Interim Applications and Payment Recovery
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Construction projects are not paid for all in one go. Interim payments and interim payment regimes are required by law as part of construction contracts, if the work is expected to exceed 45 days to complete. This is so that there is a structure for all parties to follow as to when and how much is to be paid on specific dates throughout the project. Without such a scheme, a large-scale project would soon run out of funding and never reach completion.
A payment regime may include stage payments, instalments or other forms of periodic payment. It must also define a process to apply for and determine what is owed, when it’s due and the final dates for paying. This law covers both payees and payers as part of the construction project or supply chain, including developers, building owners, contractors, subcontractors and consultants.
Most standard construction contracts ask for a Payment Application or valuation from payees. This should be submitted in accordance to the contract and begins the process of payment upon submission.
To ensure your Payment Application is valid, you should read the contract payment terms carefully and:
- Value the work according to the method and the date specified on the contract
- Submit within the deadline specified by the contract
- Include the sum due and how it was calculated
- Submit calculations in a summary sheet breaking down all costs relating to the sum
- Title your Payment Application according to the language used in the contract: for instance, if the contract calls it an ‘Interim Payment Application’, use this title to avoid any doubt by the payer.
- Make sure you use the correct address and method of service whether it is post or email or some other method.
In response to the Payment Application, the payer must issue the payee with a Payment Notice. This should usually be given no later than five calendar (not working) days after the Due Date.
Depending on the contract terms, a Payment Notice is usually valid when:
- It is submitted to the payee no later than five days after the Due Date, by the deadline
- It specifies the sum considered to be due and the calculation for this amount.
If the contract does not require the payee to serve a notice in default of a certificate, then unless a pay less notice is served, the sum specified by the Payment Notice constitutes the ‘Notified Sum’ which needs to be paid before or on the contract’s Final Date for Payment. If it is not, the payee may suspend work or adjudicate.
If the payer does not issue a Payment Notice, then the amount submitted in a valid Payment Application becomes the Notified Sum, if the contract states a Payment Application must be made. By failing to provide a Payment Notice, the payer is considered to have agreed to pay the Payment Application’s Notified Sum. However, the payer may send a Notice to Pay Less if they disagree with the sum in question.
Default Payment Notices
In the case that a contract does not expressly provide that a Payment Application should be submitted, then the payee is entitled to serve a Default Payment Notice to the payer as soon as they default (they don’t issue a Payment Notice). Again, the payer can mitigate this by issuing a Notice to Pay Less.
Default Payment Notices are validated in the same way as Payment Applications: by specifying the amount calculated to be due, how these costs were calculated, and by using the same language as the contract. This way, the amount specified by the Default Payment Notice becomes the Notified Sum; unless a Pay Less Notice is served.
It’s advised that you don’t delay if you need to serve a Default Payment Notice, as the Final Date for Payment will then be postponed accordingly. For instance, if the Payment Notice should have been received by March 1st and the Default Payment Notice is issued on the 3rd, the Final Date for Payment is then postponed for two days.
Seek legal advice from Helix Law to ensure any Default Payment Notice you need to serve is valid, and for advice on what to do thereafter.
Pay Less Notices
A Notice to Pay Less (or Pay Less Notice) is the payer’s last opportunity to pay less than the Notified Sum, in whatever form it was made. The contract should specify a deadline for serving a Pay Less Notice. If it does not, the default deadline is seven days prior to the Final Date for Payment in the contract.
Again, this must specify the amount believed to be due and how this calculation was made. This then becomes the Notified Sum which will be due to be paid by the Final Date for Payment in the contract.
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Failure to Meet the Final Date for Payment
If the payer does not pay the Notified Sum to the payee by the Final Date for Payment, there are two courses of action:
Smash and Grab Adjudication
This is used when the payee has served either a valid Payment Application Notice as set out in the contract or a Default Payment Notice, and the payer has failed to issue either a Payment Notice or Pay Less Notice. The Notified Sum is therefore the amount stated in whichever notice the payee submitted. This can then be recovered via ‘smash and grab’ adjudication as the payer is said to have made a procedural failure.
Alternatively, if valid Payment Notice or Pay Less Notice has been issued, but the Notified Sum in those notices is not paid by the Final Date for Payment, the sum can also be recovered with this method.
Similar consequences may be suffered by the payee if they fail to issue valid or correct notices. If the payee’s notices are absent or deficient they will have no grounds to commence a smash and grab.
Suspension of Works
If the payee is not paid by the deadline stated in the contract they can suspend some or all of their work, provided that they give the payer the notice required under the contract. If the contract does not provide for such suspension the payee can give seven or more days’ notice of this intention under statute (Section 112 of the Housing Grants Construction and Regeneration Act 1996 (as amended).
The payee may recover the costs of suspending the work, including any expenses reasonably incurred during the suspension period. As well as this, they are permitted extra time to return the working operations to full capacity after the delay caused by the suspension.
Contact Helix Law
Get in touch today if you have not received the payments you’re due by contractual deadlines or need advice with constructing notices. Our expert construction solicitors have years of experience in supporting clients through construction dispute proceedings.
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