Frequently Asked Questions
In the worst case scenario despite having followed all the steps mentioned previously it may be the case that the Employer or Contractor refuses to pay the full amount due to you or at all.
Q Can you suspend your Works to force payment?
A Yes, if the Contract or the Construction Order allows.
For those contracts that fall under the Construction Act, the Act does make provision for suspension if payment in full is not made by the final date for payment and no effective Article 10 withholding notice is issued. If the money claimed is indeed due, Article 11 allows a Contractor to suspend works until final payment is made providing that 7 days notice in writing is given to the person from whom payment is due stating the ground upon which it is proposed that suspension be made. If suspension is exercised in the proper manner, the period during which parties have suspended is disregarded when calculating the time limits of the contract.
But great caution is necessary. If you suspend improperly you could be said to have committed a repudiatory breach of contract and so could be prevented from completing the contract and fined to pay considerable damages.
The term "dispute arising under the contract" effectively means that disputes as to whether there is a contract in existence or a right to sue for misrepresentation relating to the Contract are outside the jurisdiction of an adjudicator appointed under Article 7 (1) of the Order.
Adjudication is useful for non-complex issues that require a quick decision. If an adjudication is issued against you, you have no choice but to defend it. If you are initiating proceedings yourself adjudication is extremely valuable if you have a well prepared claim and a non-complex case. You should particularly consider using it if you need speedy payment as it can be enforced as an interim measure even if it is not a final end to the dispute. Adjudications may also be commenced once other proceedings have been started, be they Court or arbitration. Again this is worth considering if you think you will need an interim payment. Both adjudication and arbitration have the benefit of speed and privacy.
Arbitration certainly produces results in more complex cases. As more time and preparation goes into arbitration, it has not received the level criticism that adjudication has. It has further benefit in that it provides more finality.
Arbitration is a much longer process than adjudication. Parties are therefore able to submit much more considered arguments and much more evidence. Arbitration has been shown to work in more complex disputes. There is more likely to be a hearing in arbitration. This will be useful if the majority of your evidence is oral evidence as you may introduce and cross examine witnesses. This is not the case with adjudication.
The consensus is that 95% of adjudications result in payment to the claiming party. What is essential is taking the first step towards adjudication. In all the cases that we have been involved with, there was no other effective way of getting the money. There might be some problems in actually getting the payment from the loser, but it is still worth pursuing your claim through adjudication. There is a good chance of getting some money and there is no other way which is as fast.
Adjudication has certainly come to the aid of the sub-contractor, putting pressure on main contractors who suddenly have to deal with applications before they may have got their own money. The saving in time can prevent major disputes. In arbitration or litigation, parties argue about various unimportant side issues and delays and costs escalate. The speed of adjudication will make sure that this almost never happens.
Adjudication is a very quick process. Under the Scheme for Construction Contracts a decision will be made by the adjudicator in 28 days subject to agreed extensions. Adjudication certainly works in this way as the short response period for the respondent means that settlements are often reached quickly. There are obvious correlating problems. As the Adjudicator has only 28 days within which to make a decision, mistakes can easily be made. Adjudication is clearly unsuitable for very complex disputes. Courts are now enforcing awards given under adjudication. Even to the degree where following the case of Bouygues - v- Dahl Jensen courts are enforcing decisions in which a mistake has been made. Adjudication will certainly help you to get a final or an interim settlement even if this subsequently goes to arbitration or litigation.
Pay when paid clauses
In the UK, if the Construction Act or Order applies, then it has rendered pay when paid clauses ineffective.
Article 12 (1) states as follows:
"A provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective, unless that third person, or any other person payment by whom is under the contract (directly or indirectly) a condition of payment by that third person, is insolvent."
The exceptional protection main contractors have from having to pay sub-contractors is if the employer becomes insolvent. The same is true for sub-sub-contractors and so on down the chain. The policy reason must be to spread the risk associated with insolvency as widely as possible. In relation to pay when paid clauses, the Scheme only applies where there is a pay when paid clause in the contract and the parties have agreed no other conditions. In that case all the provisions of the Scheme, payment by instalments, valuation of instalments, due date for payment and the final date for payment detailed above will apply. Some main contractors try to circumvent the "pay when paid" rules by inserting "pay when certified" clauses into the contract. There is little or nothing that can be done about these. They need to be forcibly objected to before a contract is agreed.
Any construction contract under the Order, with very few exceptions, may go to adjudication. If you are not paid on time and paid in full, use it! Adjudication is a faster and cheaper dispute resolution method that arbitration or litigation. Make sure that you have a dispute or difference and give notice of your intention to refer a dispute to adjudication under Article 7 of the Order. This right may be exercised at any time. When forming the Contract, it is worth thinking about naming a "good adjudicator". This will satisfy you that you have somebody capable at the helm if a dispute does get this far.
Under Article 11 of the Order you now have the right to suspend work if payment has not been met by the final date for payment and no withholding notice has been issued. 7 days notice of intention to suspend must be given. Think about exercising these rights as long as you are satisfied that you are exercising them within the Contract. Object to entering into a contract where the other party wishes to extend the notice period beyond the 7 days given under the Scheme.
Under Article 12 of the Order pay when paid clauses are now banned unless the third party is insolvent. Your money cannot be withheld due to a pay when paid clause. This is illegal and you must take action if the payee attempts to do this. As we indicated at the previous section, main contractors may try and get around this by including pay when certified clauses in the Contract, such a clause should not be agreed, when entering the contract initially.
Under Article 9 (2) of the Order the payer must now issue a notice within 5 days of the due date, identifying what will be paid, what the payment relates to, and on what basis it has been calculated. If you do not agree with the calculations you must write and give your reasons.
Construction contracts must now provide a final date by which each interim payment has to be made. The Scheme specifies 17 days from the due date. There are two main points here. Firstly, you should mark on a calendar when you are due payment and follow it up. Secondly, object strongly when formulating a contract if the contract contains a period longer than 17 days from the due date when a payment must be made or if it tries to alter the due date disadvantageously.
Under Article 10 of the Order parties intending to withhold payment must give notice that they intend to do this and reasons for their actions. The notice period may be a period specified within the contract, otherwise it will be 7 days under the Scheme. If no notice is received, payment cannot be withheld. Take action!
The Construction Order is supposed to help you by making bills more certain to be paid and making disputes easier to settle. The measures that were introduced to ensure this were:
- new rules to make payment fairer;
- the right to suspend work for non-payment;
- the introduction of Adjudication.
If your Contract doesn't allow for these then the Scheme for Construction Contracts will kick in.
In order to get the Construction Order to help you, you need to exercise your rights under points 1, 2 and 3. We will deal with them individually.
Different contracts have different procedures. Some such as the NEC are very simple, others such as JCT Sub-Contracts in the UK or RIAI Sub-Contracts in Ireland are complex. Invariably there must be adequate notice and sufficient detail before the set-off is valid.
The importance of serving a withholding notice on time and making it a valid notice cannot be emphasised enough. If this is not done then the right to set-off may be lost.
Contra Charges & Set-Off
Set-off is the single biggest source of dispute between Employers, Contractors and Sub-Contractors. This is because contractors/sub-contractors claim that employers/contractors deduct money for insufficient reason or for no reason at all. The effect in many instances making a profitable project break even or even worse making a project at final account stage into a loss making project. If Employers/Contractors are deducting money, you need to be sure at the outset that they are following the correct procedures. If they are not, they can't deduct money from your account!
Sir Michael Latham recommended in his famous report "Constructing the Team" that one unfair contract clause which needed to be outlawed was that which purported to set-off in respect of any contract other than the one in progress. Unfortunately this is still done. In the absence of an express contractual term, Contractors and Employers cannot set-off monies from another job other than the one that you are undertaking. This is because the two different jobs will presumably be covered by two separate contracts. The right to set-off arises under the Contract. However, Contractors/Employers are getting around this by inserting terms into the Contract allowing set-off from other jobs. If you have agreed to this you cannot object! The moral is not to agree to such a term when negotiating. After all, whose benefit is this term for?
Any set-off is subject to the Notice of Intention to Withhold that we have discussed. Regardless of what is in the Contract, if you do not agree with what is being set-off you must object in writing. Once monies have been set-off it is difficult to get them back. Whilst it may be commercially difficult, pursue it.
The only money which the Employer is entitled to hold after Practical Completion is the retention money. If the Certificate of Completion of Making Good Defects has been issued under a JCT form, then the second half of the retention must be released.
If there are defects apparent at any stage up to the issue of the Certificate of Practical Completion, then either the employer does not pay for that part of the work which is not done properly, or the Certificate of Completion of Making Good Defects is not issued. If there is a suspicion of latent defects, it would be very prudent to have an investigation done prior to the end of the defects liability period.
Where there are no suspicions of latent defects and withholding retention is merely an insurance in case of latent defects, then the Employer does not have authority to do this. If Employers wished to amend the JCT Contract to protect against such situations, it would be quite easy to do so. For example the retention could be released at the end of six years. Contractors should resist such a move vigorously, as it does not make good commercial sense and definitely does not assist in the profitability or the company's cashflow.
If an Employer felt that the retention was not a sufficient amount of money, then the sum being held could be increased by amending the contract to 10% as is very common overseas. This might have an effect on tender prices in that tenders would be higher and have a higher percentage for profit and overheads to reflect the greater liability being undertaken by Contractors.
When a building is practically complete varies, not only between Architect and Contractor, which you would expect, but also varies between Architects.
The key tests to decide whether or not a building is practically complete must include:
does everything work in the manner it is intended to, subject to minor adjustment?
does the building serve its intended function?
will any further work necessary not cause undue disruption to the occupants of the building?
If the answer to these questions is "Yes", then the building is probably practically complete.
Most people expect the answer to be very simple as it is either released on Practical Completion for JCT Contracts or at Substantial Completion for ICE Contracts. This, of course, is true but it ignores the fact that many contracts are not in those forms or that there may be no provision for the deduction of retention monies at all.
The position is much more complicated with sub-contracts. Many sub-contracts do not provide for retention and material suppliers will rarely allow for retention in their standard terms and conditions.
Those sub-contracts which do provide for retention may either provide that the first half is released at practical completion of the main contract works, or is released when the sub-contract works are substantially complete. There can be a long time between those two dates. When negotiating at the tender stage, where possible express a release of retention when the sub-contract works are substantially complete and not on practical completion of the main contract works. These are strategies to improve cashflow and profitability. Individually these steps may appear small, but cumulatively over many contracts they may have substantial impact on getting paid, cashflow and profitability.
Thus, the terms of the contract will decide what event triggers the release. The most common event is practical completion but that in turn introduces a level of uncertainty because practical completion is often not clearly defined.
There are a number of steps that you can take to make sure that your retention is released as soon as it is due to you:
- apply early;
- mark dates on a calendar as to when retention should be released for example the time of the issue of the certificate of completion of making good defects. Mark when to request the release and when to receive payment;
- keep asking;
- take action!
Where the Scheme for Construction Contracts applies, the date for final payment is taken from this. It is well worth calculating this date as early as possible in order that a prompt application might be made. The final payment will become due according to paragraph 5 of the payment provisions in the Scheme, namely on the expiry of 30 days following completion of the works or on the making of a claim by the payee whichever is the latest.
In order to remain profitable and improve cashflow, contractors should make prompt and comprehensive applications for payment as soon as the first payment becomes due and make sure that all dates for subsequent applications are met! Therefore it is good practice to ensure that the final payment is treated in the same way as all previous payments should be and apply promptly for the outstanding payment due.
The main difficulty with final accounts is not lack of understanding of the contractual provisions, as these are relatively straight forward. The real problems are as follows:
since the work has already been carried out there is no incentive for payment to be made.
Unlike interim payments contractors/sub-contractors do not have the commercial weapon of threatening to walk off site unless payment is made.
too often, the final account is successfully fudged off for many months, even years. Staff come and go, and the contractor/sub-contractor soon finds himself chasing payment for work which was carried out many years ago.
the final account should be put together or built up from day one, on and off site. It is important to have effective procedures in place to put together all the relevant information and documentation to substantiate the monies you assess as being due to you.
Final payment needs to be applied for as soon as it is allowed under the Contract. Why have the money sitting in someone else's bank account gaining interest, when it could be sitting in yours? The date for application is likely to be regulated by the construction contract. For example the DOM/1 form of Sub-Contract provides that the sub-contractor is to send to the contractor all documents necessary for the adjustment of the sub-contract sum (final payment) within 4 months of practical completion of the sub-contract works (sub-contract).
The final payment is then due within 7 days of the issue of the final certificate by the architect under the Main Contract. Before the date for final payment the contractor must send the sub-contractor a notice informing him of the amount of payment which the contractor believes is due to the sub-contractor. If the sub-contractor does not agree with the amount, he must write and put his position forcibly giving reasons. Such reasons would include alternative calculations for the monies due, correspondence detailing the claim and any action proposed to be taken. Like DOM/1 every standard form construction contract will:
provide a date for final payment;
require the payee to issue a notice indicating that payment is intended to be withheld if this is the case.
Every standard form of contract in the construction industry has some form of provision for retention or reserve. As with all issues like this, the starting point is to look at the contract and find out what it actually says.
DOM/1 is a typical contract, the provision for dealing with retention is at Clause 21.5 which provides:
- up until Practical Completion, the Contractor can deduct the percentage which is stated in the Articles of Agreement. The Articles of Agreement provide that if no percentage is inserted it will be 5%. In many instances this rate may be negotiated to 3%. It is worthwhile providing evidence that a percentage of 5% is not required from previous projects completed within a 6 year period.
although the reduction in the retention percentage may appear minimal, it may have a disproportionate impact on a contractor's profitability. When you consider 2% of PSX thousands of pounds retained by the employer/contractor over the period of the contract and 12 months after Practical Completion of the works. Example contract sum PS300,000.00, retention at 5% and 3% will be PS15,000.00 and PS9,000.00 respectively, a difference of PS6,000.00 over a possible period of 2 years. Thus, a 2% reduction would make available to a contractor an extra PS6,000.00, which should be working for him.
upon practical completion but before a Certificate of Completion of Making Good Defects is issued, only one half of the percentage of retention can be deducted. Ensure you have a calendar marked with dates on which retention should be requested and take action on those dates as they occur.
upon the issue of a Certificate of Completion of Making Good Defects, all retention monies are to be released, by way of an interim payment, to the contractor. Again this date should be marked on your calendar as two dates, when to request the release and when to receive payment.
Remember that if a contract or sub-contract does not make specific provision for retention then the employer/contractor has absolutely no right to withhold retention. If retention is provided for, the percentage and release dates may vary accordingly. First check if the contract allows for the taking of retention, and secondly check the rate of percentage. Negotiate a lower rate where possible. Lower rates add substantially to the profitability of a contractor.
In some instances a contractor/sub-contractor can wait for the release of retention for long periods after the works have been completed. Use effective procedures to chase these monies on a regular basis. It may only take a few letters and threats of adjudication or arbitration. These actions may only be minor but accumulatively they add substantially to the profitability of a company and its cashflow.
It is our experience that retention and percentages of retention are accepted as standard issues in most contracts. This general acceptance should not be the norm and should be challenged whenever the issue arises. It is particularly unfair to groundwork sub-contractors or structural steel sub-contractors who may complete their works long before practical completion of the main contract. If they have to wait a very long time for release of retention on large sums, this may have a disastrous impact on cashflow and profitability. In such circumstances, it is definitely worthwhile negotiating for a lower rate or zero retention where possible. In some instances the monies involved in retention equate to the profit on the project.
It has recently be described as unfair in the in the UK by the House of Commons Report "Construction Matters" printed on 8 July 2008.
Some contractors/sub-contracts provide for the employer/contractor to be entitled to a discount upon certain conditions being fulfilled. This provides a classic example of the importance of reading the Contract.
To take DOM/1 As an example, Amendment 10 changed the rules regarding discounts and was issued in 1998.
Before Amendment 10, the mechanism for payment under DOM/1 was detailed at Clause 21. Clause 21.3.2 provides expressly that the discount can only be made if the contractor complies with the payment obligations; in that payments are made within 17 days of the date due. If the contractor does not comply with the provisions of the sub-contract in respect of the payment dates, then discount cannot be deducted which would entitle the discount to be claimed back together with interest.
In not allowing the deduction of discount, a sub-contractor minimises his exposure to making a loss. Furthermore, it reduces his break even point on the project, increasing the opportunity to make money and become profitable.
A much more difficult question is whether the contractor has to comply with the obligation every month before he can deduct the discount from the total. If a payment in one month is made late, is it simply the percentage reduction in relation to that month that can not be made or does the contractor lose his right to deduct any discount at all? In any event, it is essential to track times of payment in discount circumstances.
The percentage of discount identified in the Articles of Agreement Part 7 is 21/2%, unless a different percentage is inserted. A lower rate should always be negotiated because why is a discount being given? It should not be because of habit or custom.
The edition of DOM/1 which incorporates Amendment 10, however, is totally different It does not provide for payment terms to be met for the discount. Therefore unless this has been specifically amended, the Contractor is always entitled to deduct discount.
It is therefore vital to not only know which standard provisions, if any, is incorporated into the sub-contract but also which edition and which amendments are incorporated.
The right to deduct discount applies to all payments whenever made and may be lost by late payment, but this would depend on the specific terms of the contract/sub-contract.
If the discount is related to prompt payment, then is each payment considered in isolation, or if one payment is late is no discount allowed whatsoever? Once again, need effective procedures are needed to monitor when payments are due, and to check whether or not the contractor/employer should be deducting any discount at all. Also ensure you have a standard letter to send out if discounts are deducted although payments are made late.
When discounts are taken ensure that they are not deducted before retention is deducted. If the opposite is carried out it would equate to giving the employer/contractor a large figure for discount - not a good idea if you are trying to improve your cashflow or profitability.
All too often we see cases where discount and retention have been wrongly deducted from contract sums. In fact, it is so universally accepted it seems like the industry norm. This shouldn't be the case! Contractors should avoid offering discounts and negotiate low rates for retention from the outset, as both impact severely on cashflow and profitability. We will take discount and retention in turn.
Obviously it is going to cost you money initially to submit a claim, both your own management costs and those of any advisors you have retained, but the important thing to remember is that on a good claim the costs of submitting it are small compared to what you will recover. If you have a good claim the initial outlay is well worth it.
The first step, is to claim everything that is due to you. In practice, the amount that you will recover will depend not only on when you submit a claim, but also on your evidence. This highlights the importance of good record keeping. Often you will have a claim for something without realising it. Potential heads are:
- unforeseen events;
- delay caused by design team;
- error in documentation;
- tendering process;
A well thought out and well prepared claim, can include any or all of these heads and bring in substantial rewards. In a claim you may recover:
- straight forward monetary loss i.e. full recovery for any measured work or variations;
- wrongfully deducted discounts;
- damages for breach of contract;
- the costs of the claim;
- an extension of time is also a valid head of claim and will not only be the foundation for claims where there has been a time element, but will also help to protect you against any claims against you for ascertained or general damages.
None of the above will be recovered unless you take action, and take it promptly.
Omissions are worrying as they will instantly mean "loss of profit".
If a contract has a variation clause, this allows for omissions seemingly without restriction. How you deal with omissions will depend on what is omitted, why it is omitted and how the character of your work changes as a result.
Usually work cannot be omitted from your package and given to someone else, this is a breach of contract and you are entitled to exercise your options. Depending on the contract, the options include claiming payment for the work which you would have originally have undertaken under the Contract, the right to terminate performance of the Contract and the right to prevent the party in breach from enforcing the Contract.
Usually the valuation of omissions at bill rates means an under recovery of profit and this consequential loss may be recoverable under the contract or may not. The exact terms of the contract must be considered.
The "normal" way to value variations is to use bill of quantities rates. The usual rules are:
- where the varied work is of similar character to, is executed under similar conditions as, and has not significantly changed the quantity of, works set out in the contract rates and prices for the work the rates are to be used.
- where the varied work is not then the rates and prices for the work shall be the basis for determining the valuation; or
- where the varied work is not of similar character, it shall be valued at fair rates and prices.
Helpful guidance on the valuation of variations under an ICE contract has been given in the case of Weldon Plant Limited - and - Commission for New Towns.
Two questions beg to be asked:
- When is it reasonable to apply Bill Rates? Where a Contractor has a particularly good set of rates and the work has not substantially changed he can rely on these for valuations of variations. The corollary being that if the Contractor has under priced a rate item he is also stuck with this regardless of whether it is advantageous the Employer. The rules are contract specific.
- What is a fair valuation?
In answering the first of these questions it has been said:
"So too is an Employer stuck with rates and prices which have been accepted by him as part of the Contract. Unless the Contract permits, he cannot extricate himself from the bargain that has been made."
Change valuation under the NEC Contracts is different.
Presumably, the only reason you will want to try and avoid doing variations is that you are worried about not getting paid. So can you avoid doing them?
The usual answer to this is no.
Strictly a contractor is not bound to execute more than the contract work unless there are express provisions allowing this. This is why the standard forms of contract do provide that the employer or his agent may require alterations additions or omissions to the contract work (i.e. variations) which you will be bound to carry out. Examples include Clause 13 of the JCT 98 Form of Contract, Clause 51 of the ICE or Clause 27.3 of NEC.
These contracts also provide for payment to be made in respect of variations (For example clause 13.2.3 of JCT '98). Make sure that you identify the clauses within the contract for payment and valuation and that the right ones are used. DO NOT agree to any terms of a party that do not provide for the valuation of variations.
There are limited exceptions to the compulsion to perform a variation which would come under two heads:
- are the variations necessary for the completion of the Works?
- is the variation so far beyond the scope of what was contemplated that you can refuse to perform it?
The first question is relatively easy to answer. There is one circumstance where contractors/sub-contractors will not be compelled to perform a variation and that is where the employer/main contractor attempts to incorporate variations into the defect list when requiring the rectification of defects and refuses to acknowledge that they ARE variations by disguising them as defects. It is advisable to undertake such variations, once payment terms have been resolved, but not to undertake them, if the employer/contractor persists in stating that they are defects.
The second question is considerably more difficult to answer. Some assistance may be derived from clause 13.2.2 of the JCT 98 form of contract which holds that any instruction under clause 13.2.1 (for variations):
"...shall be subject to the Contractor's right of reasonable objections set out in clause 4.7.7".
Clause 4.1.1 allows the Contractor to make reasonable objection in writing to compliance with a variation. Unfortunately JCT 98 gives us absolutely no guidance as to what is "reasonable". In the case of Thorn -v- London Corporation (1876) 1 App.Cas.120 the Lord Chancellor said of variations:-
"If, on the other hand, it was additional or varied work, so peculiar, so unexpected, and so different from what any person reckoned or calculated upon, that it is not within the Contract at all; then, it appears to me, one of two courses might have been open to him; he might have said: I entirely refuse to go on with the Contract - non haec in foedera veni: I never intended to construct this work upon this new and unexpected footing. Or he might have said, I will go on with this, but this is not the kind of extra work contemplated by the Contract, and if I do it, I must be paid a quantum meruit for it."
Quantum meruit would be a reasonable price. Given that there is a possible option to recover financially for "unreasonable variations" it is suggested that in order to avoid a fight later on, it would make sound commercial sense to undertake all variations, and take steps to recover money for them.
You must take instructions from the correct people, as this has an impact on profitability. If you are operating under a standard form of contract there will be provisions within this for whom you should take instructions from. For example with the GC Works 1 Contract, instructions could be given by the project manager and would be valued by the quantity surveyor. The project manager and quantity surveyor would largely be the equivalent of an engineer or architect under other forms of standard contract. It is important that you check the contract. If you take instructions from the wrong people, you may not get paid.
Once it has been established from whom you should take instructions, you need to ascertain that the instructions are genuine instructions and that you can get paid for them. It is sound practise to ensure that all instructions are in writing.
In the JCT Contracts, it is necessary to consider what constitutes an instruction and to distinguish between the different types of instructions the architect may issue, because whether an instruction exists is contractually significant, as is the type and form of the instruction. In many projects instructions greatly impact on a company's cashflow and profitability.
The architect is frequently given the express right to issue certain particulars. For example, clause 5.3.1 of JCT 98 provides:
"So soon as is possible after the execution of the contract:
the Architect. . . shall provide . . . descriptive schedules or other like documents necessary for use in carrying out the Works. . ."
These "descriptive schedules" may be more explanation or they could well be variations.