Robert Merry : Contracts
Robert Merry is an independent stone consultant and project manager who ran his own company for 17 years. He also acts as an expert witness. Here he offers further advice on avoiding the pitfalls of contracts.
Payment in construction contracts and other animals, by Robert Merry
Its 20 years since the passing of the Housing Grants, Construction & Regeneration Act 1996 and 18 years since it came into effect in 1998. It was revised in 2009 by the Local Democracy, Economic Development & Construction Act – now commonly known as the ‘Construction Act’. Still awake? Read on.
The 1996 Act legislates for the notification of all dates relating to payments for relevant contracts. These include dates for: applications, payments due, payment notices, payless notices and final date for payment. (Unfortunately, you only receive the one payment in any one period, despite many references to the same word).
The 2009 revisions were designed to bring clarity to the process of payment and to improve cash-flow. But a failure by Payers to issue the appropriate payment or pay less notices within the timescale has resulted in a negative effect on cashflow and a rise in disputes.
For instance, if the Payer (main contractor) fails to issue a payment notice within the time scale stipulated – 5 days of the Due Date – then the Payee (or sub-contractor) can issue their own payment notice, providing they do so before the Final Date for payment. Positive cashflow for the Payee, negative for the Payer, perhaps. But beware. If this is an interim application there is nothing to prevent the Payer (main contractor) issuing a pay less notice on the next valuation to redress the balance.
This is, of course, providing they can justify why there is less to pay. They usually can. Positive cashflow for the Payer, negative for the Payee. In either case what was meant to be a transparent process has in some cases deteriorated into chaos.
There have also been disputes about the validity of applications and if they are indeed what they say they are. Wording is important. Using prefixes such as ‘draft’ or ‘initial assessment’ to your applications could result in the main contractor rejecting an application for being unclear as to the intention of the document. Is it an application for payment or not? Clarity is important. So is providing enough substantive evidence to support the application. This might be in the form of invoices from suppliers, off-site valuations in the form of vesting certificates – properly executed – or simply the right paperwork to back up a claim for weekend working or instructions for additional works.
Some useful pointers when making applications for payment:
1. Timing is the art of… comedy and of being paid on time. Stick to the dates provided. If you are late it may be a legitimate cause for non-payment or a reduced payment.
2. Check if a valid pay less notice received is served in response to an actual application. It could be invalid.
3. Make sure any application sets out the calculations of the amounts clearly and separates out construction and preliminaries. Clarity will support your application. Inaccuracy will only serve to confuse.
4. Provide the evidence to support the application.
5. Use the correct terminology – avoid words that might imply it’s something else other than an application (draft, initial payment).
6. If special payments are made (for instance to secure materials off site for the benefit of the contract programme) ensure these are included in your overall application for payment.
7. Applications should always be for the gross amount of the contract completed to date – supply is part of the contract, include it.
8. Review contracts for the payment schedule.
9. Create a diary alert for application dates, payment dates, due dates and so on. It sounds obvious until you miss one of these and consequently miss an application and suffer negative cash-flow.
10. If you have several contracts to value at the same time, be warned: the application date for each will vary in the month.
The Construction Act also gives you the ‘right to suspend work for non-payment’. However, be careful. You can only suspend the works for which payment has not been made and you must give seven days’ written notice before suspension. If payment is made, the right ceases.
If the Payer has legitimate rights under the terms of the contract to withhold or reduce a payment, if you suspend work you may be in a breach of contract and could be sued for damages. Not good.
And finally, the Construction Act is a legislative animal designed to bring certainty to payment periods and outlaw the ‘paid when paid’ culture of pre-Construction Act days. But, like all seemingly harmless animals, it can turn feral.
My advice is always take professional advice at the beginning of the contract and ensure you avoid the inevitable pitfalls.