BUILDING YOUR SELF-PROTECTION
THE Housing Grants Construction and Regeneration Act 1996 is not a name that easily trips off the tongue, and you can be forgiven for not really understanding why it applies to you. But it almost certainly does!
And most importantly, the Construction Act as it has come to be known, is there to help you get paid, so now might be a good time to brush up on it.
The basic payment rules introduced by the Construction Act and the 2011 amendments are:
1. The right to payment by instalments
2. An ‘adequate mechanism’ for determining what sums are due and the final date for payment of those sums
3. Linking the ‘performance of obligations’ or ‘decisions’ under ‘another contract’ does not constitute an ‘adequate mechanism’
4. Prior notice of sums due and ‘the basis on which that sum is calculated’
5. ‘Pay when paid’ clauses to be ‘ineffective’ (except in the case of insolvency of a third party upon whom payment depends)
6. Prior notice of intention to pay less than (ie ‘set-off from’) the notified sum setting out ‘the basis on which that sum is calculated’
7. Right to suspend work (by not less than seven days’ notice) for non-payment of the ‘notified’ sum
Where one or more of these minimum requirements are not met, and/or no agreement has been reached on the terms, the relevant parts of the Scheme for Construction Contracts, come into operation as a ‘default’ mechanism.
Due dates and final dates for payment
Every construction contract (over 45 days in duration) must provide for interim payments and an adequate mechanism for determining what payments become due under the contract, and when. And it must provide a final date for payment of any sum that becomes due.
The parties are free to agree the due dates for payment and how long the period is to be between the date a sum becomes due and the final date for payment (see s110). So please take care to understand what these dates and periods are, because the Act does not stop the Contractor trying to impose extended and/or onerous payment periods.
No link to other contracts
The Act prohibits payments being made conditional on the performance of obligations under another contract or a decision by any person as to whether obligations under another contract have been performed. Therefore, a contractor cannot make payments to his subcontractors conditional on the Employer certifying his own payments as being due under the main contract.
This is particularly useful in respect of recovering retention, because linking retention release to a Certificate of Making Good Defects (or similar) under the main contract is no longer allowed.
No pay when paid – but watch out!
Payments cannot be made conditional on the payer receiving payment from a third party (see s113), unless the third party paying the payer is insolvent (the Act defines what constitutes insolvency for the purposes of this provision).
Watch out for this kind of clause, because if you are not sure about the finances of whoever is paying the contractor, and they go bust you won’t get paid!
The dreaded pay less notice
In order to withhold monies from you the contractor must serve a pay less notice (this used to be known as a ‘withholding notice’). The pay less notice must:
- specify the sum the payer considers to be due on the date the notice is served; and
- the basis on which that sum is calculated.
This is slightly different to the old withholding notices and the 2011 amendment has arguably made matters worse for the subcontractor in this particular regard, because the most rudimentary of details are now taken to comply with the requirement to state ‘the basis on which that sum is calculated’.
The contract should specify how long before the final date for payment a pay less notice must be given, and most contractors specify one day, but if the contract is silent, then the period is seven days.
The right to suspend performance
If the contractor doesn’t issue a valid pay less notice and the payment is not made in full by the final date for payment, then you are entitled to suspend performance of part or all of your obligations under the contract.
You have to give the period of notice set out in the contract, which will be a minimum of 7 days-notice of your intention to suspend, and once the Contractor makes the payment in full the right to suspend ceases.
You are also entitled to an extension to any contractual time limit and the reasonable costs incurred as a result of the suspension – this might include remobilisation costs for example.
Construction contracts must provide for notices of payment to be given. The notice must state:
- the sum the payer considers to be due or to have been due at the payment due date; and
- the basis on which the sum is calculated.
It does not matter if the sum the Contractor considers to be due is zero, a notice must still be given.
It’s vital to realise the Act applies equally to your subcontractors (even the labour only ones) and you must therefore take care to ensure your own contracts comply with the Act. Similarly, you must ensure that you comply with your obligations as regards Payment and Pay Less Notices.
What happens if my contract does not comply with the Act?
If the contract does not provide an adequate mechanism for determining the due Date and the Final Date for Payment the ‘Scheme for Construction Contracts’ applies.
The Scheme is a Statutory Instrument which sets out various details in respect of payment which will be implied into your contract.
While the payment mechanisms introduced by the Act, and the 2011 amendments might seem complicated, they give at least some protection from the contractor’s onerous amendments and bespoke terms.
Why not make sure you’re properly protected and are taking full advantage of the Construction Act by visiting our web site at: streetwisesubbie.com or email firstname.lastname@example.org, or simply give us a call.
Barry is MD and co-founder of StreetwiseSubbie.com which provides business solutions for Specialist Contractors throughout the UK