What Are Pay Less Notices in Construction?

Managing payments, usually made up of numerous interim payments, can be complex and sometimes contentious in the construction industry. A Pay Less Notice is one tool available to a payer that helps to manage these disputes by allowing them to inform the other party that they intend to pay less than the amount applied for or previously agreed upon. 

Understanding how these notices work, the content required, and what makes them valid or invalid is essential if you’re considering issuing one. This guide will explain everything you need to know about Pay Less Notices, including the steps you can take if you have received a payment application but disagree with the value of the works stated in it.

Our specialist construction litigation team deal with issues and disputes arising out of construction contracts including applications, pay less notices, smash and grab and true value adjudications across the country. If you are a construction professional facing these issues we’d love to help you. Read on for more information.

What is the Meaning of a Pay Less Notice and Why is it Important?

Pay Less notices, also known as Notices to Pay Less, are most frequently used in larger construction projects, where discrepancies in payment amounts often arise due to variations in work, delays, or defects. 

They allow the paying party to formally document that they will pay less than the amount the receiving party has applied for in a payment application or that the paying party previously agreed to pay in a payment certificate. If the paying party wants to rely on a Pay Less Notice they must specify the amount they consider due at the date of the notice and how this amount has been calculated.

For example, if a contractor submits an invoice for additional work that was not approved, the employer could issue a Pay Less Notice to reduce the payment amount to ensure that the contractor is only entitled to payment for agreed work. 

Importantly, if the paying party fails to serve a valid pay less notice in time, then the sum that the contractor or sub-contractor has applied for will become a ‘notified sum’, which would allow the receiving party to bring a ‘smash & grab’ claim for the sum in the payment application. In a smash & grab adjudication, the paying party will not be able to counterclaim for defective works or argue that the payment application is incorrect or inflated, and will be required to pay the sum applied for without deduction, unless it can show that the payment application is invalid or they have served a valid Pay Less Notice.

What Is the Correct Format of a Pay Less Notice?

To be valid, a Pay Less Notice must meet specific requirements. You should always consult your contract for the specific requirements but at a minimum, a valid pay less notice must set out:

1. The sum that the paying party considers due on the date the pay less notice is served; and
2. The basis on which that sum has been calculated.

Other factors:

 A pay less notice might also include:

• Identification details for the Contract: This might include referencing the contract number or any specific identifiers (e.g. the payment application number) to which the payment relates.
• Date of Notice: The date when the Pay Less Notice is issued.
• A Title: A clear heading setting out that this document is a Pay Less Notice.

How Should Pay Less Notices Be Served?

Serving a Pay Less Notice correctly is as important as its content: 

1. You should check whether your contract includes any notice or service provisions that require Pay Less Notices to be served in a particular manner (e.g. by first class or registered post) or to be issued to a particular person. 
2. You must ensure that the pay less notice is served within the period specified by the contract. If the contract is silent as to the time for a pay less notice, then it must be served not later than 7 days before the final date for payment specified in the contract. If the notice is served late, it will be invalid. 

Finally, depending on the requirements for service in the contract, it might be prudent to obtain proof of postage and/or delivery by using an email delivery receipt or by obtaining a receipt from the post office or courier service. 

Can a Pay Less Notice Have a Negative Value?

This will depend on the wording of the particular contract but we would not generally recommend including a negative value in a Pay Less Notice. Instead, the sum stated as payable might however, be £0.

Are Pay Less Notices Legally Permissible the Day Before Payment Is Due?

This will depend on the wording of your contract. There is no restriction on drafting payment terms that allow the paying party to serve a pay less notice one day before the final date for payment. However, if the contract is silent as to the deadline for serving a pay less notice, the deadline will be 7 days before the final date for payment.

What Makes a Pay Less Notice Invalid?

If a Pay Less Notice meets the requirements set out above (or the requirements in the contract, if greater), it might still be invalid if it is not clearly a pay less notice in ‘substance, form and intent’.

In order to ensure that the Pay Less Notice is valid, it is important to include detailed reasons for any deductions, avoiding vague language such as “payment reduced due to errors” or “we think there are issues with the plumbing”. The Pay Less Notice should clearly set out the basis of any deductions so that the receiving party can understand the paying party’s position on the value of the works.

As a starting point, a Pay Less Notice will generally be valid if it provides an ‘adequate agenda’ for a true value dispute.

Steps to Take if You Disagree With a Pay Less Notice 

If you disagree with a Pay Less Notice, acting promptly and methodically is crucial. Getting any element wrong can lead to a catastrophic impact on your positioning and ability to recover monies or to respond to a notice where one has been received. Here are the steps you should take:

1. Review the Notice: Carefully examine the Pay Less Notice to check if it meets the contractual requirements and understand the reasons and calculations behind the reduced payment. Look for any discrepancies between the notice and the work completed, and note any missing or incorrect information.
2. Gather Evidence: Collect all relevant documents and evidence that support your claim for the full payment. It could include contracts, invoices, correspondence, and records of work completed.
3. Communicate: Contact the payer to discuss the Pay Less Notice, ideally via a face-to-face or video call. Sometimes, a conversation can resolve misunderstandings or errors without needing to take further legal action.
4. Seek Legal Advice: If the issue isn’t resolved through direct communication, seek legal advice. A solicitor can check whether the pay less notice is valid and advise you on the steps you should take to obtain payment for the work completed. 
5. Adjudication: Consider formal dispute resolution methods like adjudication, if necessary. Adjudication can provide a quick and temporarily binding decision in relation to payment, with the option to proceed to Court for a final determination, if necessary. 

Need Advice? Contact Helix Law.

Pay Less Notices are used in complex construction projects, to reflect discrepancies in payment amounts through variations in work, delays, or defects. Such notices allow payers to officially state they will be paying less than expected. 

Our construction litigation and adjudication team at Helix Law has extensive experience in resolving payment disputes through negotiation, adjudication, and litigation. Our team of experts provide advice to protect and improve your position, using these notices tactically where possible, or responding to them effectively where necessary. If you’re looking to issue or dispute a Pay Less Notice Contact Helix Law today. We’d love to assist you.