Construction contracts: getting the payment process right

Getting paid is a key consideration for any job, but the mechanics of it can be much more daunting in respect of construction contracts than in many other fields of work. This is due to the statutory requirements imposed by Housing Grants Construction and Regeneration Act 1996 (the Act).

The Act defines a construction contract very widely and encompasses nearly all agreements which relate to “construction operations”. This means that the majority of construction contracts fall within the ambit of the Act and are subject to its provisions, including those relating to payment.

The provisions relating to payments are implied into all construction contracts, unless the contract has its own payment terms which comply with the Act. In order for a contract to comply, it must contain payment terms which are broadly in line with the Act’s own payment provisions. If some are compliant and others are not, only the non-compliant ones are replaced.

Ensuring your payment terms are compliant

To guarantee certainty, it’s best to ensure that your contract’s provisions comply with the Housing Grants Construction and Regeneration Act 1996, or you risk finding that your payment process is derailed and altered when the Act’s provisions take precedence.

The key tenets of the Act’s payment provisions are:

• The payee is entitled to staged payments if the duration of the work is over 45 days.
• There should be a clear mechanism determining what payments become due and when they are due to be paid.
• ‘Pay-when-paid’ clauses are prohibited.

The following flow chart sets out the standard process for staged payments under the Act:

Figure 1: Standard payment process for construction contracts under the Housing Grants Construction and Regeneration Act 1996

Adapting the standard payment process to suit your needs

In order to comply with the Act but also have a payment process that works for you, the best option is to take this basic process and amend it to your needs. The Act only requires your construction contract to include provisions for each of the four stages, but the details are left up to the parties to negotiate as best suits them.

For example, the Act’s relevant period is a rolling 28 day period from the commencement of the contract. However, parties are free to agree to any relevant period they wish. Additionally, precisely what the payee can invoice for per relevant period is also up to the parties.
It is generally understood that the payee can invoice for the value of the works undertaken in the relevant period. However, if the parties don’t include a process for how to assess that value, then the Act’s approach is that it is the cost of the work performed, the overheads and profit of the payee.

Therefore, it is in the interests of the parties, particularly the payer, that a certification process is agreed setting out how the value of the work is to be calculated for each period, which can be tailored to each individual construction contract. In terms of the timeline of the process, each of the dates set out above only come into play if the contract does not set out its own dates, or those dates and timeframes are patently unworkable.

The court’s approach to enforcing the Act and its payment provision is to do the “least violence” to the parties’ original agreement. Therefore, as long as the payment provisions of your construction contract follow the four-stage process outlined above, with clear mechanisms for calculating payment and dates for payment that are workable for both parties, the court will likely be content to leave your contract as you agreed it.

As always, the court is not there to save parties from a bad bargain. Therefore, it’s best to seek legal advice at the formation of your construction contract to ensure that it complies with the Act and serves your best interests.

Specialist advice on construction contacts

We help construction clients avoid disputes on all types and sizes of construction projects by giving you appropriate advice at all stages. Our team of experienced construction lawyers can advise you on your construction contract, its terms and how to resolve any contractual disputes. To get in touch, please fill out our contact form or alternatively you can call us on 01622 690691.

This content is correct at time of publication