Fair payment practices for construction

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.’

The Housing Grants, Construction and Regeneration Act 1996 (also known as the Construction Act) includes 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.

Interestingly, the HGCRA 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. In default, the Scheme for Construction Contracts applies providing a payment period of 17 days from the due date to the final date for payment.

The Late Payment of Commercial Debts (Interest) Act provides for simple interest to be payable on outstanding debts at a penal rate of 8% above the Bank of England base rate. Additional penalties can also be levied.

30 calendar days when the purchaser of goods/services is a public authority.
60 calendar days when the purchaser is another business, but this can be extended if expressly agreed in the contract and provided it is not grossly unfair to the supplier.

Impose a limit of not more than 30 calendar days (before the payment period begins) for the purchaser to verify the conformity of goods/services are in accordance with the contract - but this period can be exceeded by agreement and provided it is not grossly unfair to the supplier.
Allow the supplier compensation for its reasonable costs of debt recovery above the fixed costs currently recoverable under the Act (£40 for debts of under £1,000, £70 for debts of under £10,000 and £100 for debts over £10,000).

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 (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. 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.

The 2015 Public Contracts Regulations require that public bodies in England include a 30-day payment clauses in supply chain contracts. In October 2016, a guidance note was published by the government making clear that this is 30 days from the issue of a payment notice.

NB: From 6 April 2017, the Small Business, Enterprise and Employment Bill requires that large companies publish:

Payment practices and policies relating to relevant 'Qualifying Contracts' (a broad definition) and;
The company’s performance by reference to those practices and policies.
The standard payment terms of the company and any which are not standard;
Comment on any disputes relating to the payment of invoices;
A statement as to whether the Qualifying Company’s payment practices and policies provide for the deduction of a sum from a Qualifying Contract.