What Can a Contractor Do if an Employer Refuses to Pay?
Unpaid invoices severely threaten the completion of a building project, impact cash flow, and pose a significant or ultimately fatal threat to contractors in the construction industry.
Refusal to pay may be due to the employer disputing the quality and workmanship and alleging defects. There can also be disagreements over contractual terms. An unpaid invoice can herald the start of a complex dispute in a long-running project.
This article looks at contractor rights to recover unpaid sums and effective routes to achieve recovery. We also consider how a contractor can protect their position and business cash flow to minimise the risks of non-payment. Our construction litigation team act in construction disputes nationally and face questions such as this every day. If you are in this situation we’d love to assist you.
Understanding Contractor Rights for Non-Payment
Key Legislation and Contractual Clauses
Failure to pay an invoice for work completed under a construction contract may constitute a breach of contract.
It is important that contractors review the contractual payment terms before entering into a contract. However, if a construction contract does not contain payment provisions, or adequate payment provisions, then in certain circumstances. The Scheme for Construction Contracts (England and Wales) Regulations 1998 implies payment terms into the agreement to the minimum extent necessary.
A well-drafted construction contract will also make provision for interest on late payments. However, if the contract is silent, there is again legislative protection in certain circumstances.The Late Payment of Commercial Debts (Interest) Act 1998, and more recently, the Late Payment of Commercial Debts Regulations 2013, provide for interest on late payments. If the contract does include interest provisions, then these must be carefully drafted to ensure they do not amount to a penalty clause..
A construction contract may also include provisions allowing the contractor to suspend in certain circumstances, including in the event of non-payment. If not, then a contractor may still have the right to suspend under section 112 of the Housing Grants, Construction and Regeneration Act 1996 (as Amended). Suspension is a useful tool in a dispute over payment, but must be exercised cautiously, as suspending incorrectly may amount to a repudiatory breach of contract.
Managing Risk and Taking Action When Employers Delay Payment
One in five insolvencies is attributable to late payments. The construction industry accounted for 17% of insolvencies to May 2025, a 7% increase from May 2024.
Managing risk to cash flow and business health when an employer delays payment is best served by robust and defined contract provisions, as well as taking prompt action on late payments.
Issuing Notices and Protecting Entitlements
The Housing Grants, Construction and Regeneration Act 1996 (as Amended) (‘the Act’) sets out a contractor’s right to payment by instalments, stage payments or other periodic payments in certain circumstances. Where it applies, the parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due. However, if the contract fails to address these matters, the provisions of The Scheme for Construction Contracts (England and Wales) Regulations 1998 will apply to imply the relevant terms. These provisions and/or the conditions of the construction contract create a mechanism that entitles the contractor to apply for payment or requires the employer to issue a payment notice stating the sum they consider due and the basis on which that sum has been calculated by certain deadlines. If the employer subsequently fails to issue a pay less notice by the relevant deadline, then the contractor will have an automatic entitlement to the sums claimed in their payment application or set out in the payment certificate. This is sometimes known as a “smash & grab” claim.
In certain circumstances, for example, if the contract is with a residential occupier or the employer issues a pay less notice, it may be necessary to pursue a true value claim instead, which is often more costly and time-consuming.
It is important to understand and make a note of the relevant payment deadlines in your contract.
Enforcement Routes and Legal Remedies
Enforcement routes in construction disputes include Alternative Dispute Resolution (ADR), which may involve mediation, adjudication, or arbitration. There’s also the option of litigation through the courts.
Litigation can be time-consuming and expensive. Additionally, if the overdue sum is a stage payment, then it can create difficulties continuing to work with that employer on a project.
Skilled negotiation and legal representation may be sufficient to resolve the unpaid invoice. Otherwise, adjudication can offer a quick, 28-day fix .
Handling Payment Pressure and Economic Duress
Economic duress in construction occurs when one party, typically the project owner, who often holds a stronger position, imposes unreasonable or unfair terms or threatens to cancel the contract if their demands are not met.
With stage payments commonplace in construction contracts, a contractor may feel pressure to agree to specific terms and conditions. They may also be reluctant to pursue a late payment when a lengthy and valuable contract is still in effect.
Legislation prevents the application of unfair contract terms, even if a contractor has agreed to them. These include provisions such as ‘pay when paid’ clauses. However, expert legal representation at the negotiation stage helps ensure that fair and reasonable contract provisions are included in the contract from the outset.
Securing Payment Rights Through Variations and Scope Changes
It’s useful for construction contracts to include a variations clause; most developments never pan out quite as expected. Being able to adjust the scope of work is a practical and functional mechanism.
However, variations clauses must be carefully drafted to avoid disputes and linked to a payment framework so there is no ambiguity about recovering costs for these additional works.
Reducing Future Disputes
A well-drafted construction contract should always contain provisions for overdue payments, with clear context on what happens if payments are late or not made at all.
Contractors should also consider using KPIs – Key Performance Indicators – to track invoice payments. These produce valuable data about payment timelines and highlight any delays.
It’s essential to act quickly if payment is delayed, but without being heavy-handed, which can sometimes sour a productive commercial relationship.
Always verify that the invoice or application is presented in the correct form and manner. Issue timely reminders and maintain a written record of follow-up actions.
Frequently Asked Questions
Can a Contractor Charge Interest on Late Payments?
A contractor can charge interest on late payments, and the construction contract may provide for interest payments. The interest rate must be clearly stated in the agreement, along with the point from which interest accrues. There is also legislative protection for contracts that are silent on interest payments, in certain circumstances.
Is It Possible to Suspend Work for Non-payment?
A construction contract may contain an express provision allowing the contractor to suspend. If not, there is a statutory right to stop working due to non-payment under Section 112 of the Housing Grants, Construction and Regeneration Act 1996, where it applies. It is important that the contractor is clear on whether they have the right to suspend before attempting to suspend, otherwise they may act in repudiatory breach of contract.
Can a Contractor Recover Legal Costs?
In certain circumstances a contractor can recover their legal costs. In litigation, the successful party can typically recover a portion of its legal costs if the claim is for £10,000 or more. In limited circumstances, it might be possible to recover inter-party costs in an adjudication.
Contact Helix Law for Expert Legal Advice and Resolution Support in Payment Disputes
Late payments disrupt financial stability, strain commercial relationships, and can permanently damage business creditworthiness. Construction is a complex area, and non-payment may be part of a dispute over poor workmanship or defects. Contractors must build in methods that minimise the risk of late payments.
Helix Law offers robust and professional advice to protect your contractor business. Construction litigation is an incredibly niche area of law. We have one of the largest specialist construction litigation teams in the South East outside London, acting nationally. We ensure your payment terms are watertight with explicit contract provisions that make it easier to recover unpaid invoices. If you don’t have a written contract, then we can still help- using all tools at our (your) disposal including litigation or adjudication, if/as appropriate. Our advice is targeted and strategic, and we’ll find the most practical and cost-effective solution for your situation. Get in touch with the construction litigation team at Helix Law today and we will be happy to assist you.
