In this first blog, we thought we would go back to basics and give an overview of the payment process.
Construction contracts are governed by the Housing Grants, Construction & Regeneration Act 1996 as amended by the Local Democracy Economic Development and Construction Act 2009 ("the Act") which requires certain provisions to be included in construction contracts. If your construction contract does not set out payment provisions in line with the Act, the Scheme for Construction Contracts (Scotland) will apply. The Scheme sets out the payment process to apply in Construction Contracts.
The standard forms of building contract incorporate the requirements of the Act. However these standard forms are often amended so it is essential that the payment terms in each contract are reviewed carefully even if the overarching contract is a standard form that you are used to dealing with.
For the purposes of this blog series where we require to refer to the terms of a contract, we will assume that the contract is an unamended SBCC Design & Build Contract 2016 ("the Contract").
The Contract allows for payment in stages or interim payments and sets out methods of calculating the sums due. If a payment schedule is not agreed interim monthly payments is the default position.
1 Payment Application/Payment Notice
1.1 The Contract requires that the Contractor (known as the payee) must make a payment application. The application for payment must specify the sum the contractor is seeking and how it has been calculated.
2 Due date for payment
2.1 The Contract provides that the due date for interim payments is seven days after the interim valuation date or seven days from receipt of the payment application, if the application was made after the interim valuation date.
2.2 Parties can agree the due date, or how to calculate it, failing which the provisions of the Scheme apply. Under the Scheme the due date is the later of seven days after the expiry of a relevant period which would be interim monthly payment dates or upon the Contractor making a claim for payment (issuing their payment application).
3 Payment Notice/Default Notice
3.1 Under the Contract once the payment application has been made, the Employer (the paying party) has five days to give the Contractor (the payee) a payment notice. This can also be referred to as an interim Certificate. The payment notice must set out what sum they consider is due and the basis upon which it is calculated. It is important that a payment notice is issued even if the sum due is zero. If the paying party fails to do so, they must pay the sum stated in the payment application.
3.2 If a payment notice is not issued, the Contractor can serve a default payment notice specifying the amount they consider due and the basis upon which it is calculated. If they have issued an application for payment, this will be deemed the default payment notice.
4 Pay less notice where payment application issued
4.1 The Employer (the paying party) should also issue a pay less notice if they intended to pay less than the sum stated in the payment notice/default payment notice. If no pay less notice is issued, the sum to be paid will be the amount stated in the payment notice/default payment notice.
4.2 In the Contract, the pay less notice must be issued not later than five days before the final date for payment and the paying party must still pay the sum they accept is due by the final date for payment. Care should be taken as the deadline for issuing pay less notices is often amended and should not be missed.
5 Final date for payment
5.1 Under the Contract the final date for payment is 14 days after the due date.
5.2 If your contract does not specify a final date, the Scheme provides that the final date is 17 days after the due date.
5.3 If the paying party fails to make payment by the final date, the payee may give seven days' notice that they intend to suspend performance. The payee may also refer any dispute over payment to adjudication. For more information on the adjudication process please read our blog series on adjudication.
6 Final Payment
6.1 Under the Contract, interim payments continue at monthly intervals until the due date for the final payment. The due date for the final payment is one month after the latest of three triggering events; (1) the end of the rectification period, (2) the date of completion of making good, or (3) the date of submission of the final statement.
As you will appreciate there is a lot of payment terminology so in next week's blog we will provide a glossary of commonly used terms.
Should you require assistance with any aspect of a construction contract, we have a large and experienced construction team who would be happy to discuss this with you.