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Building Contractors - Getting Paid

» Posted on: 7 March 2011
» Posted by: Chris Scott
» Department: Construction and Engineering

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That cashflow is the lifeblood of the construction industry was the rationale for the Housing Grants Construction and Regeneration Act 1996 designed to improve payment terms in the industry. Knowledge of payment terms is crucial to every contractor and sub contractor to maximise cashflow.

Most standard forms of contract provide “monthly payments” which are based upon the value of the work completed in the previous month. It is rarely that simple however and monthly can mean 30, 60 or 90 days or that the payee is at the mercy of the payer or his representative, depending on the wording, assessment, valuation and certificate requirements.

Whilst the whole contract should be read and understood, how the payment regime works in each instance should be understood and any uncertainty or ambiguity clarified before execution of any agreement and systems put in place early by the payee to ensure there is no fault or error in applications for valuations which delay payment. How cost overruns, variations, extensions of time, loss and expense claims are to be dealt with should be understood from the outset and not deferred until final account but dealt with as the work is being carried out to minimise issues and deductions at the end of the contract and maximise cashflow as the work is undertaken.

“Pay when paid” clauses have been outlawed since s113 of the Construction Act came into effect. There are many ways to get around that provision including pay when certified provisions, payments when upstream payers certify, payment when various notices are received. Also, such clauses are permitted where the payer is insolvent under s113(1) although the clauses need to be carefully drafted to cover the definition of insolvency adequately [William Hare Limited v Shepherd Construction Limited 2009].

In the event of no, or inadequate, payment terms in a contract the provisions of the Construction Act and the Scheme are implied into it (s109 – s111). The provisions of the Construction Act and Scheme have been circumvented as can be seen above, but some of those avoidance provisions themselves are to be outlawed under the Local Democracy Economic Development and Construction Act 2009 when it comes into effect (it is thought from 1 April 2011).

The LDEDCA will see some changes to the existing regime. The current provisions which require a contract to provide for instalment payments by means of assessing what will be due and when paid will, like the provisions of s113, be preserved. The LDEDCA will try and close the loopholes in “pay when paid”, no longer allowing payment when certified by the employer or its representatives or otherwise linking payment to another contract. There are other provisions designed to prevent the payer delaying matters until it gives notice. No doubt as with the old regime attempts will be made to circumvent the process but contractors and sub contractors alike should understand the express payment terms in the contract and be aware of the terms implied by the Construction Act and / or the LDDCA.

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