Jacob Austin 00:00:00 Jacob Austin here from QS.Zone. And welcome to episode 127 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today, we're continuing our mini series on JCT. 2024 subcontracts and we're covering the all important subject of payment, including due dates, payment notices and Payless notices. How to protect your cash flow with compliant applications and understanding the due date and final date for payment mechanics. We'll look at spotting Payless traps and using the Contracts Construction Act alignment to your advantage. Right. Let's dig in. Today is the money episode, and we're going to start with a statement that brutally true, most failed subcontractors don't go under because they can't do the work. They do it because they fund the job for too long. Payment clauses are not admin, they're commercial leverage. And under JCT 24, payment is more tightly aligned to the Construction Act than it ever has been, meaning that process notices and timing are no longer nice to haves. They're the battleground.
Jacob Austin 00:01:36 So today we're digging into properly what triggers payment, what the due date and the final date really mean when your application becomes the notified some how pay less notice is actually work and how they can be abused, and exactly what templates should you have ready so that you can enforce cash flow without sounding like you're trying to start a fight? Because often in the UK construction getting paid isn't about who's right, it's about who's followed the process and who's got the leverage. So let's get into it. Everything that we're about to discuss sits on top of the Housing Grants Construction and Regeneration Act or as we know it, the good old Construction Act. Under the act, if a sum becomes the notified sum, the payer has got to pay it by the final date for payment unless they serve a valid pay less notice. And that's not a theory. Courts will enforce that. Hard. This is why you hear of notices and deadlines and smash and grab. And the Construction Act is designed to keep money moving. Pay now, argue later.
Jacob Austin 00:02:46 It's a deliberate policy. It stops payment being used as a weapon to starve the supply chain. If you've won a decision at an adjudication, you get paid the money. The contractor doesn't get to challenge that result and get away without paying you. Courts will go back and enforce payment if you haven't had it, and that will thwart sometimes the case that they bring to the table. But going back to the standard mechanism, you want to submit a good valuation that's difficult to argue with and knock back. And critically you need to do it to the right timescale. So item number one is always to establish what the valuation dates are for your subcontract. Contractors will often like your valuation submitted X amount of days before that date, and if they do, they will tell you that within the body of your subcontract, more than likely they will refer you to a schedule that details out a list of valuation dates from the start to the end of the job. That is the start of the JCT drumbeat. So the critical first step is get that application in on time.
Jacob Austin 00:03:52 That doesn't mean because you usually submit applications at the end of the month that you're doing it. In this instance, you need to get that schedule out and make sure you're submitting in time to it. Because if you submit late, the whole process is knocked back by however many days you were late. So let's assume you're on time. You've submitted by the valuation date. The next thing is the due date. This will be a set number of days from that initial valuation date. Crucially, that's not actually when they're going to pay you the money. It's usually and this is a place where amendments are common a timescale for the payer, the contractor to notify you how much they're going to pay you. So often the due date will coincide with the payment notice due date. There's then a further period, let's say 14 days before the final date for payment. And within that timescale there is also the pay less notice window. This is usually measured back from the final date for payment. So let's say three days before the final date for payment.
Jacob Austin 00:04:55 So to determine when you're actually going to receive the money, you're adding the period to the due date. Let's say that was 21 days to the period to the final date for payment, which we said was 14. So we're working to this overall period of 35 days. And as I said, if you apply late, all of those periods start being measured from the date you submitted. So if you're seven days late, you're going to receive your money seven days later than you could have done. So controlling that step one that's submitting the application to the right time is your first step in managing the process properly, not forces your payer to work to the right timescales themself, or if not, they fall into statutory non-compliance. For most subcontracts. We're not dealing with invoices, they operate on a self billing mechanism, so the payment process is application driven. Some contractors will specify a precise form that they want you to fill out. It might just be the summary page, or it might be the whole document that you need to send back to them.
Jacob Austin 00:06:00 If they do that, then you need to use it, because one of the most regular tactics used by contractors is rejecting an application out of hand because they say it's not valid. And if they do that and they can do it credibly because you've not used their model, say, then the due date never arises, so you get no money. Basically, if they don't specify a precise format, then quite often contractors will specify that it needs to be a cumulative application showing the total of work that you've completed since you started on the job until the current valuation date, with a small calculation taking off the amount you've already been paid to show what's due this period. That needs to be crystal clear, and if you put a slightly different spin on it, it needs to be something that a third party could understand with no knowledge of your job from a standing start. And that's the test. Could an adjudicator With 30 minutes and no context. See the valuation date, the sum due, and the basis that you've calculated it on.
Jacob Austin 00:07:06 If the answer is yes, then you're in the game. If it's not, and I've received many an application where it's been really difficult to tell whether I'm looking at a cumulative document or just the amount the subcontractor thinks they've earned this month. You don't want to be in that pack. So let's have a look at the kind of things you need to include in a typical application. Now, some contractors will ask for a load of reference numbers like your UTR, your company reference. That reference if you've got one, and even bank account details, usually just standard pieces of information that you can write out once and it's in your template forever. Then you've got job specific things. So the project name, the purchase order number or the subcontract number if that's how it's being referenced, the valuation date and the period that you're applying for, the cumulative amount of work that you've completed from your subcontract sum the value of variations. Some contractors will want to see day work segregated out from variations materials on site. If you're allowed to claim it.
Jacob Austin 00:08:13 Deductions to be made. This needs to include any discounts that have been taken, retentions, previous payments and contra charges, if any, are applicable. This then gets to a net sum due and from that net some due, you might need to adjust it further. If your cis tax is deducted by the contractor and if VAT is payable, then you would add it below that net some due line in a tax calculation. If you've got all of those things on your application for payment, then critically it will comply with the Construction Act so that it can act as a document to be paid against if the contractor defaults on responding with a payment notice that prevents you from needing to submit a further document, either an invoice or a default notice to. Determine the sum due. Now in support of that calculation, you want to have build ups to the amounts that you're claiming for your gross value of work. Depending on how difficult your contractor is being, and you'll get a feel for it over the course of a couple of months.
Jacob Austin 00:09:18 Say you want to start substantiating that application with photos marked up drawings, delivery tickets, and certainly you want to include day worksheets and testing and commissioning certificates where their relevant evidence isn't about you being busy and causing too much paperwork. It's about preventing delay in receiving your money. When you get a feel for how your contractor is behaving with you, you might taper that evidence down, or you might provide more to make it difficult for them to knock back your payments. But in a nutshell, what you need to do is make the assessment as easy as possible for them to certify. You don't want to hear. We can't assess this or we need more information on this or this ticket is missing. Make it as easy as possible for them to issue a payment notice that agrees with your sum due, and if they don't, then your application is going to stand as the default notice. Now there's some interesting case law behind why payment notices have become such a blood sport in ESG versus civic. The payer fails to issue a payment notice and failed to issue a pay less notice as well.
Jacob Austin 00:10:31 And later, an adjudicator decided the contractor was entitled to the sum in its application because the payer didn't comply with the notice regime and cases like Gallagher Tri versus estuary, where again, the failure to issue a valid notice crystallised the Pei's application. These cases created the industry behavior that we now recognize. Commercial teams die arising notice deadlines like their life depends on them. Subcontractors pushing their applications harder and disputes increasingly being fought around. Procedure. Then the law revolved further following Smt versus Grove, when the Court of Appeal confirmed that even if an employer fails to serve a payment notice or pay less notice and they have to pay the notified sum, they can still pursue a true value adjudication afterwards. But crucially, they have to pay up first. So the modern position is that you can win payment on notices, but you might not keep an overpayment forever if your valuation has been inflated. The system, though, forces that payment to go through and then the true value correction is later. That gives a fair balance, which means your goal shouldn't be smash and grab.
Jacob Austin 00:11:46 It should be get paid what you properly do on time using the process. Now let's touch on Payless notices because these are slightly different, but they can be used in much the same way. The law says a Payless notice must specify the payer's intention to pay amounts less than the notified sum. The core requirement is to state the sum the payer considers due and the basis of calculation. So a Payless notice that says we're paying less because of defects. Knocking off 20 grand without showing any basis for calculation, or even having round numbers, is a really weak position for the contractor to be in there, not giving valid calculations, articulating the basis of what you're going to be paid. That may make the pay less notice invalid. Now let's get properly current with a recent case from the TCC in place. First Construction Limited versus car construction Northeast Limited. The court considered issues around payment and painless notices that were served in the same communication and around timing. Effectively, the decision confirms that there is no reason payment and Payless notices can't be served simultaneously under the same cover letter or email, but that one notice can't serve as both.
Jacob Austin 00:13:08 This is an important change for subcontractors because it changes a common assumption. Some people used to believe that if a payer serves them together, then at least one of those documents must be invalid, and this is not necessarily the case. The courts now confirmed an approach that if the documents clearly do what they say they do and what they should do, then they can be valid. So you can't now rely on they've served them together as a slam dunk argument instead. The better thing to do is to test the validity on the timing, the clarity of the sum and the basis of the calculation, noting the requirements for the payer to calculate the sum with as much detail as you put forward yourself. Now let's consider some of the payment traps that main contractors use to get out of paying you. The first one is the non-compliant application rejection, where the contractor basically rejects your application and claims it isn't valid so they don't even serve notices. The counter to this is making your applications as bulletproof as you can and label things clearly.
Jacob Austin 00:14:16 Sometimes contractors will give you feedback on an application because you've got some invalid variations in there, and they'll warn you about rejecting subsequent applications because you haven't taken them out. And I've seen this time and again where subcontractors leave them in thinking, I'll talk up the final number so that we can come to some kind of deal. But there's no use in chasing things that aren't valid. You're not going to get anywhere with it. So pay attention to that feedback, move on and make sure you claim the next variations as fully as you can, with as much substantiation as you can put forward. Documenting instructions, labeling day worksheets, making it easy for the contractor to agree with what you're putting forward is the best counter to allegations of non-compliant applications. The next one is pay less notices that are filled with mystery maths deductions, with some vague reference to an email and without proper substantiation, without a proper calculation, often just round figures thrown in there to bring the amount they're paying you down the counter to. This is requesting clarification immediately in writing and preserving your position on whether it's valid or not.
Jacob Austin 00:15:28 Contractors deductions are often made with a point, but don't start conceding that there may be some validity to it. If it's just a round number with no basis of calculation and little evidence to back it up. This is prime territory where an adjudicator would bust that wide open, so use that argument and dismiss it in writing out of hand. The next one is contra charges used as a cash flow weapon deducting for attendances. Cleaning delays management time, often with little more than a fag packet calculation, never mind any real evidence to back off what they're charging for. If you see this, remember that contra charges need as much evidence behind them as a claim for them to be landed properly. That means dates, that means instructions. That means documentary evidence proving that something was your fault. It means invoices or extracts from payment documents demonstrating how much they've paid out to other contractors or suppliers. When you know how to challenge whether a deduction is being made validly. Often the argument can fall away. The final trap is blanket withholding of retention.
Jacob Austin 00:16:37 This is really common in the industry and I know all manner of people get frustrated with it. Releases are almost always delayed. Be it admin or were waiting for final account or even worse. We're waiting for the main contract retention to be released. The counter to this is really simple because following the construction act, there is no linkage between payment upstream and payment downstream that applies across the board to all payments, which includes retention. You can't link the main contract retention release to the subcontract retention release. If the subcontract works are finished, then retention is due. Often your site manager is more than happy to tell you when you finished your work, so obtain confirmation in writing. Retention is a place where contracts can be amended, and often a clause will say we don't release retention until the final account is agreed. If you've signed up to that, then that, unfortunately, is a valid argument. But often those clauses aren't wholesale amended properly. So this conflict between different clauses saying retention will be due upon completion of the work, and another clause that says it's due upon agreement of the final account where this conflict there's a valid claim.
Jacob Austin 00:17:50 So apply for the retention. If the contractor doesn't respond to that, you can submit a default notice that establishes that you're due to be paid. Once you've established that the money is due. You can chase it as a commercial debt. That means you can use a service such as the government's online money claim court, which you can use for any amount up to Ā£100,000 for a relatively small fee. Once you do that, you'll be surprised just how quickly money will get flowing. Now that is probably the last resort, but if you're getting really frustrated and you're getting stonewalled, it's a really effective way to get your hands on your money. Retention is a contractual mechanism. It's there to secure performance against defects. It's not a general cash buffer, so manage it by recording the amount of retention deducted each time. Forecast. Release dates. Diaries for the exact day that you achieve practical completion. Plus, you're either 12 or 24 month period so that you don't miss the date when it falls due. Then you submit an application and you chase it.
Jacob Austin 00:18:57 The money's due. You're entitled to it. It's not a favor that the contractor should pay you it at some point. It's your money, so don't lose sight of it. A simple way to do that is to make a simple tracker. You might even have an Excel table that cover all your current live jobs, showing total retention held the peak date, or the anticipated peak date. If it hasn't happened yet, the release amount at PC, the defects period, the amount due to be released at the end of the defects period, and the final release date. Keep your eyes on that money. You only cross them off that list when you get cash in the bank. The JCT 2024 has moved to modernize and streamline the contract, and that includes payment provisions that are better aligned with the Construction Act. It's even tightened up termination payments so that it follows the Construction Act's timing requirements for notices and final dates. That replaces the older approach where termination could be treated differently. So all of that means even in weird situations like termination, the process and notice discipline is more standardized.
Jacob Austin 00:20:06 And that means if you're organized, you're harder for the contractor to get around. So that means your mindset can change. Payment is no longer just something that happens to you as a subcontractor to payment being a process that you can run and you run it by submitting on time, making your application as assessable for the contractor as you can. Getting deadlines in your diary. Challenging non-compliance of notices calmly and authoritatively, and knowing that the law is there. Designed to keep cash moving. When your cash flow is protected, it buys you time and comfort, it buys you options, and you can stop making desperate decisions to get your hands on money under pressure. And that draws us to the end of our payment episode. We'll be carrying on our JCT24 series next week looking at program and extensions of time. So I hope we've got something positive out of today's episode. And if you have, then I really need your help. So my mission is to help the million SME contractors working out there in our industry.
Jacob Austin 00:21:12 And if you've taken some value away from today's show, I'd really appreciate your help in sharing the show and passing that value on to somebody else who'd benefit from hearing it. And thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at. For more information, or you can check us out on all your favourite socials again at QS.Zone And remember, miss the contract detail and the commercial risk lands on you. Thanks again. I'll be Jacob Austin and you've been awesome.
