Contractor Not Paying Subcontractor: A Complete Guide

Construction contracts are always notorious for their complexity — not least because there are often multiple parties in the contractor chain: Electricians, bricklayers, plumbers, engineers, and carpenters, all dependent upon one another.

When a contractor doesn’t pay a subcontractor, all sorts of consequences can flow from non-payment. 

The subcontractor may experience cash flow problems that may be severe enough to threaten their business. If the subcontractor stops work entirely, this can jeopardise the entire construction project.

Neither scenario is welcome, but unfair payment practices are rife in the UK construction industry. Often, subcontractors don’t know their legal entitlements and are not proactive in enforcing their rights to payment.

This guide clarifies subcontractor payment entitlements and what to do when monies owed are withheld.

What Are Subcontractor’s Rights When a Contractor Refuses To Pay?

In theory, a subcontractor can pursue the contractor for withholding payment through the courts. In practice, it’s rarely that straightforward.

For a contractor to refuse payment to a subcontractor lawfully, they must issue the subcontractor with appropriate notice in writing.

For construction contracts entered into after October 2011, the Construction Act stipulates that subcontractors must be issued with a pay less notice.

The ‘pay less’ notice must be produced within a specified time frame and set out detailed reasons for why the monies are being withheld. 

The basis of all calculations must be clear, and the work performed to date must be valued and stated in the notice.

If the contractor fails to comply with the requirements of the Construction Act, it’s much easier for a subcontractor to challenge the refusal to pay. 

However, even if a contractor has not complied appropriately with issuing a ‘pay less’ notice, they may still be able to avoid payment based upon the terms and conditions of the original agreement.

Many subcontractors do not take time to adequately familiarise themselves with the subcontractor agreement before signing on the dotted line — and literally sign away their rights.

When Is It Legal For Contractors To Withhold Payment From Subcontractors?

There are numerous situations where it is perfectly legal for a contractor to withhold payment from a subcontractor. 

Clarity should be sought from the original contract, but, in general terms, there are three situations where a contractor can refuse to pay a subcontractor:

• If work has not been finished or not completed to an acceptable standard in line with the subcontractor agreement. Contracts often make inspection provisions and may contain a clause that the subcontractor must remedy defective or incomplete work before payment is made. There may also be a clause that allows for a reduction in amounts owed under these circumstances.

• Next is a right of set-off. This is when the contractor deducts sums owed to him by the subcontractor and can mean that it effectively cancels out the subcontractor’s payment in whole or in part. The money owed by the subcontractor is usually in accordance with the terms of the agreement but can be under another contract between the same parties which is not connected with the current project. 

• A contractor without the right of set-off may make a counter-claim for compensation. A counter-claim is not a direct way to withhold money, but the threat of legal proceedings can be used indirectly as a bargaining tool.

How Long Before a Contractor Has To Pay a Subcontractor for Their Work?

Terms of payment should be specified in the original contract. If the contract remains silent on this point, the subcontractor can rely on the terms automatically implied by the construction act, as long as it does not relate to work on someone’s home where you are directly in contract with the homeowner. If the contractor is in a contract with the home owner it does not prevent the subcontractor relying on the construction act. 

Subcontractors should only sign contracts that clearly specify a payment timetable which includes due dates and final dates for payment for interim and final payments.

If the contract does not come within the construction act the absence of a terms of payment clause, the court would probably decide the builder is not entitled to be paid until the job is completely finished.

If the contractor makes deductions from any payment, they must issue the subcontractor a payment and deduction statement within 14 days of the end of each tax month.

Can a Subcontractor Stop Work if Not Being Paid?

In theory, a subcontractor who is not being paid can suspend work, put down their tools, and walk off the site. They then have the option of seeking litigation, arbitration or adjudication. The subcontractor must serve proper notice of suspension under the terms of the contract or the construction act.

However, leaving the site because of a payment dispute can lead to termination by the contractor and cause issues if the notice of suspension is not valid. 

Depending on the contract terms, the contractor may ask another subcontractor to finish the work. Some contracts even permit the cost of hiring new workers to be charged to the original subcontractor.

What To Do if a Contractor Refuses To Pay On Time

Refer to the Terms of the Original Contract

Always clearly understand the terms of your subcontractor agreement — before you sign. The rights and duties laid out in the contract will often clarify or dictate what you can do about a late or missing payment.

The contract may allow the contractor to withhold payment under various circumstances — or, if you have not applied in the correct way, without giving any reason at all.

Check the ‘Pay Less’ Notice for Validity

It may be possible to leverage the situation if the ‘pay less’ notice is defective or inadequate or the contractor has simply not issued one on time or at all. 

The ‘pay less’ notice must set out detailed reasons why the amount owed under the contract is being withheld or reduced. It must state the sum the payer considers is due, even if that amount is zero.

Failure to issue a ‘pay less’ notice or producing one that does not comply with the terms of the Construction Act makes it easier for the subcontractor to enforce their rights at adjudication.

Find out What the Issue Is

Often, a property owner refuses to pay a contractor because they are unhappy with the work or the project management. The dispute may not necessarily involve any work done by the subcontractor.

The main contractor may be refusing to pay on that basis. Alternatively, the contractor may deny that they have received payment from the property owner and are thus not funded to pay the subcontractor. Whether this is true can be challenging to verify.

It is important to note that the contract at law is between the contractor and subcontractor and does not depend upon payment from the property owner to the contractor. 

Even if the main contractor includes a contract clause that payment to the subcontractor is conditional upon receipt of funds from the property owner, such a clause is unenforceable under section 113 of the Housing Grants, Construction and Regeneration Act 1996.

Conclusion

It is crucial for subcontractors that any terms and conditions they agree to at the project’s outset protect them from late or withheld payments. 

Involving a legal expert from the start can help protect against disputes surrounding subcontractor payments.

The specialist construction law team at Helix Law provides expert advice to subcontractors when negotiating the contract. Helix also helps ensure the payment terms are met in the event of a dispute. 

Helix Law also advises contractors who may need protection from subcontractors who fail to complete the project or produce defective work that is not up to standard.

Construction contracts are a specialist area and require professional and targeted legal advice to protect the interest of contractors and subcontractors.