Setting up a construction business in the UK: Tips on payment

If you are setting up a construction business in the UK, then one of the most important areas to consider is how to ensure you will get paid for your works without delay.  Here are our top tips for getting paid.

1. The Construction Act applies

If you enter into a contract to carry out construction operations in England, Wales or Scotland, then Part II of the Housing Grants, Construction and Regeneration Act 1996 (“Construction Act”) applies and this requires that the contract contain specific provisions relating to payment and a right to adjudicate at any time.  The term “construction operations” is widely defined by the Construction Act.  If the contract does not comply, then the Government’s Scheme for Construction Contracts (“Scheme”) applies to imply such provisions.

The contract must provide for an adequate mechanism for payment and the parties are free to set their own payment intervals, and which must not run out before you complete the works, as it may not be possible to apply for any interim payments after the last date in the schedule.

If the Scheme applies there is a payment period of 17 days from the due date to the final date for payment.

2. Getting notices right

By the Construction Act, the payer has 2 opportunities to set out its calculation of the sum due in an initial payment notice (issued within 5 days of the due date) and a later pay less notice (if the Scheme applies, issued 7 days before the final date for payment).  If these notices are not provided, or invalid, then the payee may issue its own notice or sometimes rely on its initial application for payment.

The sum to be paid by the final date for payment (the “notified sum”) is the sum stated in the:

1. The payment notice;
2. The pay less notice; or
3. In absence of 1 and 2, the sum stated in a payee’s notice which may be the application for payment.

It is vital that the parties issue the relevant notices in accordance with the relevant contractual timing and content requirements.  Many payment disputes arise due to failure to issue a notice in time or in the correct format, or even to the correct address.

3. Right to suspend

The Construction Act also includes a right to suspend (or part suspend) works for non-payment of the notified sum by the final date for payment.  This requires seven days’ prior written notice and the unpaid party can claim the costs and expenses and an extension of time as a result of any suspension.  Again, any notices must be issued in accordance with the contract to avoid the unpaid party putting itself in breach.

4. Adjudication

Parties to a construction contract can refer a dispute at any time to adjudication, a process introduced by the Construction Act to speed up payment down the supply chain.   The parties will appoint a third party adjudicator to give a decision on the dispute within 28 days or as may be extended by agreement. The decision is binding on the parties unless and until overturned by a court or arbitrator (depending on the contract).

In a recent case, S&T (UK) Ltd v Grove Developments Ltd (2018) the Court of Appeal said that in the absence of a valid payment or pay less notice, the employer would first have to pay the contractor (and, by analogy, a main contractor would have to pay a sub-contractor) the amount due (i.e. the notified sum in the application for payment) before it could argue in a separate adjudication about the true valuation of the account at any point in time.

5. Interest

Don’t forget to claim interest on any late payment, usually at a contract specified rate. Alternatively, the Late Payment of Commercial Debts (Interest) Act requires interest to be paid at 8% above the Bank of England Base Rate, plus a fixed sum and compensation for debt recovery costs.

How can the Construction Team at Clarkslegal LLP help?

At Clarkslegal we have extensive experience in advising on construction contracts and any disputes that may arise on a construction or engineering project.