Jacob Austin 00:00:00 Hi all. Jacob Austin here from QS.Zone. And welcome to episode 122 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. For today's episode, we're going to continue our mini series on neck contracts, and we'll be focusing in on one of the most important sections, the 50 series, which is all of the payment clauses. We'll also be taking a look at how the main options can vary, the payment mechanisms under the subcontract, and also how the UK two clauses come in and make the contract compliant with the Construction Act, and incorporate some important rights for you as a subcontractor. All right. Let's talk payment. Because in construction, as in all industries, payment is like oxygen. You don't notice it when it's flowing, but when it stops, everyone panics. And it might involve a few creative phone calls. So this week we're going to cover how the NEC Engineering and Construction subcontract covers payment. And it does that with the 50 series clauses.
Jacob Austin 00:01:26 And we'll be looking at three things. How are the 50 series clauses actually work in terms of assessment dates, applications, certifications, payment timings and crucially, what happens if you miss a step? Then we'll look at how the main option clauses change what your amount due is based on. And finally, we'll wrap things up with how the UK two clause affects the payment mechanisms, including incorporating notices and final dates for payment. Now the NEC contract is renowned for being quite a fair and well-balanced contract, assuming it has not been amended to hell, and the same applies to payment. But critically, I have to say this loud and clear the NEC payment process is only fair if you run it properly and it can punish you with cash flow problems. If you don't, and some of the main contractors you might come across will fully know and appreciate that and use it to their advantage and not yours. The payment mindset under NEC is it's a process and that process is tied to a timetable. There is no send an application or an invoice when you feel like it and hope it gets sorted.
Jacob Austin 00:02:38 And no worries if it's a couple of days late. So you have to treat payments like a process under NEC. The anchor that that process is built around is the assessment date and everything spins out from that point. You have to apply by the assessment date. You get paid by reference to that same assessment date, the certifier must certify within a week and then payment follows within the stated period, so the assessment date certificate payment. It's a simple concept, but it relies on you administering it properly. You'll find your assessment date in the contract data. So it's not actually within the 50 series. Some contractors will refer out from the contract data to a separate schedule that defines a list of dates. Most contractors will be setting this up so that it falls monthly. And this can be an important shift, because if you're used to sending in an application or an invoice when you finish something and being paid X amount of time afterwards, then you really need to break that habit because the neck isn't waiting for your invoice to decide when payment forced you.
Jacob Austin 00:03:46 It comes from the contract timetable, and if you fall back into that old habit of I'll submit my application when I've got time, then the neck response will be cool story not paying you though, and the contract actually tells the contractor that's what they must do. Remember back to episode one of this mini series, the clause right at the beginning of the contract that says you must act as stated in the contract. This is one of those situations where the contractor acting as stated, is going to hurt you. If you, as a subcontractor haven't acted as stated as well, and it will hurt you under clause 50.4. Now we'll get to that in a minute because I do want to try and follow the order. So we're going to touch on clause 50.2 first, because the payment application isn't just going to be a number on an email or a number on a text message. Can I have X amount this month? You need to submit under 50.2 an application before each assessment date, setting out the amount you considered you, including details of how it's assessed, and it's got to be in the form of stated in the scope, and this is an area that can catch you out, because main contractors will all probably have their own version of an application for payment.
Jacob Austin 00:05:03 And they can specify under NSC that you use that template. So because contractors are writing the scope, they can specify you use their spreadsheet template, their portal, their cost code structure, their measurement rules, their list of supporting evidence and their policy saying if you don't attach 48 photos and a blood sample, then your application is invalid. This is a place where contractors can incorporate some deliberate friction in the assessment protocol, but some of that will be legitimate governance to make it easy for them. Assessing your application, along with the 30 others that they might have to on their particular site. If it's all in the same format, it makes processing it easy. But to know what you need to submit, you need to read that scope, and you need to look at payment application requirements so that your application pack matches it from day one. Because under the NEC contract, if your application is non-compliant, you're basically volunteering not to be paid. And that comes down to clause 50.4, The Quiet Assassin. And in a nutshell, that clause says if you don't submit an application or if you submit it late, remember that clause 50.2 tells you you have to submit it by the assessment date.
Jacob Austin 00:06:23 As in, you can submit it early but not late. And the upshot of submitting it late, if at all, is that the contractor then pays you the lesser amount of either the previous amount due, so you get nothing or whatever the contractor assesses, whichever is lower. So that means if you miss your application date, you don't just get paid slightly late because you're applied late. The contract says that you get nothing, and it actually says you could get less than nothing, saying maybe the contractor corrects a mistake in your last month's assessment, or you've incurred a contra charge, or maybe a defect been found that the contractor then values. You can actually end up owing the contractor money for that period because of that correction. So if you've ever wondered why some firms act like your application date is like a sacred religious holiday, then this is why. And basically the NSA contractor is telling you no application, no payment. But the point of this clause is to force discipline. It's there to make sure you submit your application on time.
Jacob Austin 00:07:29 If you're working on a job where the contractor is being paid on a cost reimbursement basis, then you submitting your application late means that they can't claim anything for your portion of the works for a period. And so it stands to reason then that you won't get paid either. So this clause is there to protect the contractor's cashflow and to encourage you to protect your own. Now, I know month end is a busy period. Probably all of your assessments are due around about the same time, so that Nessie on this front says you can submit by the assessment date. So there's nothing stopping you doing that early. You just need to hit that assessment cycle. Even if your application is estimated with some notes, you submit something compliant. You can adjust it next month if you need to. Just make sure it's submitted and keep a clean record of what you submitted and when. So the NSC sets out a simple rhythm a standard regime of certify quickly, pay quickly neck guidance and FAQs reflect that standard approach. You certify within one week of the assessment date and payment, unless amended, should be within three weeks of the assessment date.
Jacob Austin 00:08:41 That is, of course, unless the contract data says otherwise. Of course, as a subcontractor, you're probably more used to that being amended and the payment cycle reflecting something like 35 days or 42 days. So what happens if that's late? Well, you've always got the guidance that we'll refer to later on adjudication and withdrawing from site under UK two. But in addition to that the NEC has put in interest clauses for late payment. Now interest might be great on paper, but in reality a lot of subcontractors don't charge it because they're worried about being labelled difficult. And that's partly a culture problem, not wanting to be too contractual and enforce your contractual rights. But the contractor isn't going to be shy about not paying you if you apply late. Why should you be shy about charging a bit of interest to cover your costs of continuing to finance the job if you get paid late? This doesn't have to be something that goes nuclear. It's a simple mechanism to keep you from being out of pocket. Now, the payment clauses under an EC are vastly altered by the main option clauses.
Jacob Austin 00:09:50 Those are options A to E, and we discussed them in our first overview episode on the Nessie subcontract. The 50 series clauses are all about the mechanism for certification and for getting you the money, but the main options A to E vastly change how your payment is calculated. Option A is the price subcontractor with activity schedule. This has the capability to be really good if your activity schedule is built well, but it can be a real cash flow issue if it's poorly put together. Now, the premise behind the activity schedule is they're almost mini milestones that you get paid after you've completed them. And because you can only submit your application for payment once a month, you really need a granular list of activities. What really doesn't work well for you is huge activities that are going to take several weeks several months to complete. Even worse are vague completion criteria and back loaded value, where all the larger items are towards the back of your program with either of those. You could be doing plenty of work, but then getting paid peanuts until completion of those items is agreed by the main contractor.
Jacob Austin 00:10:59 So to protect yourselves when you're working under an option a subcontract, you need to break down your activities as much as possible. Because you can't get paid a percentage portion of activities, you get paid them in full on completion. So you need to think, what am I going to get done in a typical week? And how can I describe it in a way that completion of that activity is objective? It's either there or it's not. And you want to avoid activities that represent the complete installation of something, unless that installation is genuinely short. What you might need to do is break your activities down into individual rooms or individual zones. It's repetitive, but you need that granularity to be able to draw off what you've completed in a month. And what you can't foresee is the things that might prevent you from completing a whole area. Maybe the contractor unexpectedly gives over a room or part of a floor as a storage area to another contractor, but that stops you from completing your install. You can only finish 90% of it on paper.
Jacob Austin 00:12:02 You still haven't finished your milestone, so then you're financing the job. Now that would be a compensation event because the contractors fail to give you access to everything, but it still presents an unnecessary valuation argument. If you break your activity schedule down, you can claim that 90% and still be entitled to the compensation event. Option B is the most akin to a JCT way of valuing the work. Payment follows a bill of quantities, and most people in the industry understand option B as a way of paying for actual quantities completed with a bill of quantities. Structure to it. The key thing for this is to establish the measurement rules and to generate your measurement records as the job goes on. Don't wait for the end. Claim what you've completed and keep a running total going as you go. What you don't want is a big fight over the measurement at the end. This is an area where you really need to collaborate with your main contractor. Share the responsibility. Do joint measures if you can provide them with your calculations that back up what you're asking for.
Jacob Austin 00:13:07 You want to make it as easy as possible for them to agree with your point of view. You've got options C and D. These are the most difficult in my view, to operate. They both have two valuations that you need to complete. C starts with an activity schedule, much like option A and D starts with a bill of quantities, much like option B. The difference for option C is that the activity schedule isn't used to value your work. You get paid actual cost, so you don't need to go to as bigger lengths to break down that activity schedule for valuation purposes. What you do need to do is make sure it's updated to reflect any changes, so any compensation events you get awarded are added to the bottom of the activity schedule. For option D, you've got to measure the works as you go, agree your measures and then the final re measured bill of quantities is what's used as your target price to compare your output against. So for option C and D you're paid a total of your defined cost plus a fee measured against that target, whether it's a lump sum target or the re measured target we've just mentioned, the principal is then at the end your actual cost and your target.
Jacob Austin 00:14:18 You're compared and you share the difference, whether that's a benefit or a shortfall with the contractor. The percentage is that the share is based upon is written into your contract data. It's an area you need to negotiate upfront, but the idea is that it incentivizes you, both you and the main contractor, to work together to generate efficiency if they can plan the site so that you can finish efficiently. They get a share of the saving that you make. Target cost is seen as being a fair way of valuing the work, but it's only fair in my eyes if defined cost is properly defined in your subcontract, so you need to see rates in there that reflect all the different facets of work that you're going to complete. It relies heavily on your keeping good records, because disallowed cost can be weaponized via audits. If you don't have good records of what people were doing and when they were doing it. This needs a lot of administration. We're talking. Time spent on site filling out timesheets to demonstrate what you are doing.
Jacob Austin 00:15:23 It's not good enough just to charge hourly rates back to the contractor. If you can't demonstrate that that person was working productively on the job, and just because something has been charged to the job on your accounting system, doesn't mean you can recover it. The contract asks for your account and records to demonstrate the charge. Ability of costs you are including in your account records means that's more than just a build up. It's more than just 8.5 hours on a Monday. 8.5 hours on a Tuesday, and so on. It's having descriptions of what was achieved to demonstrate that the cost is genuine. Otherwise, your ads could have been all upstairs, sat in a back room playing a game of poker, for all we know. And obviously, if that's what they're doing, the contract is not going to pay for it. Equally, if there's no record, you can expect a similar thing to happen. So a good and practical way forward on this is to agree with your contract at the level of records that you're going to produce from the start, and try and agree a reasonable level of detail that's going to strike the balance of having sufficient records without losing hours and hours per day on documenting every minor movement.
Jacob Austin 00:16:34 If you can agree something sensible, then it sets the bar and you can press on with it. The same principle applies when you're working under option E. Everybody hears option E and thinks happy days. Actual cost can't lose out. But the reality is different. You can still be underpaid on a cost reimbursable deal if your costs are disallowed. If your records are weak. One of the big principles that you need to get your head around for cost reimbursable contracts is what's included in the fee. So for option C to E, you're using the schedule of cost components as the method for charging your actual cost. So anything that's listed there within that schedule you can charge for now, you might have to justify the rates that you're charging for those items. You might have to provide invoices to back off the amounts that you've paid, but there are items that you're going to incur on a typical job that aren't in the schedule. And these items need to be funded out of your fee. So you need to have a good, detailed look at that schedule and satisfy yourself that everything you're going to use on the job is either an item that you can charge under the schedule, or that your fee is man enough to cover for that item because you can't recover it through charging a cost for it.
Jacob Austin 00:17:51 This is another place where you can fall down and lose out, because the fee needs to cover more than just your standard overheads and profit. Depending on how you set up and what you class an overhead, you might need to increase your fee to make sure that it covers the reality of what you're going to spend but not be reimbursed for. Obviously, if your fee is already agreed for the job, then it's too late to do anything about that, and you'll have to chalk that one off to experience. But the level of disallowed cost is something that you can take into account, and perhaps adjust your fee for the next job that you do. Treat it as a learning experience, but if you're considering tendering for actual cost based jobs, this is where you need to spend your time. Examine that list. See what you can claim. See what you can't. And build your fee accordingly. So final chunk for this episode we're going to look at Y UK 2, which is one of the option clauses.
Jacob Austin 00:18:45 But in the UK the Housing Grants Construction and Regeneration Act, widely known as the Construction Act, is a mandatory piece of legislation. And that means if you're working in the UK, Y UK 2 is going to apply all the time, every time. If it doesn't, then the provisions of the Construction Act will apply anyway. So the Y UK 2 clause is there to bring in that legislation. And in practical terms, what it's telling you is when a payment becomes due, when the final date for payment is what counts as a payment notice and the pay less notice process as well. NEC changed Y UK 2 in 2020 because case law made it risky to link the final date for payment to something that could be variable, like an invoice submission. And what that was about was a case that had been brought before. The court was arguing that it was unlawful for the receiving party not to be paid because they hadn't provided an invoice. There is no mention of invoicing in the Construction Act. Basically, one party asked for the money.
Jacob Austin 00:19:49 The other party provides a payment notice and then provides payment that caters very much to the self billing arrangement that most contractors follow. Effectively, they're invoicing themselves and sending you a copy of it. If you don't subscribe to self billing, then it becomes a little bit more difficult and you need to provide a copy of an invoice to help the payment along. But the court rightly, in my opinion, decided that the invoice didn't have a place in that process and that payments should flow based on the assessment date and the payment notice, not a separate invoice. The invoice in this instance was breaking the chain because payment was being made a set period after the invoice had been provided, which made the payment date variable rather than definite, as the Construction Act intends to do so for your payment process to be compliant, the final date for payment must be a fixed period from the due date, not a moving target. Depending on someone deciding your invoice is valid in any key terms, the contractor gives you a certificate. That certificate is the payment notice as far as the law is concerned, and they have to issue that within the date set out in your subcontract.
Jacob Austin 00:21:01 This is a regularly amended section of the contract, so I can't tell you what the hard and fast rules are around that you need to read your document yourself to determine when payment notices are due. Timing matters and the contractor must certify your payment properly and promptly. A defective notice could mean that you're entitled to full payment of your application without any deduction, and the same applies if it's late. But watch out for the ambush of the pay less notice, because even if the contractor has missed their payment notice date, you can be hit with a pay less notice and your amount due can drop. The best defence for this is good administration at your end. A compliant application. Sufficient evidence to allow your payment to be made in the amount that you want. And being on top of your timetable to know when to submit your applications. In truth, the payment regime under an NEC contract is pretty reasonable and a lot of the pain surrounding payments comes out of the contractor's amendments. Contractors will take a contract designed for clarity, for fairness and then bolt on things like longer payment periods, extra hurdles that you need to comply with for your application to be valid.
Jacob Austin 00:22:18 Subjective milestones, and the old favorite. The accreditation that has a habit of running out just before you need to be paid, or changing its criteria and withdrawing your certificate. And when that happens, the contractor is quite happily sitting behind his rule book saying, no, I can't pay you. You've got to have this accreditation and you don't have it. It's these kind of amendments that can really catch you out. So the devil is in the detail. These are the bits you've got to read and pay attention to when you review your subcontract. Now let's wrap up today's episode with a simple checklist for payment under an NEC subcontract. Start by mapping out the calendar, the assessment date. The application deadline. The certificate deadline. The final date for payment. Map it out for each month you're going to be on the project. You can use this to measure your contractor's response against. It gives you a ready reckoner if they've missed the payment notice date, but more importantly, it gives you a schedule to work to to submit your applications against.
Jacob Austin 00:23:22 And that leads me to the next item. Submit every cycle. Every month. Never skip an assessment if you liked clause 50.4 that we discussed earlier makes it really easy for the contractor to simply pay you nothing. Next item match the scope format. This is a really simple one. If the contractor has given you a template to use, then use it. Don't give them an excuse to call your application non-compliant. Sometimes they'll give you a list of requirements and you'll have to build your application to meet it. Quite often all they're looking for is simple details to be included. Most of them shouldn't come as a surprise to you, and once are in your model, then you can rest easy and you know you're compliant till the end of the job. Next, you need to build your application around the main option that you're working with. For option A, the key is a clear activity schedule with enough items in it that you can keep the cash flowing. For option B, it's observing the measurement rules, building a measurement up as you go, and collaborating with the contractor to get to the right answer for options C, D, and E, it's all about defined cost records being ready for the contractor's audit.
Jacob Austin 00:24:38 Having discipline about creating those records. And that probably means training for some of your admin staff or perhaps your supervisor, to make sure that you've got documents that back up time spent. Next item is to treat the payment process as part of your contract management system. It's not just admin, not just paperwork. It's a vital part of your job to keep your cash flowing and finally, be positively assertive on late payment notices and late payment itself. The NEC contract gives you the structure to do that, but you need to use it, and it's as simple as that. You should now understand the payment mechanisms around the neck subcontract alongside the foibles introduced by the different main options. We'll be continuing our series next week, and we're going to focus on compensation events. And we may touch on early warnings and how they can feed into compensation events as part of a wider change process. I hope we've got something out of today's episode. My mission is to help the million SME contractors working out there in our industry. If you've taken some value away from today, then I'd love it if you'd share the show and pass that value on to somebody else who'd benefit from hearing it.
Jacob Austin 00:25:53 And of course, subscribe yourself if you haven't already. And 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 for more information or you can check us out on all your favourite socials again at @QS.Zone. Thanks all! I've been Jacob Austin and you've been awesome!
