In a typical construction contract that last longer than 45 days in overall duration, in accordance with Section 109 of The Housing Grants, Construction and Regeneration Act  there will be stage payments made.
The parties to the contract are free to agree the amounts of the payment and a mechanism to calculate this and the intervals or circumstances under which they become due. As a fallback position if the contract is silent on this mechanism then the supplementary provisions to the Act contained in The Scheme for Construction Contracts Regulations  As Amended in 2011 will apply.
If we assume that the contract is between an Employer and a Contractor and is using an un-amended Joint Contract Tribunal (JCT) Standard Building Contract.
The Payment Mechanism under this contract will be:
- An interim Application for Payment (AfP) Date will be determined. e.g. Final Friday of each calendar month, Final Day of Each month, Every Second Friday after the Base Date etc
- The Due Date for payment is 14 days after agreed date for the submission of the AfP
- Within 5 days of receipt of the AfP the Contract Administrator is to issue to the Contractor a Payment Certificate stating the sum that the Employers intends to pay to the Contractor
- Where this sum was less than the sum applied for in the AfP, the Contract Administrator must issue a Payless Notice (Notice of Withholding) where it to set out the grounds for the withholding of sums that have been subject to the AfP. This Payless Notice must be issued no more than 5 days before the Final Date for Payment.
- In the event no Payless Notice is issued then the Contractor can expect to receive the sum that has been certified in the Payment Certificate on or before the Due Date.
- In the event payment is not made or the incorrect sum is paid, then the payment can be deemed late and interest and the penalty fee under the Late Payment of Commercial Debt Regulations  As amended may be claimed
If we look briefly what the three main elements of this Payment Mechanism:
Interim Application for Payment
This is a document prepared by the Contractor setting out in such detail as required by the Employers Requirements or as agreed the sum being applied for and any supporting details.
For example if there is an item of equipment whose delivery to site for incorporation into the works is critical to the programme being able to be achieved, a Vesting Agreement may be entered into. Here the Employer will pay for the item of equipment even though it is not on site, but has been completed and is being stored off site. Of course this is the extreme case, whereas generally the interim AfP will be for works completed on a percentage basis and any materials that are on site but have not been incorporated into the works.
Where there is mutual trust and goodwill that exists between the parties this can even take the form where the Contractor and Contractors Representative meet on site on the date of the AfP or just before and effectively agree the sum that will be applied for. This will generally make the Payless Notice unnecessary as the Payment Certificate will be to the sum applied for..
Following receipt by the Contract Administrator of the Contractor’s AfP; if this has not been effectively agreed prior to the submission of the AfP; then the application will be assessed and a Payment Certificate issued of the sum that is intended to be paid.
Where the sum being certified is the same as the AfP, then in the event of no deductions being made there will be no further requirement, other than for the Employer to make payment of the sum due by the Final Date for Payment.
Where the Contractor has made application for a sum and the Contract Administrator does not agree that the sum applied for is due, a Payless Notice will be prepared and issued. There are strict timeframes in the Contract for the issue of this Payless Notice.
The Payless Notice has to specify the amounts that are proposed to be withheld and / or deducted and the grounds attributable to each sum that is being withheld. It follows that each ground has to have a legal basis under the Contract. Where the sum withheld is as a result of progress on site, or lack of it as the case may be this can be quite subjective, unless pre agreed milestones have been agreed by the parties.
I suppose the thought now is, “Why write about some mundane, mechanical, well known elements of the contract and payment mechanism?”
The reason is that recently at the Technology and Construction Court (TCC) a case has recently concluded where these three processes were not followed as required by the contract. It could be said the entire process should be a case study in how NOT to administer a contract.
In the next post will look at this case at the TCC and its implication for all the parties to a Contract.