Payment for construction

Revision as of 17:00, 14 March 2018

Introduction

In general terms, 'payment' is the transfer between parties of some form of value (such as funds, services, assets) in an agreed exchange. This can be for goods, services or to fulfil a legal obligation such as a debt. The most common form of payment involves money although it can also take the form of stock issues or other benefits, and is typically preceded by a bill or invoice specifying the amount due.

The payee (the party being paid) generally has the right to specify the method of payment they will accept from the payer (the party that is paying). The payee may decide that they will accept a part/discounted payment in exchange for certain conditions, i.e. a cash payment, prompt payment, and so on.

By accepting a payment, the payee extinguishes the debt or other obligation that was owed to them by the payer, and usually acknowledges the payment by issuing a receipt. Generally a payee cannot unreasonably refuse acceptance of a payment.

Construction industry

In the construction industry, payment can be the source of a great deal of controversy. Not only are the sums involved very large, and the duration of projects very long, but the total amount payable tends to change over time. In addition, contractors, subcontractors and suppliers face considerable risk when pricing construction projects, and optimistic pricing or late payments can quickly cause cash flow problems.

As a result, payments are often be the source of disputes which can ultimately lead to a breakdown in relationships and even project or business failure.

Agreeing the price

The price agreed for construction works is often referred to as the ‘contract sum’. However, this sum is rarely ‘fixed’, and contracts will typically allow the price to change under certain circumstances:

• Variations: Most contracts will contain provision for the architect or contract administrator to issue instructions to vary the design, quantities, quality, sequence or working conditions.
• Relevant events: A relevant event may be caused by the client (for example failure to supply goods or instructions), or may be a neutral event (such as exceptionally adverse weather) and may result in a claim for loss and expense by the contractor.
• Provisional sums: An allowance for a specific element of the works that is not defined in enough detail for tenderers to price.
• Fluctuations: A mechanism for dealing with inflation on projects that may last for several years where the contractor tenders based on current prices and then the contract makes provisions for the contractor to be reimbursed for price changes over the duration of the project.
• Payments to nominated sub-contractors or nominated suppliers.
• Statutory fees.
• Payments relating to opening-up and testing the works.
• Interim certificates
• Retention

Depending on the nature of the contract, prices may be referred to as; fixed, firm, guaranteed maximum price, target cost, lump sum, measurement, open book and so on.

Payment process

The Housing Grants, Construction and Regeneration Act 1996 includes provisions to ensure that payments are made regularly and promptly throughout the supply chain. Interestingly, the Act does not stipulate payment periods, simply providing that parties are free to agree what payments are due and when, i.e. the contract must set out an adequate mechanism for determining these matters. If contracts do not comply with the Act, then, the Scheme for Construction Contracts applies.

Typically, regular payments are allowed for by interim certificates, generally valued by the cost consultant, perhaps having taken advice from the lead designer). The client must honour the certificate within the period stipulated by the contract.

See interim certificates for more information.

Retention

Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract.

Half of the amount retained is released on certification of practical completion ('substantial completion' for Institution of Civil Engineers (ICE) contracts) and the remainder is released upon certification of making good defects (or 'final statement' for design and build contracts such as Joint Contracts Tribunal (JCT) DB 16).

See retention for more information.

Fair payment practices

Construction 2025, the government's long-term vision for the future of the construction industry, cited equitable financial arrangements and certainty of payment as critical success factors for the industry and proposed a need to ‘...create conditions for construction supply chains to thrive by addressing access to finance and payment practices.’

Measures undertaken to try to ensure fair payment include:

• The Housing Grants, Construction and Regeneration Act.
• The Late Payment of Commercial Debts (Interest) Act
• The Late Payment of Commercial Debts Regulations
• Construction Supply Chain Payment Charter
• Small Business, Enterprise and Employment Act
• Project bank accounts.
• Prompt payment code.

See Fair payment practices for more information.

Find out more

Related articles on Designing Buildings Wiki

• Causes of construction disputes.
• Construction invoice fraud.
• Construction supply chain payment charter.
• Fair payment practices.
• Housing Grants, Construction and Regeneration Act.
• The Late Payment of Commercial Debts Regulations 2013.
• Payment notice.
• Payments to nominated sub-contractors.
• Pay less notice.
• Project bank accounts.
• Prompt payment code.
• Scheme for construction contracts.
• Small Business, Enterprise and Employment Bill.
• The causes of late payment in construction.