15 Payment

The provisions relating to payment concern the way the contractor is paid by the employer. The consideration given by the employer to the contractor is not always a fixed amount of money. However, there are only certain circumstances in which the contract sum can be altered. The most important of these is where there are variations, i.e. changes to the specification of work, but there are others. This Chapter addresses these issues, and also the way that mechanisms such as retention and set-off affect payment to the contractor.

15.1EMPLOYER’S OBLIGATION TO PAY

The primary obligation upon the employer is to pay the contractor the sum of money which forms the consideration for the contract. Money must be paid promptly and fully unless there are specific reasons for withholding it.

15.1.1Contract price

Different contracts deal with the contract price in different ways. Under JCT contracts with bills of quantities, the bid by the contractor is based upon the work described and quantified in the contract bills. If any quantities are altered because of changes (for example, to the client’s requirements), then the contract sum will be altered accordingly. Otherwise, the contractor is paid the amount of the tender. This is by contrast with FIDIC 1999 Red Book, which is often known as a ‘remeasurement’ contract. This means that, even though the bills priced by the contractor may contain quantities, these are provided purely for the purpose of the tendering process. The price to be paid for the works will not be fully established until the works are completed and the quantities actually carried out are ascertained. In this situation, the contractor takes the risks associated with the price per unit of work, whereas the employer takes the risks associated with the quantity of work differing from what was envisaged. A JCT contract of this type is JCT SBC 11 in its version ‘with approximate quantities’ (also see Section 3.2.3).

These two types of contract are basic types, and naturally there are variations on these basic themes. The difference between them is of fundamental importance to any employer when considering which type of contract is appropriate for a particular project.

There are numerous provisions within the contract conditions to ensure that the contract is for the whole of the work specified. The simple fact that the money is actually paid in stages does not alter this. This is a theme followed through in the

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contracts by the fact that only the final certificate is ever conclusive as to workmanship or quality of materials.

15.1.2Time of payment

It has for many years been common practice in the UK construction sector for payment of the contract sum to be made by instalments, except on the smallest contracts and sub-contracts. One of the main purposes of this is to reduce the need for the contractor to fund the development of the project. This is because the total value of each contract forms a large proportion of a contractor’s annual turnover. Payment by instalments should eliminate the need for the contractor to borrow money pending final payment.

Payment under construction projects carried out in the UK is subject to statutory protection which sets out mandatory payment procedures. For construction contracts that do not contain those procedures, the statutory provisions take effect as implied terms within the contract and replace the contract’s payment provisions. In practice, all UK standard forms of contract for building and construction work contain compliant terms, albeit with minor variants or additional elements. Here, the requirements in the statutues are explained in outline. The FIDIC conditions are not drafted for use in the UK and hence are considered later.

Payment in construction contracts is governed by Part II of the Housing Grants, Construction and Regeneration Act 1996, as amended by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 which require every construction contract to which the Acts apply (see Section 9.1) to contain certain provisions. To the extent that the terms of a contract fail to satisfy this requirement, the contract will instead incorporate the terms which are set out in a statutory instrument called the Scheme for Construction Contracts.1 It should be noted that, where a contract fails to make provision on a particular item, it is only the provisions of the Scheme relevant to that item that are implied into the contract, rather than the whole Scheme.2

Section 109 of the 1996 Act, as amended, makes payment by instalments obligatory in every construction contract, except where either the contract specifies or the parties agree that the work is to be of less than 45 days duration. The parties are free to agree both the amount and the timing of interim payments. If they fail to do so, the Scheme for Construction Contracts provides that payment will be on the basis of work done and materials supplied during each successive period of 28 days.

Sections 110 and 111 contain detailed provisions dealing with the timing and details of payments, and with procedures to be followed in the event the employer or contract administrator seeks to value the work at a lower amount that requested by the contractor, or to withhold amounts for whatever reason from amounts otherwise due. Under the Act the following matters must be covered:

1 Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998 No 649) as amended by the Scheme for Construction Contracts (England and Wales) Regulations 1998 (Amendment) (England) Regulations 2011.

2 Hills Electrical & Mechanical plc v Dawn Construction Ltd 2004 SLT 477.

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How much and when: The contract must provide ‘an adequate mechanism’ for determining what amount is due and must show how the amount is to be calculated. It must also show when that amount is due. As shown below, the payment due date is not the same thing as the date by when it must be paid. As to the latter point, if not addressed, the following are implied under the scheme: interim payments are due 7 days after the end of the 28 day period, or when claimed if later; the final payment is due 30 days after completion or when claimed if later.

The final date for payment: The contract must provide for the final date for payment of each interim and final application. This is the last date by when payment must be made. If not addressed, the final date for payment implied under the Scheme is 17 days after the sum became due.

The payment notice: The contract must provide for the paying party or agent to give a notice identifying the amount it considers is due together with the basis of that assessment; or for the payee to give the notice. Either notice must be given no later than 5 days after the payment due date. If the contract fails to provide for one of the parties to give the payment notice, then, under the Scheme, the responsibility lies with the payer; and the notice of the amount and basis of calculation is to be given no later than 5 days from the payment due date.

The default notice: Where no payment notice is given, the payee may give a payee notice in default. This has the effect of postponing the final date for payment by the number of days delay in giving the notice.

The pay less notice: If the paying party wants to pay less than the notified sum it must serve a pay less notice stating how much it considers to be due and the basis of the assessment. The contract has to specify how long before the final date for payment this notice is to be given. Each party should then know the amount that is to be paid at the final date for payment. Under the Scheme, any pay less notice has to be no later than 7 days before the final date for payment.

The amount of money due in each instalment is recorded by the contract administrator in an interim certificate (see Section 10.1.2). The issue of such a certificate by the contract administrator imposes upon the employer a strict obligation to make payment (subject only to certain exceptions discussed in Section 20.4.3).

JCT SBC 11 contains detailed provisions for valuation and payment at clauses 4.6 to 4.16. In addition to addressing the core requirements of the Acts as noted above there is provision for VAT, CIS adjustments, advance payment and final certificates. Clause 4.12 obliges the employer to pay within 14 days the amount of money shown on an interim certificate. Clause 4.11 notes that the contractor may provide an interim payment application setting out the amount claimed and basis of calculation. This reflects a long-standing tradition or practice whereby the contractor’s surveyor prepares a detailed payment application, which invariably formed the basis of the Employer’s QS valuation. Under clause 4.11, if the interim valuation is not issued by the due date, and such an application has been made, then the application becomes the amount payable unless a valid pay less notice is issued under clause 4.12. If the contractor has not made an interim application but the due date for payment has passed, it may issue an interim payment notice,

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which, again, becomes the amount payable unless a valid pay less notice is issued under clause 4.12.

FIDIC 1999 Red Book, by clause 14.3, requires the contractor to submit a monthly interim payment application (called a ‘statement’) to the engineer. Within 28 days of the submission of this statement, the engineer shall certify, and within 56 days the employer shall pay, the relevant amount of money. Clause 14.6 provides that amounts may be withheld from payment to cover the cost of rectification or replacement of work done that is not in accordance with the contract. Under clause 14.7, the amount to be paid also takes account of advance payments, discussed further below.

Many construction contracts provide for the payment of interest upon any payments made late. Where they do not, there may be a right to claim interest at a rate fixed from time to time by the government under the Late Payment of Commercial Debts (Interest) Act 1998.

15.1.3Advance payment

Particularly on large-scale engineering projects, or projects in remote overseas locations, it is common for a contractor to have to invest considerable sums in setting up site and mobilizing heavy plant (such as tunnelling or piling) well before any work commences on site. To help fund the site setup, contractors ask for an advance payment. Further, if an advance payment is to be made, the number of contractors prepared to tender and take on the work may be wider, a factor which can be important in developing countries. Accordingly, forms for larger scale works, including JCT and FIDIC forms, provide for an advance payment.

In making an advance payment there is a risk that the contractor might simply abscond or fall into liquidation before work commences. The usual arrangement is that in return for receiving the advance payment, the contractor provides a bond or performance security for the amount of the payment by way of security for the employer in the event of failure of the contractor. This is in addition to a retention bond or performance bond that might also be provided.

Clause 14.2 of the FIDIC 1999 Red Book provides for the employer to make an advance payment if, and only if, a satisfactory security and guarantee is received. A model form of guarantee is set out in Annex 3 to the guidance notes in the form. The advance payment is repaid in instalments during the course of the works, generally as a credit against interim payments due. The amount of the bond and frequency and amount of repayments is set out in the appendix to tender. The FIDIC clause anticipates that the advance will not exceed 22% of the contract amount.

15.1.4Effect of certificates

Interim certificates are simply a mechanism for confirming that an instalment of the contract sum is due to the contractor. JCT SBC 11 is based on a contract administrator’s valuation of work done each month. ICC 11 is based on a contractor’s claim for payment, which is evaluated by the engineer.