What Payment Terms Are Implied in a Construction Contract if None Are Agreed?
Part II of the Housing Grants, Construction and Regeneration Act 1996 came into force on May 1, 1998. It contained provisions that aimed to improve aspects of construction contracts, including clarifying payment terms and procedures when there are payment disputes. The Act is often also referred to as the ‘Construction Act’.
The Construction Act is supplemented by The Scheme for Construction Contracts (England and Wales), also referred to as ‘the Scheme’.
The Scheme provides a catch-all set of provisions where a construction contract has no clear payment terms or if the terms are inadequate, incomplete or non-compliant with the Act.
If a construction contract does not have any clear payment terms, then all the payment provisions of the Scheme will be implied in the contract to help create certainty and a workable situation.
The Act covers contracts for most construction projects, but it excludes contracts with residential owner-occupiers.
What Does the Construction Act Provide?
The Construction Act provides parties with a right to periodic payments throughout the contract works where the work lasts 45 days or more.
The contracting parties typically determine payment terms and provisions concerning the amount and frequency of payments — and what happens if there’s a dispute.
Stage payments are implied in a construction contract for what is described as ‘a relevant period’. If the contract doesn’t specify otherwise, the applicable period will be 28 days.
How Much is Due?
The amount due is the value of work done for the relevant period.
When Does Payment Fall Due?
An interim payment falls due on the date of the claim by the payee or seven days after the end of the relevant period, whichever is later.
When is Final Payment Due?
Final payment falls due no later than 30 days after work is completed or upon application for final remittance if this is later. The last date for timely payment is 17 days from the due date.
What Happens if the Project is Scheduled to Last Less than 45 days?
For construction projects of less than 45 days, the payment period is 30 days from completion.
Crucial Changes under the 2009 Act
In 2009, the scope of what constituted a construction contract was widened to include oral agreements. Previously, only contracts evidenced in writing were governed by the 1996 Act.
Most construction contracts are made in writing, but widening the scope to include oral agreements crucially covered projects only partly evidenced in a written contract.
Far more contracts are now subject to the payment provisions of the Scheme.
The Importance of Legal Advice
Allowing a construction contract to remain silent on arguably among the most crucial provisions – those relating to payment – is entering dangerous territory.
An absence of agreed terms encourages project interruptions and disputes. Relying on implied terms often leads to costly delays, both from hold-ups to the work and damaging cashflow issues when payments are not forthcoming.
If the parties to the construction contract failed to address payment terms at the drafting or agreement stage, taking professional advice is essential — particularly if there has been a payment failure or the parties are drifting towards a dispute.
Since the introduction of the 1996 Act, there has been a considerable volume of case law developing and clarifying the precise nature of acceptable financial terms in a construction contract.
Whether you are the project owner or a contractor, it is crucial to take legal advice at the contract drafting and signing stage. Don’t inadvertently agree to something that may be prejudicial later on.
If you’re a contractor experiencing difficulty receiving payments, an accurate assessment of your written or oral contract — and how the relevant law applies — is essential to protect your position and keep your business solvent.
Helix Law provides specialist advice for project owners and contractors on construction agreements at the crucial drafting stage — when it is easiest to foresee potential areas of disagreement and help avoid them altogether.
Helix Law’s expert construction team can also step in when a contract falters due to lack of clarity or because the agreed payment terms are not permitted under the 1996 Act.
Prompt intervention is essential in these situations to prevent financial suffering and damage to the business.