Construction projects are complex undertakings that require careful planning, management, and execution. One of the most critical aspects of any construction project is payment. Construction contracts typically involve large sums of money, and ensuring that payments are made on time is essential for keeping the project on track and avoiding disputes.
Two key pieces of legislation that address construction payments are the ‘Housing Grants, Construction and Regeneration Act’ and the ‘Scheme for Construction Contracts’, both of which are sometimes referred to as the Construction Act.
While these legal frameworks are crucial for managing payments in construction projects, they can be complex and difficult to understand for non-legal professionals. Our overview will provide a high-level understanding of these legal frameworks and how they impact the construction payment process, including the challenges these laws aim to address and how they manifest in the application for payment process.
In this blog we answer the following questions:
- Why is the Construction Act needed?
- What does the Construction Act say?
- What is the Scheme for Construction Contracts?
- How do construction Payment Notices and Pay Less Notices work?
- What is adjudication in construction?
- How do we comply with the UK Construction Act?
- How do we manage construction payments effectively?
Why the Construction Act is necessary?
Prior to the introduction of the UK Construction Act, the construction industry was plagued with payment issues. Contractors and subcontractors often found themselves in difficult financial situations due to late or non-payment by clients or main contractors. The lack of clear payment terms and procedures led to disputes, delayed projects, and even insolvency for some businesses. Additionally, the practice of ‘pay when paid’, where payment from the employer to the contractor was contingent on the employer receiving payment from a third party, was commonplace.
To address these issues, the UK government introduced the Housing Grants, Construction and Regeneration Act in 1996 and Part II of this legislation in 1998, which aimed to improve cash flow in the construction industry and promote fair and timely payments. The Act also introduced a statutory right to adjudication for construction, which allows parties to resolve disputes quickly and inexpensively.
The UK Construction Act was later amended in 2009, coming into force in 2011 to strengthen its provisions alongside an amended Scheme for Construction Contracts. The Scheme provides default provisions for construction contracts in situations where the parties have not used a written contract with agreed payment terms. In this situation, the Scheme’s payment terms and process timeline is used instead.
How does the Construction Act affect applications for payment?
The UK Construction Act and the Scheme for Construction Contracts provide a framework for managing payments in construction contracts. One of the most significant impacts of these acts is on the application for payment process, which is a crucial aspect of managing cash flow in construction projects.
The Acts set out a specific process for applications for payment, which includes setting payment dates and issuing Payment Notices. Contractors and subcontractors must submit timely and accurate applications for payment, and clients or main contractors must issue Payment Notices within strict deadlines. Failure to adhere to these deadlines can result in a dispute and may trigger the statutory adjudication process.
Payment notices and the Construction Act
These two Acts have significantly shaped the application for payment process. Here, the contractor or subcontractor submits an application for payment for work done or goods supplied, and the employer or main contractor has 5 days from the Due Date to issue a Payment Notice.
If the employer subsequently disputes the amount due as specified on the previously issued Payment Notice, they must issue a Pay Less Notice with the revised amount and details of how they calculated that figure no later than 7 days before the Final Date for Payment.
If the contractor or subcontractor disputes the payment amount, they can refer this dispute to an adjudicator by issuing a note of adjudication. A referral note is then served to the employer or main contractor, who has 7 days to respond. The adjudicator must issue a decision within 28 days, although this can be extended by up to 14 days with the agreement of both parties.
If the employer fails to issue a Payment or Pay Less Notice within 5 days of the Due Date, the contractor or subcontractor may issue a notice of its own, or the submitted application becomes the default Payment Notice, and the amount submitted in that application becomes payable (the Notified Sum). This notice must also state the amount due and the basis for the calculation – read more about the timeline in our application for payment in-depth guide.
Guide: Read our in-depth guide on the Application for Payment process: Application for Payment: An In-Depth Guide
Construction Act payment terms – what are fallback timings?
The Acts provides fallback timings for payment terms, notices, and adjudication timelines in situations where the parties have not agreed on specific terms within their contract. These fallback timings are designed to ensure that payments are made in a timely manner and that disputes are resolved quickly.
The fallback timings for payment terms under the Scheme for Construction Contracts state that payment becomes due (the Due Date) 7 days after the ‘Relevant Period’ (if the contract does not state the Relevant Period, then the Scheme sets this at 28 days) or on receipt of a valid application, whichever is later.
The Scheme sets the default Final Date for Payment at no more than 17 days following the Due Date. This provides a clear timeline for payment, ensuring that contractors and subcontractors can plan their cash flow effectively in the absence of contractually agreed timeframes.
If the employer disputes the amount due, they must issue a Pay Less Notice within a specified timeframe. The fallback timing for issuing a Pay Less Notice payment is no later than 7 days before the Final Date for Payment. This ensures that the contractor or subcontractor is given sufficient notice of any potential payment issues and has time to refer the dispute to adjudication if necessary.
What about adjudication in construction?
The adjudication process, which is a statutory right under the Acts, allows parties to resolve disputes without the need for court proceedings. The process is designed to be quick and cost-effective, with strict timelines for the adjudicator’s decision. Adjudication is a powerful tool for resolving disputes in the construction industry, as it allows parties to avoid lengthy and expensive court proceedings and to keep projects on track.
For example, if the employer issues a Pay Less Notice that the subcontractor disagrees with and no agreement can be reached, the contractor or subcontractor can refer the dispute to adjudication. The adjudicator must then issue a decision within 28 days, although this can be extended by up to 14 days with the agreement of both parties.
Ensuring compliance with the Scheme for Construction Contracts and UK Construction Act
Payapps is an essential tool for businesses in the construction industry looking to support compliance with the UK Construction Act and the Scheme for Construction Contracts. The platform streamlines the application for payment process, removing the need for manual processes and providing an intuitive user experience.
Payapps’ workflows and automated reminders help meet key deadlines, reducing admin overhead and the risk of non-payment and adjudications from non-compliance. The platform provides full digital audit trails to track, report and evidence compliance.
Automatic reminders and notifications to the contractor’s team and their subcontractors reduce the risk of key application deadlines and documentation being missed or undelivered, and streamlined workflows allow businesses to manage their projects efficiently and effectively while remaining compliant with legal frameworks.
Managing subcontractor construction payments effectively
The UK Construction Act and the Scheme for Construction Contracts provide a robust framework for managing payments in construction contracts. By setting out clear processes, fallback timings, and adjudication rights, these Acts help to promote fair and timely payments in the construction industry while also providing a mechanism for resolving disputes quickly and cost-effectively.
It is essential for all parties involved in construction contracts to understand these legal frameworks and to adhere to their requirements to ensure that projects are completed successfully and without unnecessary disputes.
This article is for information purposes only. It is written to raise awareness of UK Construction legislation and prompt further, more detailed investigation. You must not rely on the information in this article as an alternative to legal advice from an appropriately qualified professional. If you have any specific questions about any such matter, you should consult an appropriately qualified professional.
