Fair payment practices for construction

Revision as of 07:37, 19 March 2013

The Housing Grants, Construction and Regeneration Act 1996 (also known as the Construction Act) include provisions to ensure that payments are made promptly throughout the supply chain. These provisions include:

• The right to be paid in interim, periodic or stage payments.
• The right to suspend (or part suspend) performance for non-payment and to claim costs and expenses incurred and extension of time resulting from the suspension.
• The client must issue a payment notice within five days of the date for payment, even if no amount is due. Alternatively, if the contract allows, the contractor may make an application for payment, which is treated as if it is the payment notice.
• The client must issue a pay less notice if they intend to pay less than the amount set out in the payment notice, setting out the basis for its calculation.
• The notified sum is payable by the final date for payment.
• If the client (or specified person) fails to issue a payment notice, the contractor may issue a default payment notice. The final date for payment is extended by the period between when the client should have issued a payment notice and when the contractor issued the default payment notice. If the client does not issue a pay less notice, they must pay the amount in the default payment notice.
• Pay when certified clauses are not allowed, and the release of retention cannot be prevented by conditions within another contract.

On public sector projects, the OGC Guide to best fair payment practices (endorsed by the Public Sector Construction Clients’ Forum which recommends adoption of its principals by public sector clients) sets out additional procedures for public sector projects. The procedures are intended to ensure transparent, and proper payments are made to the main supply chain members within 30 days. They can been integrated into JCT (The Joint Contracts Tribunal) contracts by making amendments set out in the JCT Public sector supplement.

The recommendations in the OGC Guide to best fair payment practices include:

• The drafting of a fair payment charter that is signed up to by the client and the main supply chain members.
• Transparency regarding payment procedures throughout the supply chain, and the provision of information relating to payments works (for example information about a particular work package that appears on certificates for the main contract) so that it is clear what sub-contractors and sub-sub-contractors can expect to be paid and when.
• Any amount to be withheld should be justified (also now required by the Construction Act).
• All contracts (including sub-contracts and sub-sub-contracts) should be valued on the same day, the ‘common valuation date’.
• All payments should be made no more than 30 days from the date when the payment was first valued, the ‘common valuation date’. This may involve paying main contractors before the 30 days has expired, so that subsequent payments to sub-contractors and sub-sub-contractors can all be made within 30 days. The JCT Public sector supplement proposes payment under the main contract within 19 days and payment to sub-contractors within 23 days, allowing payment to sub-sub-contractors within 30 days. NB if the valuation date is before the due date (certification generally precedes the due date on construction contracts), then payment should be made within 30 days of the valuation date, not the due date.
• Provisions in relation to protection in the event of insolvency.

NB The Office of Government Commerce (OGC) has now been absorbed into the Efficiency and Reform Group (ERG) within the Cabinet Office. OGC guidance has been archived, however, it is cited in the Government Construction Strategy and the Common Minimum Standards, and links are provided to OGC documents from government websites such as the Major Projects Authority.

Find out more

Related articles on Designing Buildings Wiki

• Causes of construction disputes.
• Default payment notice.
• Housing Grants, Construction and Regeneration Act.
• Payment notice.
• Pay less notice.
• Remedies for late payment.
• Scheme for Construction Contracts.

External references

• Late Payment of Commercial Debts Regulations 2002
• The Housing Grants, Construction and Regeneration Act.
• Scheme for Construction Contracts.
• OGC: Guide to best fair payment practices.
• JCT Public sector supplement.