Payment Protection - Top Tips for Construction Subcontractors

If a non-payment issue arises, assuming there is no insolvency involved and the work is commercial, there is plenty that can be done quickly to ensure payment is recovered. To make the other party pay, the facts need to be assessed and the appropriate attack deployed using construction law and the contract. The contract therefore needs to be effective at dealing with the non-payers. The contract is the toolbox any contractor should have properly stocked before commencing any work, with steps taken to reduce the risk of non-payment arising. The main points in stocking the contract toolbox are:

1. Procurement – Get the Right Contract in Place

2. Payment Terms

3. Other Essential Terms to Protect Rights or Look out for

In the tender/quote, an organised subcontractor will provide the detail and terms it wants set in stone that will protect their rights against issues that might lead to non-payment. They might seek to establish the proposal by starting on work before any counterproposal comes forward. The start of work is often, in the absence of any signed contract, the acceptance of contract. What is set out between the parties at that point is the contract. The organised main contractor, will however, impose its terms on subcontractors through a prestart meeting or subcontract order. In the case of the latter, if this is issued after the work has been started, it counts for nothing, unless then signed by the subcontractor. This is known as “the battle of the forms” and is very common in construction contract procurement. 

If there is a prestart meeting or subcontract order before the start, be sure to counter any inaccuracies or clauses you do not accept in writing before the start of work and do not sign the contract. If you sign a formal contract, everything that has gone before it is wiped out and the new deal, perhaps with unacceptable terms, will apply and take retrospective effect. 

The Construction Act governs the right to payment, which is absolute and governs the adequacy of terms. The Construction Act demands that payment terms provide an “adequate mechanism”. The subcontractor should be aware of common payment terms that are illegal/void and that the Construction Act makes it free for the parties to agree how and when payments are made, so beware of onerous conditions on these points as they will not be illegal. For example, terms saying you must serve an application on a particular day, in a particular way to trigger a Due Date in 30 days, whereafter the final date for payment is in 90 days, is legal. An easy way of setting out payment terms in a quote for a project is to say the Scheme applies and you alter any of its terms as you wish. The Scheme is in effect a Statutory set of contract terms that are imported in when payment terms are missing or inadequate. Notably, the Scheme gives 17 days payment terms from the Payment Due date and a 7 day deadline for a pay less notice to be served before the end of the payment period. It also entitles the final payment to become due only 30 days after the work completes (+17 for payment), where there are no final payment terms. 

Other terms that ought to be included in writing for clarity are ‘no discount applies nor retention’ and ‘rights to suspend or terminate the works on a 7 day notice for non-payment after the Final date for Payment’.

The obvious parts to get right are, after getting the party names legally correct, the big three; Price, Time and Scope. Will the price be fixed or on quantities, you are likely to have a fixed price imposed, but you may wish to adopt quantities, so you get paid for what you do. Consider if you want to be bound by a deadline to complete and whether to introduce or exclude EOT, loss/expense, Liquidated Damages with time at large or not. What are you going to deliver? What qualifications have been made? Has the work been designed and specified? What provisional sums are there? These aspects are often areas of potential quarrel. The secret is to design and specify everything down to the taps.

Other important terms not mentioned above to consider are:

• Variations – How these are dealt with

• Late Payment Rights – Late Payment Act, base + 8% and debt recovery costs 

• Service of Notices – Parties are free to agree so make it simple

• Practical Completion – Define this

• Design Responsibility – Who has this?

• Warranties – Do you have to provide these and at what cost?

• Assignment Rights – Do not allow without agreement

• Adjudication – You have a Statutory Right but incorporate the Scheme

Remember, do not sign up to common terms that can destroy your business through non-payment such as ‘supplement the labour at your expense’, ‘insolvency of the Employer no further sums due’, ‘instant termination’, ‘condition precedent’s to entitlement to time’ and ‘assignment of contract to a valueless party’. Check that all terms are in your favour at the outset otherwise it could cost you your business.

If you have carried out works and are not being paid, no matter which stage the works are at, even if already in Court, there are several ADR options you can take including Adjudication. The adjudication process is a fast and cost-effective method of resolving contract disputes without the need for lengthy and expensive Court proceedings. The process generally takes 28 days and any party to a commercial construction contract has a statutory right to appoint a construction adjudicator and refer any dispute to Adjudication, without a specific clause needed in the contract.

Adjudication in construction provides the advantage of a quick, low cost commercial solution to any construction contract dispute, including JCT contracts, and can be used in disputes going into millions of pounds, irrespective of any Court proceedings that may have already started.

Last year Arbicon had almost a 100% track record in prosecuting construction claims in adjudication, with our latest victory being circa £800k plus Adjudicator’s costs, interest and VAT payable by the other party to our contractor client. We always look at resolving our Client’s disputes in the most effective, commercial way, no matter if the owed sum is £20k or £400k.