Payments in construction work

Construction work can involve large sums of money being spent over a number of months or years. The basic principle of contract low (when a contractor undertook to do work for a fixed sum and only received payment when the whole work had been completed) was usually varied by agreement between the employer and contractor. This allows interim payments to be made as work proceeded, in order to deliver cash flow to the contractor. All standard forms of contract now necessary to agree with the Construction Act (Construction and Regeneration Act 1996).

Interim payment provisions can be in any one of the following forms:

payments of pre-determined amounts at regular intervals

This method has the advantage of minimum administration and cash flow certainty. Disadvantage is it can lead to problems if the contractor falls behind programme or finishes with defective work.

payments of pre-determined amount when the work reaches pre-determined stage of completion

This form of interim payment keeps down administration cost and does not lead to overpayment to the contractor if he falls behind programme or finishes with defective work.

Disadvantages: it does not take into account the value of unfixed materials on or off site.

payments of amounts at regular intervals calculated by a detailed valuation process as the work proceeds

This method is the fairest and mostly accepted in contracts, each payment takes into account contractor’s defective work, delays, materials on and off site, fluctuations, loss or expense and retention.

The contractor has similar obligations to his suppliers and sub-contractors as does the employer to the contractor.

The duties and responsibilities of the parties to the contract are:

The architect / contract administrator

The architect / contract administrator has to issue interim certificates stating the amount due to the contractor, to what that amount relates and the basis of calculation of that amount:

On the dates provided for in the contract particulars up to the date of practical completion or to within one month thereafter.

After practical completion as and when further amounts are ascertained as being payable to the contractor.

After expiration of the rectification period or upon issue of the certificate of making good, whichever is the later.

Interim certificates are vital to the smooth running of a project and the architect / contract administrator should bear in mind that:

Certificates must be issued at the appointed time and in accordance with the requirements of the contract.

He is legally responsible for the accuracy of his certificates.

He must remain independent in the issuing of certificates so as to be fair to both parties.

The quantity surveyor

If contractors submit an application setting out their gross valuation to the quantity surveyor, the quantity surveyor has to make an interim valuation. If the quantity surveyor disagrees with the gross valuation of the contractors, he has to submit a statement to the contractor at the time of making his valuation and in similar detail to the contractor’s application, identifying his disagreement. If clause 4.21 – choice of fluctuation provisions- is stated in the contract particulars as applying, the quantity surveyor has to make an interim valuation before the issue of each interim certificate. Otherwise it is at the architect / contract administrator’s discretion whether or not interim valuations are to be made by the quantity surveyor.

The employer

Not later than five days after the date of issue of an interim certificate the employer ought to give written notice to the contractor specifying the amount of the payment proposed, to what that amount relates, and the basis of calculation of that amount. Not later than five days before the final date for payment of the amount certified due, the employer may give written notice to the contractor specifying the amount proposed to be withheld or deducted from the due amount, the ground(s) for so doing, and the amount attributable to each ground.

If the employer does not give these notices and fails to pay, in full, the amount stated as due in an interim certificate by final date for payment, that is within 14 days from the date of issue of the interim certificate, then:

Contractors are entitled to be paid simple interest on the overdue amount at 5% per annum above the official dealing rate of the Bank of England.

Contractors are empowered, subject to giving the notice required by clause 4.14, to suspend the performance of their obligations under the contract until payment in full occurs.

Contractors are empowered, subject to giving the notices required by clause 8.9, to terminate their employment under the contract and they may also start proceedings in the courts for the recovery of the debt.

Whilst employers have the right, in the circumstances prescribed by and subject to giving the notices required by clause 2.31, to deduct liquidated damages from the amount stated as due in interim certificate, they do not have the right to interfere with the issue of any architect / contract administrator’s certificate. If they do so it is a matter for which the contractor may determine his employment under the contract. However contractors would achieve nothing by determining if it were the final certificate that was obstructed or interfered with, and it is doubtful whether they would achieve much by determining close to or after the practical completion. In such circumstances they would, instead, be better off invoking the procedures for the settlement of disputes or differences prescribed by mediation, adjudication, arbitration or legal proceedings.

When it is recorded in the contract particulars that the employer is a ‘contractor’, the employer must, when making payment, comply with the provisions of the clause 4.7 and must do so in accordance with the CIS. Certain non-construction businesses that have an average annual expenditure in excess of £1 million on construction operations over the three year ending with their last accounting date. These organizations are required by HM Revenue and Customs to operate the CIS.

The contractor

Whilst clause 4.10, subject to any agreement between the parties, allows the contractors to submit to the quantity surveyor an application setting out their gross valuation pursuant to clause 4.16, they are under no contractual obligation to assist in any way in the preparation of interim valuations or certificates. It is the architect / contract administrator’s responsibility to issue the interim certificates at the correct times and it is the employer’s responsibility to make payment to the contractors within the 14 day period.

Not later than five days after the date that payment becomes due to the contractor ought to give written notice to each sub-contractor specifying the amount of the payment in respect to their sub-contract works, to what that amount relates, and the basis of calculation of that amount. Not later than five days before the final date for interim payment, the contractor may give written notice to each sub-contractor specifying the amount proposed to be withheld or deducted from the amount due to them, the ground(s) for so doing, and the amount attributable for each ground. If the contractor does not give these notices and fails to pay in full the amount stated as due in an interim payment by the final date for payment, that is within 21 days after the date on which they become due, then:

The sub-contractor is entitled to be paid simple interest on the overdue amount at 5% per annum above the official dealing rate of the Bank of England.

The sun-contractor is empowered, subject to giving the notice required by clause 4.11 of Standard Building Sub-Contract, to suspend the performance of his obligations under the contract until payment in full occurs.

Delay

The most common reason of arguments between contractor and client are delay to the progress of the works and expenses related with such delays. If the delay occurs by default of the client (or his representatives), contractor become entitled to the compensation of expenses. Common law gives him certain rights to claim damages.

If companies assume they have experienced direct loss or expenditures, they must make written application to the contract administrator as soon as it became clear that progress of the works has been affected, he should give as much information as he can. Also, upon request, contractor have to submit to the contract administrator or quantity surveyor such details as are reasonably necessary to allow them to establish the amount of loss incurred, any amount so ascertained must be included in the next interim certificate.

Quantity surveyor should normally produce the regular financial reviews and send to the employer and other members of the design team at monthly intervals, agreeing with the dates of issue of interim certificates. These reviews should show a forecast or the employer’s total financial commitment to the contractor, including the reimbursement of direct loss and expenses and should contain an estimate of the final adjustment of the contract sum.

SBC Clause 4.5 Duties and rights in respect of final adjustment of the contract sum.