Payment in Construction Contracts: Payment Provisions

It was once said by Sir Michael Latham (and Lord Denning before that) that “cashflow is the lifeblood of the construction industry.” This is still very much the case….

This note provides a summary of the minimum requirements for the payment provisions in a construction contract.

Introduction                                

The construction industry remains one of the key drivers of the UK economy, contributing to jobs and economic growth. The Chartered Institute of Building notes that approximately 2.3 million people are employed in the construction industry and that in 2018, the construction industry contributed 6.1% of the UK’s total GDP in the sum of £116.3 billion[1].

With the construction industry’s importance to jobs and the economy, there are public policy and economic grounds for maintaining the health and efficiency of the industry. New legislation has been implemented to ensure that business to business contracts (as opposed to contracts with residential occupiers of dwellings) are in line with established payment provisions. This is particularly important in the construction industry given that:

• it often involves multiple stakeholders (Employers, Contractors, Sub-Contractors, Consultants etc), such that an efficient payment process ‘down the chain’ is essential for the smooth operation of construction projects;
• suppliers of materials, plant and machinery will require ongoing payment, failing which there may be log jams / delays; and
• payment / lack of payment might result in substantial knock-on delays and an increase in costs to construction projects.

The Legislation

Against this economic background, exists a key statutory framework for payment provisions in construction contracts. This framework has been established by:

• The Housing Grants, Construction and Regeneration Act 1996 (commonly referred to as the ‘Construction Act’) – Part II of the Construction Act in particular; and
• The Scheme for Construction Contracts (England and Wales) Regulations 1998 (SI 1998/649) (commonly referred to as the ‘Scheme’) – Part II of the Scheme for Construction Contracts in particular[2].

‘Construction contracts’

It is only those works which are “construction operations” for the purposes of section 105 of the Construction Act and that are to last for 45 days or more, which must observe the Construction Act’s requirement for a regime of interim payments.

Section 105(1)(a) to (f) of the Construction Act provides that “construction operations” include demolition works, painting and decorating, architecture, installation of heating systems, structural engineering and repair and maintenance works. This is not an exhaustive list, and section 105 casts a wide net. It is important to highlight that works to a dwelling with a residential occupier do not constitute a “construction operation”.

Further exclusions are provided at section 105(2). For example, drilling for natural gas, the extraction of minerals, and the delivery of plant and machinery to site are not considered to be construction operations for the purposes of the Construction Act.

The Construction Act’s requirements

Providing a contract is for construction operations which are to be ongoing for 45 days or more, the Construction Act conveys an entitlement to staged payments. Parties need to ensure that their contract incorporates adequate payment mechanisms providing for such.

For the most part, parties are free to agree their own specific payment terms and conditions i.e. the amount due, when payment becomes due, the payment intervals and so on. However, great care must be taken to ensure the requirements of sections 109 to 113 of the Construction Act are complied with. Sections 109 to 113 specify the payment terms that a construction contract must contain. If the contract does not observe the requirements set out in these sections, the Scheme will imply terms into the contract to the extent necessary to achieve the Construction Act’s requirements.

The Construction Act vs. The Scheme

The table below summarises the Construction Act’s payment provisions and the relevant terms of the Scheme which will be implied if said provisions are not contained in a construction contract:

Conclusion

Navigating payment processes in construction contracts can often be a minefield. Parties would be well advised to take care to ensure the payment provisions in their contract comply with the Construction Act, to avoid consequences which were not intended by either party.

Our specialist team at IBB is on hand to advise from the outset, whether it be in respect of the drafting of the contract itself or assisting in respect of a payment dispute which has materialised.

 

Speak to our specialist Construction and Engineering lawyers

If you have any questions about this blog, please speak to one of our construction team on 03456 381381 or email construction@ibblaw.co.uk.

Alternatively, contact Samantha Beasley on 01895 207283 or Samantha.Beasley@ibblaw.co.uk.

[1] The Real Face of Construction 2020, Socio-Economic Analysis of the True Value of the Built Environment, CIOB – https://www.ciob.org/media/53/download

[2] There is a separate Scheme for Construction Contracts relating to Scotland which we do not address here.