5 days before the Final Date for Payment
||Pay Less Notice
||Main Contractor submits a “Pay Less Notice” to reduce the amount previously stated in the Payment Notice.
What is a Pay Less Notice? The issuance of a Pay Less Notice is something which can lead to disputes and commercial friction. There are some key things to better understand on this matter, including what a Pay Less Notice is, and how it can be used.
A Pay Less Notice is a written notification from the Payer to the Payee of the Payer’s intention to pay less than the value stated in either their previous Payment Notice and/or the Payee’s application. In our example above, the Pay Less Notice would be issued by the Main Contractor to the Subcontractor confirming their intention to pay less.
What does a Pay Less Notice look like?
A Pay Less Notice can come in many forms depending on the templates used by the company issuing it. However, the Act (and all JCT Contracts) do require that any Pay Less Notice meets certain minimum criteria as the JCT explains below:
“A Pay Less Notice shall specify both the sum considered to be due at the date the notice is given and the basis on which that sum has been calculated.”
In short, JCT contracts require that a Pay Less Notice be detailed enough that it is sufficient for the recipient (or anyone else for that matter) to understand:
- The basis of the calculated sums
- The reasons for which these sums have been calculated (and deductions have been made)
What constitutes a valid Pay Less Notice?
Failure to provide the appropriate level of detail can result in a Pay Less Notice being considered null and void in Adjudications and the Courts and therefore, it’s imperative that all Notices follow certain minimum requirements.
For a Pay Less Notice to be a valid notice it must:
- be issued within time before the final date for payment and,
- must provide the basis of calculation, which can be by reference to other specific documents already issued, and must show an actual amount to be paid, even if the amount is zero.
If it is not issued on time and in compliance with the contract and the relevant legislation, then the last notified sum (i.e. the Payment Notice) is the amount to be paid.
What monies can be deducted for with a Pay Less Notice?
There are many reasons that the Payer may need to reduce the value of a payment due to matters that happen in the period between issuing the Payment Notice and making Payment.
These can be issues for which the Payer has suffered Loss and Expense as a result of the Payee and can range from minor issues like damage to materials on site, to more significant problems like failure to complete the works on site.
Under JCT Contracts, are there any time restrictions?
There are time restrictions, but it does depend under which JCT Contract you’re working as this does vary in some standard forms.
If your Contract does not include the time restrictions for issuing a Pay Less Notice than The Act becomes the precedent as it is statute. The Act states the following under Section 144 of its conditions that:
“A [Pay Less] Notice must be given not later than the prescribed period (5 days) before the final date for payment…”
With Contract Law, please pay attention to the fact that some companies will change the statutory prescribed period of 5 days and if the contract is signed on this basis it is agreed to. Where changes to the statutory periods are made in contracts it is advisable to always request amendment back to the statutory period otherwise you’ll have accepted the revised periods.
Final Takeaway thoughts…
Payment is the single biggest cause of disputes between parties in construction. It’s vital that both parties to a Contract understand how the payment conditions work and the dates by which they must make an Application for Payment and provide notice by.
Clarify this in detail during the tender stage negotiations and adopt an open approach to the Application for Payment process. If both parties approach the project with this genuine intention, they will find it simpler to successfully manage the financial aspect of the project.
For more thoughts on Pay Less Notices, read our eBook on the topic click here.
About Paul Heming
Paul was a Quantity Surveyor who gained 10 years experience of managing £200 million worth of flagship UK projects, including 20 Fenchurch Street and Battersea Power Station. In 2015, Paul founded C-Link with the intention of sharing his expertise of managing major projects with the SME market.