It seems obvious that a contract should have a mechanism for payment. It took Sir Michael Latham's report to crystallise that proposition which described payment for works undertaken as "fundamental to trust within the construction industry." He recommended that contracts make provision for interim payments, clearly setting out the period within which interim payments were to be made. Cash is, after all, still king.
The Act therefore had some work to do, to ensure that payment provisions were adequately addressed in construction contracts. As, with the statutory entitlement to adjudication, if a construction contract does not make provision for payment, as prescribed by the Act, the Scheme for Construction Contracts (Scotland) Regulations 1998 apply.
What does the Act say?
The Act provides that Construction Contracts must contain:
1 An entitlement to Stage Payments: Parties have the right to payment by "instalments, stage payments or other periodic payments for any work" if the duration of the contract work is more than 45 days. The parties can agree the amounts of the instalments and the circumstances where payment is due, with parties having a "…wide measure of freedom as to the nature of the regime which they may agree." (Balfour Beatty Regional Construction Ltd v Grove Developments Ltd  EWCA Civ 990); and
2 A payment mechanism which i) determines what payments become due under the contract and when those payments become due; and ii) identifies a final date for payment for any sum that becomes due. Parties can agree the length of time between the due date for payment and the final date for payment.
If a contract does not contain these essential elements the Scheme makes provision for assessment of the amounts due by way of instalment, due dates and final dates for payment.
- Due Date = making of a claim by the payee + 7 days; OR the expiry of a relevant period + 7 days; OR 7 days following the completion of the work to which the payment relates.
- Final Date for Payment = Due Date + 17 days
There are slightly different timeframes associated with final payments.
Whilst parties are of course free to contract as they see fit provided the essential elements prescribed by the Act are covered, it is useful to consider what some of the standard forms prescribe.
SBCC Design & Build Contract, 2016, Payment Provisions
In the SBCC Design & Build Contract, the Contract Sum is specified in the contract and the Employer is responsible for paying this sum to the Contractor together with any VAT due. Valuation Dates are also specified.
The Due Date is 7 days after the Interim Valuation Date, or 7 days after receipt by the Employer of an Interim Payment Application if later. The Final Date for Payment is 14 days from the Due Date.
- Due Date = Interim Valuation Date + 7 days OR Interim Payment Application + 7 days
- Final Date for Payment = Due Date + 14 days
The pay less regime is a topic for another day.
SBCC Minor Works Building Contract, 2016 Edition, Payment Provisions
Again the SBCC Minor Works provides for Interim Payments. The Due Date is 7 days after the relevant Interim Valuation Dates which are specified at the beginning of the Contract. The final date for payment is 14 days from the Due Date. This is dependent on the Employer having issued a Certificate within 5 days after the Due Date.
If a certificate has not been issued by the Employer but a Contractor's payment notice has been given in time the sum claimed falls due. There is, however, some ambiguity around the final date for the Employer to pay the sum stated in the Contractor's payment notice, in which case reference has to be had to the Scheme.
If the Contractor has not made an application (which it is entitled, but not obliged to do) and the Employer has failed to issue a certificate the contractor can make an application for payment any time beyond 5 days after the Due Date. The Final Date for payment in that situation is postponed by the number of days beyond the expiry of the 5 day period. That is rather clunky but can be summarised as follows:
- Due Date = Interim Valuation Date + 7 days
- Final Date for Payment = Due Date + 14 days OR Due Date + 17 days OR 14 days + (no. of days between Due Date plus 5 and Date of Contractor's Application)
It is not difficult to see how these payment provisions could become challenging to administer
NEC3/4 Payment Provisions
The NEC3 contracts operate on the ‘payer-led’ basis, meaning that a payment notice is given by the payer, or on the payer's behalf. This will specify the amount due at the payment due date and the basis on which that amount was calculated.
The date on which a payment becomes due is seven days after the assessment date and the final date for payment is fourteen days after which the payment becomes due.
- Due Date: Assessment Date + 7 days
- Final Date for Payment: Due Date + 14 days
NEC4 has updated this by relying on a contractor application for payment. They also introduce a final assessment by the project manager 4 weeks after the defects certificate is issued.
As you can see, payment provisions in construction contracts are in no way uniform, and can be fairly complicated. The payment provisions detailed in the various contracts above can also be amended in the Contract, so this makes payment even more difficult to address in general terms. The devil is in the detail and each contract should be reviewed and understood at the outset to avoid potential payment issues further down the line.
If you require any assistance with payment in construction contracts, or construction contracts in general, please contact Alyson Cowan.