In construction it is important to both pay and get paid the correct amount on time. Cash flow is the life blood of the industry and if the payment process does not work both Employers and Contractors will suffer. Interim payment under the various forms of contract can be both very different and complex. The approach of a JCT contract is varies considerably from that of an NEC form. It is therefore vitally important that both Employers and Contractors understand the process set out in their contract to ensure the amount of any interim payment is correct and paid on time. Failing to follow the contract may result in amounts being legitimately excluded and can lead to disputes.
This article looks at interim payment under a JCT Standard Building Contract With Quantities 2016 (“SBC”), focussing specifically on the payment procedure. The next article looks at what can be included and how it is calculated. Across the suite of JCT contracts there are generally similar principles to payment but they are adjusted to reflect requirements of the particular form. As the SBC may be considered the standard form for a “traditional” contract it can be seen as a good starting point to review the JCT approach to payment. The article will focus specifically on “interim payments”, i.e. those made during the course of the works as opposed to the final payment where certain other provisions apply.
As always, it is important to carefully read the contract when operating payment provisions. Make sure this takes into account any bespoke amendments and that these comply with the Construction Act. This legislation made it compulsory for certain payment provisions to be included within contracts for applicable projects. Consequently terms such as “due date”, “final date for payment” and others became common place as the standard forms were amended to achieve compliance.
The payment provisions of SBC are contained in Section 4. As a lump sum contract the Contractor is only paid the Contract Sum stated in the Contract. Any adjustments to the Contract Sum can only be by way of those identified in the Contract (cl 4.3). This must be taken into account when calculating any Interim Certificate as the amount due must be based on the Contract Sum and only adjustments permitted by the Contract.
The payment process can generally be split into two parts. The calculation of what is to be paid and the process and timetable for making the application and getting paid. SBC clauses 4.7 to 4.13 which fall under the heading “Payments, Certificates and Notices – general provisions” cover the procedural matters including timetable, whilst clauses 4.14 to 4.15 under the heading “Interim Payments – calculation of sums due” describe what is included within any interim payment. Subsequent clauses within Section 4 of SBC deal with Listed Items (cl 4.16), Retention (cl 4.17 – 4.19) and Loss & Expense (Cl 4.20 – 4.24). The remaining clauses of Section 4 (4.25 – 4.26) relate to the Final Adjustment and Final Payment.
The SBC sets out a general payment procedure as well clauses to cover those eventualities where a Payment Certificate is not issued and if the Employer wants to pay less than the sum stated as due on a Payment Notice or Certificate. It is also worth getting familiar with the payment terminology used in JCT as it can be confusing especially where there can be more than one term used for effectively the same thing (for example Payment Certificate and Interim Certificate).
General Payment Procedure
The key priority in any payment process is establishing the payment due date. Clause 4.8 states the due date for interim payments by the Employer shall be 7 days after the relevant Interim Valuation Date. Interim Valuation Dates should be set out in the Contract Particulars, failing which reference would have to be made to the Scheme for Construction Contracts, which would establish the default position.
Not later than 5 days after the due date, the Architect/CA has the obligation of issuing an Interim Certificate (Cl 4.9.1) which states the sum due at the due date (cl 188.8.131.52) and gives the basis of the calculation of that amount (184.108.40.206). Clause 4.9.2 sets out that the valuation is made by the Quantity Surveyor, whenever the Architect/CA considers it necessary for ascertaining the sum due. Therefore it is the Architect/CA’s obligation to calculate the amount due, whilst the Quantity Surveyor only carries out the duty if instructed The Contractor does not have to make an application at all. It could leave it all to the Architect/CA, although this is generally not recommended.
By clause 4.10.1, the Contractor is afforded the opportunity to make an application to the Quantity Surveyor (a “Payment Application”) stating the sum it considers due and the basis upon which it has been calculated. This must be submitted not later than the Interim Valuation Date. This is the usual start of the valuation process where the Contractor submits its valuation to the QS for review and assessment. Although it is assumed that the QS will review the Contractor’s application, it is not stated that the QS has to use it as the basis of its calculations. If the QS and Architect/CA consider the Contractor’s application approach is flawed for any reason, they may approach the valuation in the way they think correct.
In reality it is rare that the QS would completely disregard the Contractor’s application. More commonly there may be differences in approach to the valuation of certain sections of the application, such as preliminaries and variations (for example, Hawk has had situations where a Contractor considered daywork the means to value the variation account, whilst Hawk, using the valuation rules, correctly valued the Variation account on a rates and prices basis). The key to remember is that if you are a Contractor you do not have to make an Application and even if you do it may not form the basis of the Interim Certificate. If you are an Architect/CA then the obligation is on you to prepare an Interim Certificate with all that entails.
Clause 4.11 sets out that the final date for payment (the day by which payment must be made to the Contractor) is 14 days from the due date.
When a Payment Certificate is not Issued by the Architect/CA
Should the Architect/CA fail to issue a Payment Certificate, then other provisions kick in. If the Contractor has made a Payment Application under 4.10.1 that application becomes the Payment Notice i.e. the amount that the Employer should pay (cl 220.127.116.11). If the Contractor has not made a Payment Application it has the opportunity at any point subsequently to issue a Payment Notice to the QS relating to that application stating what sum it believes due at the relevant due date and how it has been calculated (cl 18.104.22.168).
In effect, the Contractor is given the opportunity to “fill the gap” when the Architect/CA fails to issue a Payment Certificate. In such circumstances, subject to any Pay Less Notice, the Contractor should be paid the sum stated as due in its Payment Notice (Cl 4.11.3).
If the Contractor subsequently issues a Payment Notice because the Architect/CA has failed to do so (cl 22.214.171.124) the final date for payment is postponed “by the same number of days after the last date for issue of the Payment Certificate that the Payment Notice is given”. (cl 4.11.4). This clause maintains a payment timetable and allows for the issue of a Pay Less Notice.
Paying Less than the Payment Certificate
Although there is an amount due to be paid on a Payment Certificate or Payment Notice, the Employer still has a further opportunity to reduce the amount that is actually paid. This is by issuing a Pay Less Notice. Under clause 14.5 this must be issued not later than 5 days before the final date for payment. The amount to be paid “shall not be less than the amount stated in it as due”. Effectively the amount in the Payment Certificate is reduced by the amounts to be deducted and shown on the Pay Less Notice.
Simple interest is due on the amount if it is not paid by the final date for payment. (cl 4.11.6).
Clause 4.12.1 sets out that a Pay Less Notice can be “given by either party” although in general circumstances this would by the Employer or the Architect/CA or QS on his behalf (cl 126.96.36.199). It also states that the Pay Less Notice shall specify the amount due to the other party “at the date the notice is given” and the basis of calculation. The Pay Less Notice may therefore allow for deductions for matters which materialise after the due date.
Clause 4.13.1 – 3 sets out a right of suspension for the Contractor if the Employer fails to pay the sum due to the Contractor and sets out the procedure for implementing such a suspension.
It is clear that the whole payment procedure is complex, with specific terminology and dates that must be adhered to. If you get the procedure wrong then the consequences can be severe and likely to result in dispute. However even if you get the procedure correct, you must still be capable of valuing the works correctly and that is covered in the next article.
If you require any assistance in ascertaining a payment schedule or simply need some help navigating your contract and payment dates, we can help. Just give us a call. (link to contact page)
 Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009
 References to specific contract clauses are set out in brackets for example (cl 4.3)
 The Scheme for Construction Contracts (England and Wales) Regulations. This applies when construction contracts do not comply with the Housing Grants, Construction and Regeneration Act