Manage payment notices and stage payments on a construction contract

The Construction Act gives the parties to a construction contract payment rights that the contract cannot take away. If the contract leaves out a payment term the Act requires, the Scheme for Construction Contracts fills the gap. This applies whether you are paying for work or being paid.

Contracts the rules cover

The Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) covers agreements to carry out construction work, to arrange for others to do it, or to supply labour for it. That includes building, civil engineering, repair, maintenance, demolition, installing heating, lighting, power, drainage or fire protection, site clearance, and painting and decorating. Architects, designers, surveyors and other consultants advising on construction work are covered too.

The Act does not cover:

• a contract with a residential occupier for work on the home they live in or intend to live in
• drilling for oil or gas, or extracting minerals
• installing or demolishing plant on a site whose main activity is, for example, power generation, water treatment, or processing chemicals, oil, gas, steel or food and drink
• manufacturing or delivering components, materials or plant to site, unless the contract also covers installing them
• employment contracts

A landlord who has work done on a property they let is not a residential occupier, so the Act applies.

Stage payments

You are entitled to be paid in instalments, stages or other periodic payments unless the contract says, or you agree, that the work will take less than 45 days. You can agree the amounts and intervals. If you do not, the Scheme sets them.

Payment dates when the contract is silent

Under the Scheme, a periodic payment falls due 7 days after the end of each 28-day period, or when the payee makes a claim if that is later. The final date for payment is 17 days after the due date. Payment of the whole contract price on a contract not paid in stages falls due 30 days after the work is finished, or on a claim if later.

Payment notices

Every construction contract must set a due date and a final date for each payment, and say who gives the payment notice. The notice must be given no later than 5 days after the due date and state the sum considered due and how it was worked out. The sum can be zero.

The contract can require either:

• the payer, or someone named such as the contract administrator, to give the notice
• the payee to give it, usually as their payment application

The amount in a valid notice is the notified sum. The payer must pay it by the final date for payment unless it serves a pay less notice in time.

If the payer gives no notice

Where the payer should give the notice and does not, the payee can give its own notice, stating the sum it considers due and how it was worked out. That sum becomes the notified sum, but the final date for payment moves back by the number of days the payee's notice came after the payer's deadline. If the contract let the payee apply before the payer's notice was due, and the payee did, that application already counts as the payee's notice.

Pay less notices

To pay less than the notified sum, the payer, or someone named in the contract, must give a pay less notice before the final date for payment. It must state the sum the payer considers due and how it was worked out. The contract sets how long before the final date it must arrive. If it does not, the Scheme requires at least 7 days. A late or incomplete pay less notice is invalid, and the full notified sum stays payable.

If an adjudicator later decides more was due than the payer's notice said, the extra must be paid within 7 days of the decision, or by the original final date if that is later.

Pay when paid clauses

A term that makes payment depend on the payer being paid by someone else, such as the client, has no effect. The exception is where that third party has become insolvent.

Your right to suspend work

If the notified sum, less any amount in a valid pay less notice, is not paid in full by the final date for payment, the payee can suspend any or all of its work. Before suspending, give the payer at least 7 days' written notice saying you intend to suspend and why.

While you are suspended:

• the contract period is extended by the length of the suspension
• the payer must pay a reasonable amount for the costs and expenses the suspension causes you

Your right to suspend ends once the payer pays the sum in full. Suspending without giving the notice is a breach of contract.

Interest on late payment

Unless the contract sets its own rate, a business that pays you late owes statutory interest at 8% above the Bank of England base rate.

Retention

Retention is money a payer holds back from each payment as security against defects. No law requires it. Release of retention is a payment like any other, so the same notice rules apply to it.

Keep your notices in order