In the latest iteration of the JCT suite of contracts (JCT16), there were three key changes from (JCT11). These changes were:
- The introduction of a Common Valuation Date or “IVD” Interim Valuation Date, which intends to align the cashflow throughout a project.
- The frequency of applications post PC, where previously these were at bi monthly cycles, these are now monthly until the final certificate.
- Notified sums are now recoverable as debts following the line of authority as defined within “ISG v Seevic”
With many different agreements and project types in the construction industry, the standard form JCT Contract makes provision for multiple supply chain payment options as detailed below:
Generally, a lump sum payment made prior to any works being commenced to assist in the cashflow of the project and provide security for the contractor. This typically might be an amount equal to that of the peak cashflow. Any advance payments will likely be secured via a bond to provide the Employer security in the event of a Contractor default.
These are the standard form payment mechanism most will recognise in the industry. They place responsibility on the Contractor Administrator (CA) to issue a payment notice no later that five days (calendar) from the due date for payment. The due date for payment is generally seven days from the interim valuation date. The final date for payment is typically 14 days from its due date. The payment notice is required to be issued regardless of whether the CA is in receipt of a contractor’s application, except for Design and Build, where the onus is on the contractor to submit an application to the employer’s agent for review. Interim certificates will be issued at monthly intervals (Alternative B) or at the completion of pre-agreed stages (Alternative A), dependent on what is agreed within the contract. Generally, monthly payments are the standard position: interim valuations shall be carried out monthly prior to practical completion and bi-monthly subsequently until agreement of the Final Account.
Pay Less Notices
Following the issue of a Payment Notice made by the Contract Administrator of Employers Agent (EA), the employer is then under an obligation within the contract to pay the monies due within the prescribe timeframe (+14 days from the due date), however, should an employer wish to pay less than the amount within the payment notice, a payless notice will need to be issued no later than 5 working days prior to the final date for payment.
Final Payment / Final certificate
This will be issued no later than 2 months after whichever of the following events occurs last;
- Expiry of the rectification period,
- The date of the issue of making good defects certificate
- The date whereby the EA/CA issues copies of the Statement of Ascertainment to the contractor (damages) to be prepared under clause 4.5.2
The final certificate will state the contract sum as adjusted throughout the contract and the sum of amounts previously stated as due (the previous cumulative payment) any difference in the two sums positive or negative will be the amount due to the respective party.
When comparing JCT Design and Build to the JCT Standard Building Contract or Minor Works the terms do differ slightly. The main “key” difference here is that under JCT Design and Build it is the Contractor’s obligation to apply for payment, as the due date commences either seven days from the receipt of application (if application is later than the interim valuation date) or seven days from the interim valuation date if the application is made before the application date.
Without an application, the due date and subsequent time frame does not become triggered, therefore there’s no obligation on the EA to prepare a payment notice in line with the contract.
Conversely, under the JCT Standard Building Contract or Minor Works Contract, the Contract Administrator “SHALL” submit a payment notice within the prescribed time frames from the interim valuation date. Failure to submit a notice results in the Contractor’s Application becoming due for payment. Should an application have been submitted or, if no application has been submitted, the Contractor may at any time apply for payment by issuing a payment notice substantiated by the basis on which the sums have been calculated.
The Relevance of the Act
The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) has been an important part of law affecting the construction industry since the act came into force on 1 May 1998 and Part 8 or the Local Democracy, Economic Development and Construction Act provides substantial amendments to the Construction Act (HGCRA). Those amendments came into force from 1 October 2011 in England and Wales and 1 November 2011 in Scotland. The amendments seek to provide increased certainty regarding construction payments and to provide a fairer payment regime, improve rights for contractors to suspend works in non-payment circumstances and make adjudication more accessible for the resolution of disputes.
Where construction contracts provide no payment terms, then the terms provided for by the act will be implied within the contract. Should a construction contract part comply with the act then only those terms within the act that aren’t complied with will be implied into the contract. The JCT suite of contracts are compliant with the Construction act.
Generally, a worked example of the monthly application process will consist of the following;
- Up to seven days prior to the due date, the contractor may issue an application under the JCT Standard Build Contract to the CA/QS for review. Under the JCT Design and Build Contract the due date is seven days after the interim valuation date within the contract, or seven days following receipt of the contractor’s application, whichever occurs last.
- The Contractor’s QS and the Employers QS will generally meet on site and carry out a review of the works to date. The review will be inclusive of prelims (site management, plant, machinery etc) site works, materials on and off site (should payment for materials off site be required a vesting process should be carried out with advice sought from a qualified legal adviser), and where materials on site are claimed, these should be on site in a timely manner and required for the works coming within the next period. Materials brought to site too early may be rejected for payment.
- The surveyors will then jointly review the application. However, this is carried out as good practice and not as a matter of course. Should the PQS wish, they can review the application via desktop with notes, drawings, photographs and general annotations providing a record of the works complete. Any amendments to the application are put to the contractor for review and comment, again, this is as good practice.
- The responsibility to issue a notice sits with the Employers’ QS/EA or CA and shouldn’t be in anyway jeopardised by failure to agree the application with the Contractor. Failure to submit a notice within the required timeframe will by default result the amount claimed by the contractor being the amount due. This of course can be negated by a payless notice.
Payment timelines must be adhered to at all times. Failure to do so may be severe and failing to submit the relevant payment notice by the relevant date will result in the Contractor’s application becoming due for payment. This process has been held in a case between ISG Construction LTD v SEEVIC College (2014) where, in summary:
- ISG (the Contractor) applied for circa £1.1m within an interim application, post Practical Completion but before settlement of the final account;
- The application included for sums in the region for c.£700k in relation to loss and expense;
- The Employer didn’t issue a payment notice, nor did they issue a pay less in the correct manner, they felt the true value was much lower c.£400k for this application;
- However, the correct procedures had not been followed and the judged ruled that payment was due for the full amount of the ISG application.
The interim valuation date is the nearest business day in the month, and this means that the payment cycle is subject to variances depending on the day the interim valuation date falls on. For example:
- If the interim valuation date (IVD) falls on a Monday 1st, + 7 days for the due date would be the following Tuesday 9th, plus 5 days to issue a payment notice would be the Sunday 14th.
- Should the IVD fall on a Wednesday the 1st, the Due Date would be Thursday 9th and the final day to issue a payment notice would be Tuesday the 14th.
It is not uncommon for the due date, IVD and Final Date for Payment to be on a different day and date every month. Variance can be minimised by working with a pre-determined schedule of dates and adhering to them.
Notwithstanding this, failure by the Contractor to issue an application on time would also throw the payment process out of sync. As the intention of the JCT is to provide back to back fair payment terms throughout the contracting chain, should the sub contractors apply prior to the Interim valuation date to the Main Contractor, and the Main Contractor applies after the Interim Valuation Date the monies coming into the Main Contractor won’t be in sync with the Monies going out, as they will be on two different payment timeframes.
Schedule of Application Dates
Prior to entering into a Construction Contract, it is advisable to prepare a “Schedule of Application Dates.” This sets out the date by which the Contractor should submit the application (Design and Build) and the due dates can also be worked from the schedule. This gives all parties to the contract a clear understanding of the timeframes around the Interim Valuation Dates and subsequent Due Dates from the beginning of the Contract Period, allowing for the foresight to arrange meeting in advance. This should provide in turn the requisite amount of time for the payment notice to be processed.
Under the JCT Standard Building Contract, the same schedule could be used and this would provide the CA / Architect with the relevant IVD and Due Dates, dates for serving a payment notice and dates for serving pay less. Calendar reminders and, if required, invites should be sent out in advance of the IVD. It is encouraged to work with a good practice of submitting Valuations early, thus allowing for an extended period of time to review and agree.
The JCT suite of contracts provide a comprehensive payment mechanism that is generally set out under clause 4. Payment provisions allow for interim or staged payments, advance payments with advance payment bonds as a security, and final payments at the settlement of the final account. Typically, the payment is led by the Architect or Contract Administrator, meaning a Payment Notice must be served in accordance with the conditions of the contract regardless of whether the contractor has applied for payment or not. This differs to the JCT Design and Build Contract where the payment mechanism is contractor led, the contractor must apply for payment to be able to receive or be entitled to payment for the works.
Best Practice and Final Thoughts
It is good practice to map out due dates from the outset of a construction project. This will allow for good time keeping and assist in ensuring applications are processed and reviewed in line with the contract conditions along with the requirement to issues notices in a timely manner.
The IVD and Due Date may be on different days and dates every month. As it isn’t uncommon to list the IVD as “the last business day in the month following date of possession,” it is a good idea to avoid this and record the IVD as an actual date that repeats every month. This way the payment timescales will be more uniformed and will only be subject to change when the IVD/DD falls on a day that isn’t a business day. Another option is to record the IVD and subsequent due dates via a schedule and refer to this schedule within the contract.
Always ensure that payment notices are issued in line with the requirement in the contract. Failure to do so will result in the application becoming due for payment even if the amount is incorrect. The risk here to the entire supply chain using construction contracts is that a supplier may go bust following receipt of an overpayment.