UK: The New Construction Act - Finally Live!

Last Updated: 3 November 2011
Article by Kate Knox

From 1 October 2011 a payment regime that applies to all 'construction contracts' entered into on or after 1 October 2011 came into force. The changes to the payment provisions set out in the Housing Grants, Construction and Regeneration Act 1996 (known as the 'Construction Act') have been introduced by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (the "LDEDC Act 2009").

Changes to the payment procedure

In simple terms, construction contracts will need to provide for the following payment structure:

  • Payment Due Date
  • Payment Notice
  • Payer's 'Pay Less' Notice
  • Final Date for Payment

The below diagram highlights the new process:

The new provisions require a payment notice and a pay less notice to be given even if the sum due is zero. Separate payment notices and pay less notices must be served.

The Scheme for Construction Contracts will apply to non-compliant contracts (or to the deficient area of the contract). Consequently, the Scheme has also been updated to reflect the changes in the LDEDC Act.

In July 2008, the Department for Business Enterprise and Regulatory Reform told the industry that anticipated savings included £5.8million potentially saved in administration costs per annum by simply treating third party payment notices (payment certificates issued under building contracts) as valid notices under the Act. When we later look at the illustration of the payment procedure under the traditional and design and build contracts, you will see that the number of notices required to be issued under Rev 2 and 2011 Design and Build versions of the contract look to be the same. Under the 2011 SBC version of the contract, there is potentially a reduction in the number of notices (reduced by 1 notice), if the architect / contract administrator issues his notice on time; however, if the notice is not issued, the administrative burden on the contractor is likely to be increased, by forcing the contractor to instead issue a default payment notice.

The potential savings anticipated to be achieved through improvements to the payment framework by ensuring that contracts create timely entitlements to interim payments (at the time thought to be in the region of 1 - 1.5% on the average project, representing £1 - £1.5billion) stand a better chance of coming to fruition.

Payment Notice (Section 110A)

The contract may specify that either the payer, the payer's specified person (e.g. architect, contract administrator, engineer etc) or the payee may issue the payment notice.

The payment notice must be issued within 5 days of the payment due date.

The payment notice must set out the sum considered to be due, even if it is zero, and the basis of calculation. This is the 'notified sum'.

Default Payment Notice (Section 110B)

If the payer / payer's specified person fails to serve its payment notice within the required 5 days after the due date, the payee may serve a payment notice after the lapse of that period.

The final date for payment is then extended by the time that has elapsed between the expiry of the 5 day period and the issue of the payee's default notice. Unfairly, this does give the payer more time to pay.

However, by forcing the payee to serve a default payment notice, the industry can no longer avoid serving payment notices, thereby achieving one of the main aims of the reform. Parties will no longer be able to combine a payment notice and what is currently known as the withholding notice into one notice.

Pay Less Notices (Section 111)

This replaces the existing withholding notice. If the payer wishes to pay something 'less' than the 'notified sum', the payer must issue a pay less notice.

The notice must be issued within the period prescribed under the contract or, in the absence of a prescribed period, the period prescribed by the Scheme (currently 7 days before the final date for payment). This has not changed from the existing Act.

Fundamentally, the pay less notice must be served whether the payer intends to rely upon set-off, counterclaim or to abate against the sums claimed. Currently, it is possible (in certain circumstances) for a party to abate without having served a withholding notice. This will no longer be possible under the new regime.

How the JCT 2011 implements the changes

The JCT have now published their new suite of contracts. Looking at the changes being made to the payment regimes for the SBC and the DB:-

Traditional JCT (Standard Building Contract )

Pre 1 October 2011

Post 1 October 2011

Due dates are not expressly identified.

The contract now expressly identifies payment due dates. The payment due dates are the monthly dates specified in the contract particulars. (Clause 4.9.1)

The contractor may submit an interim payment application to the quantity surveyor, setting out what the contractor considers to be the amount of the gross valuation, not later than 7 days before the architect/contract administrator issues its interim payment certificate. (Clause 4.12)

As previously, the contractor may submit an interim payment application not less than 7 days before the architect/contract administrator issues its interim payment certificate. Notably, the contractor's application must set out the sum that the contractor considers due to him and the basis that the sum has been calculated. (Clause 4.11.1)

The architect/contract administrator must issue an interim payment certificate on the dates provided for in the contract particulars, stating the amount due, to what the amount relates and the basis on which the amount has been calculated. (Clause 4.9)

The architect / contract administrator must issue the interim payment certificate within 5 days of the due date. The interim certificate must state the sum that he considers to be due and the basis on which that sum has been calculated. (Clause 4.10.1)

Employer's payment notice – issue within 5 days of the issue of the architect/contract administrator's interim certificate. (Clause 4.13.3). In practice, this notice was often not given.

The architect / contract administrator's payment certificate (discussed above) is treated as the Employer's payment notice. No separate notice is required. (Clause 4.10.1)

If the architect / contract administrator fails to issue the interim certificate, the payment timetable slips. However, the failure to issue an interim certificate or final certificate is expressly stated to constitute a dispute or difference. (Clause 1.11)

If the architect/contract administrator does not issue an interim certificate in time, the interim payment application (if any) issued by the contractor is treated as the default payment notice. (Clause 4.11.2.1) In the absence of either an interim certificate from the architect/contract administrator or an interim payment application from the contractor, the contractor is now entitled to issue a payment notice to the quantity surveyor after the expiry of 5 days from the due date and this is treated as the default payment notice. This notice must set out the sum that the contractor considers due to him and the basis that the sum has been calculated. (Clause 4.11.2.2) In which case, the final date for payment of the sum specified is postponed by the same number of days as the number of days that have elapsed between the 5 day period and the giving of the contractor's payment notice. (Clause 4.12.4)

Because the contractor now has the ability to stop the payment timetable slipping and issue its own 'default' payment notice, clause 1.11 has been deleted.

Withholding notice – Employer to issue not less than 5 days before the final date for payment. (Clause 4.13.4)

Pay less notice – the employer / architect / contract administrator / quantity surveyor / employer's representative or another person who the employer notifies to the contractor as being authorised so to do, may serve this notice not less than 5 days before the final date for payment. (Clauses 4.12.5 and 4.13.1)

Final date for payment - 14 days from the date of issue of the architect/contract administrator's interim certificate. (Clause 4.13.1)

Final date for payment - 14 days from the due date but this may slip (see below). (Clause 4.12.1)

JCT Design and Build

Pre 1 October 2011

Post 1 October 2011

The contractor must submit an interim payment application. The application shall be accompanied by such details as may be stated in the Employer's Requirements. (Clause 4.9)

The difference is that the contractor's application must set out the sum that the Contractor considers due to him and the basis that the sum has been calculated. (Clause 4.8.1)

Due date not expressly specified.

If stage payments, the due date is the later of the date of completion of the stage and the date of receipt by the employer of the contractor's interim application. (Clause 4.8.2)

If periodic payments, the due date is the later of the specified date (e.g a specified date each month) or the date of receipt by the employer of the contractor's interim application. (Clause 4.8.3)

Employer's payment notice – 5 days after the Employer's receipt of the contractor's interim application. (Clause 4.10.3) In practice, this notice was often not given.

Employer's payment notice – 5 days after the Employer's receipt of the contractor's interim application. (Clause 4.10.3) In practice, this notice was often not given. Employer's payment notice – 5 days after the due date. (Clause 4.9.2) If the Employer fails to serve a payment notice, subject to any pay less notice, the Employer must pay the sum referred to in the Contractor's interim application i.e. the Contractor's interim application is treated as the default payment notice. (Clause 4.9.3)

Withholding notice – not less than 5 days before the final date for payment. (Clause 4.10.4)

Pay less notice – the employer or another person who the Employer notifies to the Contractor as being authorised so to do, may serve the notice not less than 5 days before the final date for payment. (Clause 4.9.4)

Final date for payment - 14 days from the date of the employer's receipt of the contractor's interim application. (Clause 4.10.1)

Final date for payment - 14 days from the due date (Clause 4.9.1)

Other changes to the payment provisions in the Construction Act

Prohibited Payment Clauses

  • New Sections 110(1A-1D) of the Construction Act prohibit certain conditional payment clauses, such as pay-when-certified clauses. Contractors cannot therefore make payments under subcontracts conditional upon the issue of a payment certificate under the main contract. Management contracting is excluded from this prohibition, although there are issues concerning the drafting of this section and whether the drafting is sufficient to apply to all levels of the management contracting chain
  • Section 113 of the Construction Act remains intact, so that pay-when-paid clauses remain prohibited, except for cases of upstream insolvency
  • Significantly, new Section 111(10) of the Construction Act provides that the requirement for a payment to be made on or before the final date for payment is disregarded where the contractor / consultant has become insolvent provided that the insolvency has occurred after the date when the pay less notice should have been given but before the final date for payment and further provided that the contract contains a reciprocal provision (e.g. See clause 8.7.3.2 of the JCT SBC without quantities 2011). Make sure that your contract does this – update your standard terms and conditions!

Suspension

The right to suspend performance on non-payment will allow for suspension of the whole or part of the services (Section 112(1) of the Construction Act). This change has been adopted by the JCT in their amendments to the list of 'relevant events' and in the main suspension provisions (e.g. see clauses 2.29.5 and 4.14.1 of the JCT SBC without quantities 2011).

There will now be the express right for the suspending party to receive a 'reasonable' amount for costs and expenses arising from the suspension (Section 112(3A)) and to receive extra time for a suspending party to remobilise (Section 112(4)).

Again, this change has been adopted by the JCT in their amendments to the main suspension provisions (e.g see clause 4.14.2 of the JCT SBC without quantities 2011) but the JCT have deleted from the list of 'relevant matters' the Contractor's suspension of the works (e.g see deleted clause 4.24.4 of the JCT SBC without quantities), which entitled the contractor to claim for direct loss and expense and so, arguably, this was slightly broader than the new drafting entitling the contractor to his reasonable costs and expenses arising from the suspension.

Checklist for the new legislation

  • If you are working with published forms, obtain the published amendments to the standard form contracts/appointments. For example, optional clause Y(UK) 2 of the NEC3 ECC (payment provisions under the Construction Act) has been amended, together with some of the core clauses in order to comply with the changes taking effect on 1 October. The NEC Panel's legal working group have produced a short schedule of amendments adapting the contract to be compliant with the new legislation and the amendments are now available, free of charge, from the NEC website. Interestingly, the NEC panel appear to have chosen not to include provision for the Contractor to issue a default payment notice where the Project Manager has failed to issue the payment certificate, though this remains a statutory right which will be implied by the Scheme.
  • If you use bespoke contracts/your own standard terms and conditions, you will need to amend them to include the new payment provisions and the adjudication provisions. Check your bespoke contracts/standard terms and conditions for:
    • Any 'pay-when-certified' or other conditional payment clauses that may fall foul of the new legislation. Delete any such prohibited clauses
    • Any adjudication costs clauses that may fall foul of the new legislation. Delete any such prohibited clauses
    • A clause that allows you to rely upon new Section 111(10), so that you are not required to make payments where the contractor/consultant has become insolvent
  • Make sure that any draft contracts/appointments that were in negotiation but were not entered into until after 30 September 2011 are updated to include the new payment provisions and the adjudication provisions. If you are working on the existing Revision 2 JCT contracts, rather than changing the form to the new 2011 (which may be difficult if you are amending the standard terms), consider attaching a short set of amendments that make the contract LDEDC Act 2009 compliant.
  • While operating the contracts, be clear whether you are dealing with a pre-LDEDC Act contract or a post-LDEDC Act contract and make sure that you serve the correct notices that apply to that contract. This will potentially be confusing.
  • If you are a contractor working under a traditional JCT contract, consider serving a payment application by not less than the specified 7 days before the architect / contract administrator is due to serve the interim certificate. If the interim certificate is then not served, there will be no slippage to the final date for payment. If you have not served a payment application and the architect / contract administrator is late in serving the interim certificate, issue a 'default' payment notice as soon as possible, to limit the slippage to the final date for payment.
  • Ensure that you are familiar with the new terms of standard form contracts

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