Certainty of Payment logoCertainty of Payment

Specialist Contractors should know for every payment how much they are going to receive and when they are going to receive it.  A payment process whereby the amount applied for becomes due if it is not contested within a certain period of time provides certainty of payment and enables the effective use of suspension and adjudication in the event that there is any dispute.

 Certainty over how much and when payment is made builds trust between supply chain members and underpins collaborative working
to achieve value for money projects for clients. 

OGC Guide to Best 'Fair Payment' Practices

Certainty of how much is due for payment and when improves relationships in the supply chain resulting in quality and value for money projects. It provides companies with the opportunity to discuss any differences in the value of the work before payment is made and make effective use of the sanctions provided by the Local Democracy, Economic Development and Construction Act (the 'Construction Act') if payment is not received.

The Construction Act was amended in 2011 to introduce a default position whereby the amount applied for automatically becomes due and payable in the event that the application for payment is not contested within an agreed period of time. It also now prohibits 'pay-when-certified' clauses which make payment dependent on an ‘event’ under another contract (usually the issue of a certificate or application).

The best way of achieving certainty of both how much and when is to make sure that, for every payment, the application, due and final dates for payment are recorded in the contract as calendar dates or by reference to calendar dates (e.g. the last Friday of the month).

Get your contract right

Achieving certainty of when payments become due is relatively straightforward. The Construction Act requires that your contract determines:

  1. the dates on which payments become due – the 'due date'
  2. the dates on which payment should actually be made – the 'final date for payment'.

This can be done by including a schedule of calendar dates in the contract, which establish the application, due and final dates for payment.

You should never accept payment provisions where any of the dates in the payment cycle are determined by an event under another contract (such as the issue of a certificate or an application). So called 'pay-when-certified' provisions, which are actually nowprohibited under the Construction Act, link the due date in the sub-contract to the issue of the main contract certificate by stating that an amount only becomes due to you when the contractor receives his certificate from the employer (an event which you have no control over or even knowledge of). This means that, if the certificate is issued late, the due date (and by extension the final date for payment) for your payment slips.

You should also look out for conditions precedent to payment which state that you cannot be paid until the contract or other documents have been signed as these will allow the contractor to avoid paying you until the conditions have been met.

The best way of obtaining certainty of how much is due for payment is including a 'default' process in your contract, whereby the amount applied for becomes due and payable unless a counter valuation is received within a certain period of time.

Know your client

There is no point in going to the trouble of establishing certainty of payment if the contractor or client will not actually have the money to pay you!

When you allow contractors and clients time to pay, it should be a conscious decision based on knowledge and you can check their credit worthiness using the following simple methods:

  • Credit reports
  • Bank references
  • Trade references
  • Companies House
  • Your own records

NSCC also works with Creditlook to provide access to an online credit forum which enables companies to exchange information about contractors and clients trading outside of agreed payment terms.

If you consider a contractor or client a risk, you can improve your likelihood of getting paid by insisting on payment upfront or requesting a Director’s personal guarantee or a parent company guarantee.

Getting Paid on Time

Once you have established certainty of payment, there are a number of things that you can do to increase your chances of actually receiving your money.

  • Submit applications on time – To ensure that an application is paid promptly, it is advisable to show your payment terms clearly on the front, include as much information as possible in respect of the amount claimed and submit it on time
  • Confirm the payment – Attempt to determine the contractor’s intentions before your payment becomes due. If you receive a notice detailing your proposed payment and you disagree with it, write to the contractor explaining why you disagree and requesting a meeting to discuss it
  • Pay by BACS – By switching to BACS for making and receiving payments, you can do away with the excuse that 'The cheque is in the post' forever!

Chasing Payment

If the contractor is in agreement with the value of your work but states that he is withholding an element of it (e.g. because he claims that some of your work was defective or you have delayed another sub-contractor), you should receive a pay less notice. If you have not received payment and a pay less notice has not been issued, you can issue notice of your intention to suspend work until payment is received.

If the contractor disagrees with the value of your work (e.g. his measurement of the amount of work completed by the valuation date is less than yours), you can either accept or dispute it. If you choose to dispute his valuation, you have a number of options (see Next Steps below).

If you receive a reduced payment with no explanation such as a pay less notice, write to the contractor asking for an explanation of the amount that he considers due for payment and requesting a meeting.

If the final date for payment comes and goes and you do not receive any payment or a pay less notice, write to the contractor informing him that your application is overdue and in the absence of a pay less notice payment is due immediately.

Next Steps

If payment is not forthcoming in spite of all your efforts, there are a number of options you can consider and NSCC members have access to a free legal and contractual helpline – contact NSCC for further information.

  • Suspension of work – If you are certain that the final date for payment has passed and no pay less notice has been issued, you can issue notice of your intention to suspend work until payment is received.
  • Adjudication – Once you have exhausted negotiations, you can go to adjudication to obtain what you are owed by referring the dispute to the adjudicator or Adjudicator Nominating Body (ANB) named in your contract. If your contract does not name an adjudicator or ANB, you can approach the Association of Independent Construction Adjudicators (AICA) and NSCC Specialist Contractors will receive a free nomination –
    www.aica-adjudication.co.uk.
  • Court – You can use the Small Claims Court to recover debts under £5,000 and the County Court for debts up to £150,000 – www.hmcourts-service.gov.uk. The Small Claims Court in Scotland can be used for debts up to £53,000 and there is no County Court procedure – see www.scotcourts.gov.uk.

Online Credit Forum

Creditlook enables companies to exchange information about contractors and clients trading outside of agreed payment terms.

Schedule of Interim Valuations/Payment Time Scales

 

Valuation No. Sub-contractor's application date Value up to and including date Due date Notice date to sub-contractor (latest) Payment to sub-contractor (latest)
1 Fri 24 Aug 2007 Sun 26 Aug 2007 Mon 3 Sep 2007 Mon 10 Sep 2007 Tue 25 Sep 2007
etc.          

 

Sub-contractor’s application date denotes the date by which the sub-contractor application must be received at the site office marked for the attention of the Project QS.

Payment Clause Template

 

  1. The sub-contractor shall make applications for interim payment at [monthly] intervals commencing one month after the commencement of the works [or start on site].
  2. Not later than 5 days after the receipt of an application for payment, the contractor shall give a written notice specifying the amount for payment proposed to be made in respect of that application, the basis on which such amount is calculated and to what the amount relates and shall pay the amount proposed no later than the final date for payment. The amount so notified shall be the amount due.
  3. Not later than 5 days before the final date for payment of an amount due pursuant to clause 2, or in the absence of a notice pursuant to clause 4, the contractor may give a written notice to the sub-contractor specifying any amount proposed to be withheld and/or deducted from that due amount, the ground or grounds for such withholding and/or deduction and the amount of withholding and/or deduction attributable to each ground.
  4. Where the contractor does not give any written notice pursuant to clause 2 and/or clause 3, the amount stated in the application for payment shall become the sum due. The contractor shall pay the sub-contractor this amount by the final date for payment.
  5. The final date for payment of an amount due as an interim payment shall be 30 days from the date of receipt by the contractor of the sub-contractor’s application for payment.