UK Construction Act Overview: Take Control of Subcontractor Payments
The UK Construction Act Begins to Bite
The payment provisions in the UK Construction act have been designed to impose structure, clear timelines and defined areas of responsibility into what is one of the most contentious parts of the contractor – subcontractor relationship.
This framework, in combination with a revamped dispute resolution process designed to give both sides access to rapid adjudication, means that contractors need to develop a firm understanding of the payment process and their responsibilities within it.
In this overview we will outline in brief, the key changes to payment requirements that the Act imposes. Please remember however, that this article has been written for information purposes only, to raise awareness of these issues and prompt further, more detailed investigation.
Its contents should not be relied upon in any specific situation without taking relevant legal advice.
Improving Payments in the Construction Supply Chain
The new amendments aim to improve the payment process in the construction supply chain and make straightforward and timely
dispute resolution possible.
The Main Aims of the Act are:
- To improve the payment process
- To provide a quick and straightforward dispute resolution process (adjudication)
No More ‘Pay When Paid’
As part of this, the Act prohibits the linking of payments due under one construction contract (to the subcontractor) with the payment clauses of another contract (the main contractor’s contract for the project), immediately outlawing the contractor’s ability to hold subcontractor payments until they have themselves been paid for a project.
The amended Construction Act states that:
- Every contract must provide for interim payments – if the contract period is greater than 45 days
- Each payment requires a mechanism (process) for calculating the sum due; the Due Date and the Final Date for Payment
Making interim payments available (as well as abolishing pay when paid) for longer contracts is aimed squarely at improving the ability of subcontractors to access funds that will help them remain liquid in the face of lengthy 60, 90 and 120-day contract terms.
And with the introduction of the Due Date and Final Date for Payment, the act imposes a standard timeline on each payment within the construction supply chain, which both parties – contractor and subcontractor – are required to adhere to.
This timeline works within the framework of a contractor’s existing payment terms and does not mean that all UK contractors must now pay on a mandatory 30 or 45 days – rather it sets out clearly defined ‘events’ that must occur at certain times, within the existing contract itself.
If, however, a written contract does not exist between the parties, then the terms of the Scheme for Construction Contracts will apply and the payment process timeline will work within its more aggressive timeframes.
As with any legally prescribed process, there are some nuances and exceptions that we’re not going to cover here, but we’ll outline an example default process to give you an idea of the increased workload involved in subcontractor management and the legal and financial ramifications of a failure to comply.
Payment Process Timeline
Let’s look at an example of how the payment process timeline will work, with a brief explanation of what is going on and what needs to happen at each stage.
Payment Application and Due Date
The payment process starts with a subcontractor making an Application for Payment. This could be because they have completed the work or they are making an application for an interim payment.
The next event in the process is the Due Date. The Due Date for the application is worked out in reference to either the contract in place or the timeframes in the Scheme for Construction Contracts.
The Due Date is not the date the subcontractor would receive their money – that is the Final Date for Payment. The Due Date acts as a time-stamp for the following series of events that occur as part of the new payment process – a line in the sand after which the legal wheels could be set in motion.
Not later than five days after the Due Date, a Payment Notice must be served by the contractor giving details of the sum they consider to be due and how it has been calculated. This is called the Notified Sum.
This Notified Sum would then be payable on the Final Payment Date as detailed in either the contract (as agreed between the contractor and subcontractor) or the terms detailed in the Scheme for Construction Contracts.
Failure to Issue a Payment Notice
In the event the contractor fails to issue this first Payment Notice within the time limit, the subcontractor may issue their own payment notice (for what they consider to be payable under the terms of the agreement), before the Final Date for Payment.
Providing this notice is submitted to the contractor within the correct timeframe, that sum is then payable by the Final Date for Payment, which is moved back from the date of this new Payment Notice.
This makes it vital for contractor’s administration processes around payment applications to be well established and responsive, as failure to issue the correct notifications from the Due Date could now be extremely costly.
Pay Less Notice
If the contractor wishes to pay a lesser amount for whatever reason, they must issue the subcontractor with a timely Pay Less Notice.
This must be served no later than the Prescribed Period – a period that is either set out in the contract or detailed in the Scheme for Construction Contracts, which can be, for example, between 1 and 7 days before the Final Due Date.
Like the Notified Sum, the Pay Less Notice needs to state how this new sum was calculated. Again, like the Payment Notice, a correctly submitted Pay Less Notice will move the date of the Final Date for Payment.
If the contractor fails to submit the Pay Less notice on time and in the correct format or decides not to, then they lose the ability to challenge the sum in the Payment Notice and must settle that amount by the Final Date for Payment.
If the contractor fails to pay, then the subcontractor has the legal right to suspend work under the contract and give notice of its intention to refer a dispute to adjudication.
Below: The Payment Process Diagram
Download this Diagram as a PDF
This basic example will give you some idea of the actions a contractor and subcontractor are required to take as part of the new payment process and how failure to comply with the new rules can leave a business seriously exposed.
Contractors need to start to grasp how these new requirements will impact across the various functions and roles within their business and what steps they need to take to implement the processes required to satisfy them, ensuring favourable outcomes for the business.
Working towards compliance with this new payment process for subcontractors will undoubtedly mean additional time and financial overheads for contractors. But it also represents an opportunity to build better relationships with subcontractors and improve overall financial planning within the business.
Prompt, efficient payment and frequent communication builds stronger, more productive relationships and enables contractors to attract and keep the very best subcontractor partners to work on their projects.
While researching this article, we read a number of different resources . If you want further information on this topic, please refer to the list of useful sources below.