The Construction Act consultation has acknowledged that companies need payment certainty, but it is not tackling the surreal arrangement whereby the payer decides what the payee is owed
The basic obligation of the Construction Act is that all contracts must contain an adequate payment mechanism to define when and what payment is to be made.
The operation of the act depends on a debt being established at the final date for payment. At present, however, it is all too easy for the payer to ignore a payment application or dispute it on spurious grounds, forcing the payee to establish its entitlement in an adjudication.
This is of concern to most contractors and consultants, which are small and medium-sized enterprises. They don’t want to go through expensive rigmaroles to establish their payment entitlement. So, when the DTI – now the Department for Business, Enterprise and Regulatory Reform – issued its consultation document last month, there was quiet satisfaction that this problem had finally been acknowledged.
But the reaction from some industry bodies was weird, to say the least. The Construction Confederation (representing some major UK contractors) railed against an increased burden on the industry. So, giving firms payment certainty is an increased burden?
Meanwhile, the key performance indicators for M&E contractors published by the Building Services Research and Information Association last month make dire reading. Payment KPIs for M&E firms are the worst of all the KPIs for the sector. So this final Construction Act consultation is timely.
Let’s look at how it works now:
Wouldn’t it be great if we could draw up our own gas bills and send them to British Gas as the amount due, telling them the bill is being revised – downwards?
- Contracts to state the due dates, the final date for payment and the period between the two dates
- No later than five days after the due date, the payer is to issue a payment notice
- The notice is to state the amount the payer proposes to make; this is the sum due
- If the amount is less than the payee’s entitlement because of alleged breaches of its contractual obligations, the grounds for paying a lesser amount must be stated
- The sum due may be revised by a withholding notice issued before the final date for payment; it is subject to adjudication
- Where a payment notice is not issued, the statutory fallback is that the payee’s claim will constitute the sum due
- The payer’s claim may be subject to a notice of withholding
- Pay-when-certified clauses to be outlawed.
Will this mechanism provide a fair balance between payer and payee? Well, it does identify the sum due at the date for payment. But the process to get there is bizarre. The payer draws up the payee’s bill. Some days (or weeks or months) later, the payer sends a withholding notice to make deductions from the bill. If the payee doesn’t like the bill the payer has drawn up, it can always spend a few thousand quid to get an adjudicator to revise it.
Wouldn’t it be great if we could draw up our own gas bills and send them to British Gas as the amount due? Not only that, we could also notify them that the bill is being revised – downwards. The only time that British Gas will be able to send a bill (that will become the due sum) is when we have neglected to send our version of the bill.
So, what needs to be done to restore the balance? That’s easy. The payee sends off its bill, as is normal in commercial transactions. The payer can issue a notice of withholding and, at the same time, set the period between the due and final dates for payment as long as it likes. Simple mechanism. No red tape.
The bill becomes the due amount in the absence of a withholding notice or, if such a notice has been issued, the due amount is the difference. Put that in your response to the consultation document.
But don’t forget that other matters have been ignored in this consultation:
- No outlawing of cross-contract set-off
- No outlawing of all conditional payment provisions
- No insolvency protection.
All these were listed in Sir Michael Latham’s review as matters to be dealt with by amendment to the act. Nonetheless, significant progress has been made – we’ve acknowledged the need for a sum due at the date for payment.
Rudi Klein is a barrister, chief executive of the Specialist Engineering Contractors Group and visiting professor of construction law at Northumbria University