Applications for payment, Payment Notices and Pay Less Notices in construction projects

There are many reasons why disputes may arise in construction projects, with one of the most common being over payments.  The Housing Grants Construction and Regeneration Act 1996 (as amended) provides for regular interim payments for construction contracts.  Andrew Cullyer, Litigation Executive specialising in construction contracts and disputes, explains the general rules for making these monthly interim payments analysing the two regimes; one where the payee is allowed to make applications and one where they are not.

Payment Applications allowed in construction contracts

In order to provide an adequate mechanism for payment, a construction contract must set out or have a method of calculating:

• A due date;  and
• A final date for payment

Where the contract permits applications for payment, to be made by the party claiming payment (the “payee”), these must be made by the payee before or by the due date.  Usually the contract provides for these applications to be made substantially before the due date, for example the unamended JCT Standard Form Contract requires an application to be made on the interim valuation date which is 7 days before the due date.

Applications must set out the amount due and the basis upon which it is calculated as a minimum.  It is suggested that providing all relevant substantiation can help prevent disputes.

What this relevant substantiation is very much depends on what you are applying for. However, it can be useful to provide:

• Instructions for any Variations
• Any agreed quotes for variations
• Any invoices needed to justify costs
• Any progress photographs demonstrating the work that has been carried out.

Payment Notice in construction contracts

A Payment Notice is to be given by the payer no later than 5 days after the due date.  This Payment Notice should set out the amount to be paid and the basis upon which it is calculated.  In the event that this period is missed, the Payment Notice will not be considered valid and the full amount of the payment application will be considered to be the amount due or the notified sum.  

The notified sum must be paid by the final date for payment, irrespective of whether it represents the true value of the works.

The payer always has a further opportunity to provide a notice known as a Pay Less Notice.

Final Date for Payment

The final date for payment is usually a number of days from the due date.  This is generally determined by the contract, but if the contract is silent, a period of 17 days may be implied by the Scheme for Construction Contracts (England & Wales) Regulations 1998 (as amended) (“the Scheme”) (if applicable).  The standard form contracts vary but this is usually between 14 and 28 days.

Pay Less Notice

The payer may give a Pay Less Notice.  This is usually not later than between 7 days and 1 day before the final date for payment, dependent on the terms of the contract.  The Pay Less Notice must state the amount the payer considers to be due and the basis upon which it is calculated.  If this notice is validly served the amount stated to be due will be considered the sum due for this interim payment, or the notified sum.

Contracts where Payment Applications are not allowed

This is generally the same process as set out above in respect of when the payee is permitted to make applications for payment, with one very significant difference which is that the payee does not make an application in the first instance.  The payer provides a Payment Notice within 5 days after the due date stating the sum due and the basis on which it is calculated, which is the notified sum.

If the payer fails to do this the payee will usually (and should) submit an application as a default payment notice.  The rest of the process proceeds as set out above with the payer retaining the residual right to issue a Pay Less Notice.

Notified sums

It is important to understand that notified sums are payable notwithstanding their underlying validity.  If the wrong notices are given or the right notices are given at the wrong time, you may be forced to pay out large sums that the other party is not, on a true valuation, entitled to.

These sums may be recoverable by way of an adjustment to the next interim payment or by adjudicating for the true value of the account, but you will more likely than not have to pay the sums out in the first instance.

It is always easier, and will inevitably save you time and money in the longer term, to get the notices right at the outset than to try to rectify it at a later date.

The same or similar principles apply for instalments or stage payments but they are not identical.

If you have any queries about a Payment Notice or Pay Less Notice served against you, about serving such a notice, or you have questions relating to payments within your construction contract, you can contact Andrew Cullyer today to discuss your situation on 023 8071 7482 or email andrewcullyer@warnergoodman.co.uk.

For general Litigation or Dispute Resolution enquiries, contact Laura Blakemore on 023 8071 7412 or email laurablakemore@warnergoodman.co.uk.

ENDS

This is for information purposes only and is no substitute for, and should not be interpreted as, legal advice.  All content was correct at the time of publishing and we cannot be held responsible for any changes that may invalidate this article.