John Elven, Senior Consultant at Arbicon, discusses the importance of following payment provisions carefully to get paid.
• Subcontractors engaged on NEC4 ECSS must carefully follow the payment provisions to ensure they get paid.
• Unlike NEC4 ECS, the subcontractor (not the contractor) assesses the amount due each month.
• Late or incorrect payment applications could result in a zero amount due, including when the UK Construction Act applies.
• Subcontractors should check for any amendments which extend the standard payment terms to more than 4 weeks, or 3 weeks if the Construction Act applies.
Most NEC users will be familiar with the payment provisions in the NEC4 Engineering and Construction Contract (ECC) and Engineering and Construction subcontract (ECS). But what about the many other NEC4 contracts? All NEC4 contracts have been carefully drafted to reflect the statutory payment provisions included in the UK Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009 (the Construction Act). Despite this, not all payment provisions in NEC4 contracts are identical.
This article considers the payment provisions contained within the NEC4 Engineering and Construction Short Subcontract (ECSS). It aims to highlight the importance for subcontractors to follow carefully the NEC4 ECSS payment provisions to ensure they get paid on time.
Subcontractor’s assessment of payments
Unlike NEC4 ECS, NEC4 ECSS clause 50.1 says the subcontractor (not the contractor) has to assess the amount due and applies to the contractor for payment before each assessment day.
There is an assessment day each month from the starting date to the month after the contractor issues the defects certificate or the subcontractor’s obligation to provide the works has been terminated. The starting date and assessment day are identified in the subcontract data. Clause 42.4 confirms the defects certificate is to be issued either at the defects date in the subcontract data, or at the end of the last defect correction period, or when all notified defects have been corrected.
Clause 50.2 confirms that the subcontractor’s application for payment includes details of how the amount has been assessed, and clause 50.3 says it should be for the price for work done to date plus or minus any other amounts due or owed. The price for work done to date is defined in clause 11.2(12) as the total of the price for each completed lump sum item or quantity in the price list. The subcontractor’s application should not include works not yet completed by the relevant assessment day. Page 8 of the NEC4 ECSS includes a template for the price list, which includes item numbers, work descriptions, units, quantities, rates, and prices, for which the total of the prices is derived. See also the definition of the prices in clause 11.2(13), noting for example that the price list may be subject to change in respect of compensation events (see clause 63.9).
Late and incorrect applications for payment
But what happens if the subcontractor fails to submit its application for payment before the assessment day? Firstly, noting the fundamental NEC principle included in clause 10.1 that the parties shall, ‘act as stated in this subcontract,’ it is clear the ECSS does not envisage any alternative in favour of the subcontractor if it fails to issue an application for payment on time.
Clause 50.4 makes it clear that if the subcontractor fails to issue its application on time, the amount due will be the lesser of the amount due at the previous assessment day or the amount the contractor assesses has become due at the assessment day, so it could be zero, or a sum the contractor considers is due from the subcontractor.
If the subcontractor makes an incorrect assessment, clause 50.5 allows the contractor to correct the amount due stated in the subcontractor’s application. However, this clause is deleted for jurisdictions where the UK Construction Act applies (see next section). The remaining clauses 50.6 to 50.8 relate to the payment of delay damages, retention, and the retaining of 25% of the price for work done to date if a required programme has not been submitted. Clauses 51.1 to 51.3 also relate to payment, including the subcontractor’s right to interest on late payments.
Additional Construction Act payment clauses
If the Construction Act applies, NEC4 ECSS users need to turn to page CS 17, which details the additional payment conditions that apply. This starts with some definitions.
Clause 1.1(1) says time periods exclude Christmas Day, Good Friday, and bank holidays. For example, if the final date for payment fell on a bank holiday Monday, the payment would not be due until the following day Tuesday.
Clause 1.1(2) says each assessment day is a payment due date, unlike NEC4 ECS which states the payment due date is 14 days after the assessment date. The NEC4 ECSS provision reflects the intention that it is to be used for relatively straightforward low-risk work (to both parties).
Clause 1.1(3) says the final date for payment is 3 weeks after the payment due date. This is in keeping with other standard NEC contracts, but subcontractors should check for any contract amendments that attempt to extend this period.
Clauses 1.2 to 1.4 deal with assessing the amount due in respect of the Construction Act. NEC4 ECSS subcontractors need to give these clauses full attention.
Clause 1.2 says when the subcontractor makes an application for payment before a payment due date, the application is the notice of payment specifying the sum the subcontractor considers to be due at the payment due date (the notified sum). This may appear strange when typically, one might expect a payment notice to be issued not later than 5 days after the payment due date. However, NEC4 ECSS is correct here as it reflects the wording of section 110A(1)(b) of the Construction Act. The payment provisions in NEC4 ECSS contracts are payee led. Issuing a notice of payment before each assessment day is fine, as it is not later than 5 days after the payment due date. Noting the intended use for NEC4 ECSS, it is clear the payment provisions are intended to be straightforward and simple, not requiring too much unnecessary administration, in an attempt to promote prompt payments for relatively straightforward subcontract works.
Clause 1.3. says if the subcontractor does not make an application for payment before a payment due date, the notified sum is zero, or, if an amount is to be paid to the contractor, the amount which the contractor considers is to be paid. Noting clause 50.4, the best-case scenario is a notified sum of zero by reference to the relevant assessment day or payment due date. The subcontractor may have undertaken a considerable quantity of work since the last assessment day but, on account of its failure to make its application before the current assessment day, no payment is due. Alternatively, the contractor may assess that an amount has become due from the subcontractor and hence notifies the subcontractor accordingly. This then becomes the notified sum.
Clause 1.4 replaces clause 50.5 when the Construction Act applies. It makes provision for the contractor or subcontractor to issue a payless notice not later than 7 days before the final date for payment, which may show an amount due of zero. If so, a dispute may arise that can be referred to the adjudicator. If the pay-less notice is issued late, say 6 days prior to the final date for payment, the notified sum will remain due in full, as highlighted in the last sentence of clause 1.4.
It is vital for NEC4 ECSS subcontractors to issue their applications for payment on time. They also need to be aware of any contract amendments that may affect any of the NEC4 ECSS standard clauses and, when relevant, consider whether any such amendments run contrary to the provisions of the Construction Act.
“First published in the NEC Users’ Group Newsletter, issue 124, March 2023”.