Jacob Austin 00:00:00 Hi all Jacob Austin here from QS.zone. And welcome to episode 117 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode is a deep dive into the Housing Grants Construction and Regeneration Act part two, which is commonly called the Construction Act, and the accompanying scheme for Construction Contracts, which provides critical protection for subcontractors in the UK industry. These rules are designed to ensure payments are made promptly throughout the supply chain, and that disputes can be resolved quickly. The act will even apply if your contract is oral or only partly in writing. This means that nearly all construction subcontracts, with a few exceptions, are covered. So today we'll be outlining key provisions of the Construction Act and how they affect subcontractors in practice, along with practical guidance on using those rights. The Construction Act grants several important rights and imposes rules on all construction contracts, which does include subcontracts for construction work. If a contract fails to meet these minimum provisions, then the scheme for construction contracts implies them by law.
Jacob Austin 00:01:33 So for subcontractors, the act ensures your right to interim payments. This means that interim periodic or stage payments for work should be made as it progresses, rather than having to wait until final completion stage, and that applies to any contract that lasts more than 45 days. You should receive payment notices to ensure that you are informed of the amount due for each payment and of any amount intended to be withheld by a formal notice. This creates transparency about what you'll be paid and why you should receive prompt payment, and no surprises. If there is a scenario where the contractor needs to pay less money to you, they are legally required to serve a timely pay less notice explaining the deduction, otherwise they can't withhold payment. You have the right to suspend works. That means you no longer have to perform your subcontract obligations if you haven't been paid what's due after giving notice. That gives you leverage to enforce payment without breaching your contract. You have a right to statutory adjudication, meaning you can refer a dispute at any time to adjudication, which is the 28 day fast track dispute resolution process, and finally pay when paid clauses are outlawed by the Construction Act, so there can be no link to the main contractor being paid by their client.
Jacob Austin 00:02:59 So even if they're paid late, you must be paid by law. With the one exception, which we'll explain later around the insolvency of the contractors client. So let's dig a little bit deeper into interim payment rights. The first fundamental provision is the right to those stage payments. And that applies if your contract lasts more than 45 days, in which case you're entitled to be paid in instalments as the work progresses. So your contract must provide a periodic payment schedule. The frequency and amounts of interim payments are usually agreed in the contract. Often that's monthly or at specified stages, reflecting the value of work done. This ensures that you have steady cash flow throughout the project, which is vital for obviously covering your cash flow commitments. The Act doesn't spell out what the payment schedule should look like, but it does require an adequate mechanism for determining when payments become due and the final date for payment. So that means in practice, you should see a clear time frame for establishing how much you've earned by a point in time when you should be informed of how much the contractor thinks you've earned, with a due date for that payment to be paid by the final date for payment.
Jacob Austin 00:04:12 So a subcontract might say that payments are assessed at month end within, say, 14 days. The contractor will tell you how much that application is worth. And then a further 14 days, for example, is when your payment will fall due and that's when you should receive it in your bank account. Make sure your contract spells out those milestones. If it doesn't, or if the timescales are unclear or too vague, then the law imposes a default timetable from the scheme for construction contracts. So the scheme for construction contracts contains a statutory set of terms that fill in any gaps in payment provisions if your contract lacks proper stage payment descriptions or schedule. The scheme implies a default cycle, which essentially breaks the contract into 28 day intervals, with payment becoming due seven days after the end of that 28 day period. The final date for payment under the scheme is 17 days after that due date, giving a total of 24 days. So in short, if you don't have an agreed billing cycle, the law assumes a monthly payment cycle with payment the following month.
Jacob Austin 00:05:22 And that leads us on to our next point, which is knowing what you already paid. To improve transparency and reduce payment disputes. The act stipulates a payment notice regime for every payment cycle. The paying party, typically or contractor, must issue a payment notice shortly after that due date. This notice must state the sum they believe is due to you on the due date and how the sum was calculated. The timing is tight following the scheme requirements, and this is often adjusted by contractors. They should be telling you within five days of the payment due date. For example, if your valuation date is the first of the month, the main contractor should issue a payment notice by the sixth of the month, and there's no stipulation saying exactly what that notice must look like. So the act assumes that the contractor will give you as much detail as you give them in the form of your application. So the more detailed you make that application for payment, the more detailed assessment you're going to get back from the contractor.
Jacob Austin 00:06:23 And it makes the whole process simpler for the contractor and gives far more clarity to you. If you put some effort into giving a real comprehensive build up to the payment you're asking for. Next, the act requires that amount as calculated to be paid to you unless there is a later pay less notice, which will mention in a bit. First, we're going to cover what happens if no notice is served, and sometimes a contractor fails to issue the required payment notice. In that situation, the law protects you as the subcontractor by allowing you to step in and secure your payment. There are two routes here. First, if you'd already submitted an application for payment that's compliant with the law, then your application itself may be treated as the default payment notice. So in effect, the amount you applied for becomes the notified sum due. This is why it's really important that your applications are clear itemized, and they set out properly the amount that you've cumulatively earned, less any amounts previously paid or retained by the contractor, and that it's submitted on time.
Jacob Austin 00:07:31 If it meets those criteria, then the application will turn into the payable amount if the contractor drops the ball. Alternatively, if you hadn't submitted a compliant application, you can issue what's known as a pays notice in default, often just called a default payment notice. You can do that as soon as the payer's notice is late, and that notice sets out the amount you consider to be due, but it must meet those criteria of valid adjustments made under the contract. Once you've served that default notice, that becomes the notified sum. So that must be paid to you. And this is why it's vitally important for you to submit fully valid applications on time. In either case, the final date for payment may be postponed by the number of days that the application was submitted late. So if your valuation date was the 30th of the month, say, but you didn't submit it for another five days, then the requirement to submit notices against it slip by that same period. And then if the contractor doesn't submit a notice and you issue your default notice three days later, then the payment date will shift by a further three days.
Jacob Austin 00:08:44 This prevents the person making the payment from being ambushed, but it still ensures you get a valid notice amount on record. So the bottom line here is that the contractor cannot silently pay you less than you asked for without issuing a proper notice. If they don't issue a notice, you're entitled to full payment of your application by the final date. Now, to prevent unexpected deductions, there is such a thing as a pay less notice. This happens after a payment notice has been issued. Or even if your application becomes the notice, then the paying party. The contractor has one more chance to adjust the amount, but only by following the correct procedure. So if the main contractor intends to pay you less than the notified sum, they've got to serve you a pay less notice, which was previously known as a withholding notice that must specify the revised amount they now consider due and the basis for that calculation. Crucially, that payment notice has a strict deadline, and that deadline is seven days prior to the final date for payment.
Jacob Austin 00:09:50 Note that the contractor might adjust that requirement in their small print or their amendments. So, for example, if the final date for payment to you is the 30th of June and the standard notice period is not adjusted, then the pay less notice should come to you by the 23rd of June at the latest. If the contractor misses that window or fails to issue a valid Payless notice, they can't buy law short to pay you. And the law is really clear on that. The notified sum is binding, and you must be paid that full amount by the final date by missing the Payless notice period. They lose the right to dispute the amount at that stage, and would have to pay now and argue later through adjudication or other means that pay now and argue later principle is central to the Construction Act's payment regime. It prioritizes cash flow to subcontractors whilst allowing disputes to be resolved separately. So as a subcontractor. This means if you don't receive a pay less notice by the due deadline, you can be confident that the full amount of your application or the last notified sum should be paid in full, and any attempt by the contractor to pay less without notice can be challenged and adjudicator, or a court would simply order them to pay the notified sum in that scenario.
Jacob Austin 00:11:09 So practically speaking for you, you always need to track the notice deadlines. That means reading your subcontract so that you know when the final payment due date is and the final date for payment is and where. In between that the painless notice could validly arrive. If a pay less notice is served, then scrutinise it. Does it clearly state and use some that's due and the basis of calculating that sum? Is it issued on time? If not, it's invalid. The strict requirements of the Construction Act mean that any procedural errors can render a painless notice ineffective, in which case you can claim the full amount due. So the contractor has got to be really transparent and timely if they want to withhold or reduce payment. Now, if you're not paid on time in spite of the above, then the Construction Act gives subcontractors a really powerful remedy to suspend their performance of any contractual works for non-payment. This is really, really powerful because contractors program times are at an absolute premium, and if you've not been paid on time, that likely means that the contractor's QTS has slipped up in administering the process now.
Jacob Austin 00:12:25 No contractors QS wants to be the reason for the program slipping, so submitting a seven day written notice that triggers your right to suspend performance is a really strong power play. The law says that you can do that without liability, meaning you won't be in breach of contract for stopping work in those circumstances. But the key here is that the notice needs to be submitted. You don't just ring up the QRS and say, oh, I've pulled my lads off. You send him a letter and you set out what you're going to do. You can also partially suspend the works if you think that's strategically better. For example, you might stop work on a high cost activity whilst continuing to do less valuable work to pressure the contractor into making the payment and protect your cash flow at the same time. The Construction Act, if you do suspend the works, also entitles you to a fair extension of time for the period that you've suspended, and it says you can claim reasonable costs and expenses that you incur in stopping and resuming the work.
Jacob Austin 00:13:29 So the law recognises that pulling offsite and then re mobilising could cost you time and money, so it lets you recover those impacts. Once the payment is made. That right is an incredibly powerful self-help tool. If you're considering suspension, just ensure you follow that correct procedure. That means give a written notice. You state the grounds that the amount is unpaid and you state your intention to suspend. Then, once you've allowed seven days to elapse, you can lawfully downed tours with the protection of extensions of time and payments were re mobilizing. And it's a huge leverage point, especially if your work is critical to the project. And as I said, you're entitled to an extension of time for the period that you've suspended. And that means that you can't be penalized for a valid suspension. So there will be no damages, no lads brought against you for delays if you follow the procedure. Next, we have statutory adjudication. This is another really powerful tool that is brought to you by the Construction Act, and you can refer a dispute to adjudication at any time and get a decision within a tight time frame.
Jacob Austin 00:14:41 Once the dispute is referred to the adjudicator, a decision must be reached within 28 days of the referral unless the parties agree to extend it by a further 14 days. The process is intentionally fast and it's cost effective. It's often described as rough justice, but it keeps the cash flowing. It's vital for subcontractors who can't afford to wait months or years to resolve a dispute via court. You can refer any dispute that arises under the contract to adjudication. Common examples include non-payment, undervaluation of work, extensions of time variations, or contra charges. The typical procedure, if not specified in the contract, is set out again in the scheme for construction contracts. You serve a notice of adjudication outlining the dispute and adjudicator is appointed either as named in the contract or by a nominating body, and then you submit your arguments in a referral within seven days. The other side usually has a week or so to respond, and the adjudicator can conduct inquiries as for meetings or documents, and then issues a binding decision within 28 days of the referral.
Jacob Austin 00:15:56 That decision is legally binding on the parties on an interim basis. It must be complied with immediately. So if the adjudicator says you're owed £50,000, then the contractor has got to pay it. But decisions can be later revised in litigation going to court if either party chooses to contest it. In practice, though, adjudication decisions are rarely reopened because the courts will try to enforce them in the majority of instances, and they'll even enforce a losing party to pay up if they refuse. Adjudication can be a game changer for subcontractors because it embodies that pay. Now argue later. Ethos that we mentioned earlier by giving you a way to quickly secure payment or resolve disputes. Mid project, you don't have to wait for the job to finish or spend a fortune on legal fees to get what you're owed. That means you can use adjudication as soon as a serious payment issue arises, for example an unpaid interim application or a disputed valuation. The mere threat of adjudication can often prompt a settlement, but if not, you get a decision about it in a month.
Jacob Austin 00:17:08 Far faster than going to court and even oral contracts are covered so you can adjudicate a dispute if your subcontract wasn't formalized in writing. The fact that you can refer a dispute to adjudication at any time means that some dispute that happened earlier in the project, or a failed payment notice can allow you to adjudicate later because there's no time bar on it to combat things like this. Some subcontracts have amendments which potentially restricted utilization entitlement. So a tip for you is to ensure that your contract doesn't unfairly restricted utilization. The act nullifies any clause that prevents or hinders adjudication, or tries to make one party pay all the costs, regardless of the outcome. And if the contract's adjudication clause is not compliant with the Construction Act, then the scheme's adjudication rules will apply by default, ensuring that you have that right to adjudicate the final part of the Construction Act that affects all contracts and particularly subcontractors. Is the ban on pay when paid clauses? In the past, this was something that subcontractors often fell victim to. With many subcontracts having provisions that stated that the main contractor didn't have to pay the subcontractor until the main contractor itself received payment from the client.
Jacob Austin 00:18:31 That could result in a subcontractor waiting indefinitely or never getting paid at all if the client delayed or defaulted. So the Construction Act outlaws that, and any provision that makes your payment conditional on receipt of payment from a third party is ineffective. So simply put, the contractor cannot refuse to pay you just because they haven't been paid by somebody else. This also applies to retention, and this is where the contractors are often getting away with maintaining a pay one paid approach. But you can clearly say with confidence that the release of your retention can't be linked to the release of the contractors retention. So if you've got a 12 or a 24 month retention period, during which time the contractor holds on to a piece of your money, 12 or 24 months after you finish the job, you can apply for that retention, whether the contractor has received theirs or not. The Construction Act, with its 2011 amendments, prohibits clauses that makes payment to you conditional on events that are part of another contract. So that means that the contractor is making good defects.
Jacob Austin 00:19:41 Certificate has got absolutely no bearing over whether your retention is due or not. And what they're supposed to do is go out and inspect your work, check for defects themselves, and certify the release of your attention on its own. The one exception to pay when paid is that if the third party, being the ultimate client or otherwise that's responsible for paying the main contractor becomes insolvent, then a pay when paid clause is allowed. Insolvency is carefully defined in the Construction Act. It includes administration, liquidation, bankruptcy, etc. and in that instance the Construction Act is effectively sharing out the risk of the client's insolvency across a supply chain working on a given project. So that is a really limited situation, and I'd be very surprised if you didn't know that the client was becoming insolvent before this came down to a payment issue for you. So all of this means that for subcontractors, you should refuse any contract that tries to link your payment to main contractors payments. If those kind of terms are in your subcontract, then they won't be legally enforceable.
Jacob Austin 00:20:55 But it's better to challenge them up front because the fact that they're not enforceable won't stop the contractor from trying to railroad you with them anyway. Now, I mentioned a couple of times the scheme for construction contracts throughout those explanations, and it's worth explaining that whilst the Construction Act sets the rules, the scheme for Construction Acts is the set of default contract terms that will become a part of your subcontract if the contract you're working on doesn't contain compliant terms itself. So, for example, if your contract said that there was no entitlement to adjudication, then the terms and conditions set out in the scheme for construction contracts around adjudication will imply into your contract by law. So that means that even if a subcontract is drafted poorly or one sided, you will still get the minimum protections of the Construction Act. And those terms are what will apply if you have an oral contract. So if you find yourself in situations where people are agreeing things with you on the basis of a handshake and no documents are ever exchanged, then the minimum terms from the scheme will form the backbone of your contract.
Jacob Austin 00:22:08 So you will get that entitlement to adjudication. You'll get the entitlement to payment every 28 days for ongoing work. You're entitled to the same payment notice and final payment 17 days after the due date, and also a pay less notice. If there's any adjustment of that payment, it is always, always worth getting your contract agreed in writing, because the act doesn't go as far as determining the scope of the program, what you'll find when you get to site, and so on. I honestly don't understand how you could do a job without a contract, but at the same time, I've read legal cases where agreements have been made over the phone or even by text messages. And as bizarre as that might be to me, if you do find yourself in that situation, please be aware that you have legal rights that flow out of the Construction Act in the form of the scheme for construction contracts, and though they're to be relied on if you have to. And there we have it, the Construction Act. I wanted to bring you this episode this week as a reminder of your statutory rights as a subcontractor, and so that you know exactly what you've got to rely on if you need to.
Jacob Austin 00:23:21 Knowing these rules and asserting them at the right time will help you to ensure you get fully paid and on time for the work that you do. My mission with the podcast is to help the million SME contractors working out there in our industry. I hope we've taken some value away from today's show, and if you have, I'd love it if you'd share the show and pass that value on to somebody else who'd benefit from hearing it. And be sure to subscribe if you haven't already. Thanks for tuning in. If you like what you've heard and you want to learn more, then you can find us at www.QS.Zone and again on all your favourite socials at @QS.Zone. Thanks all! I've been Jacob Austin and you've been awesome!
