What is an Interim Payment in Construction and How Does it Work?
Construction contracts are often lengthy and notoriously complex with numerous parties and contractors. Failure to receive appropriate payments throughout the course of construction agreements is a long-held grievance by subcontractors.
If the construction project is set or estimated to take more than 45 days to complete, UK law requires a mandatory interim or stage payment regime of partial remuneration for ongoing work. The schedule is intended to help regulate the common predicament of delayed or non-payment in construction contracts.
A payment regime must detail a process for identifying:
- What payments are due
- When payments are due
- A procedure to apply for payment
- A final date for payment
- What notices must be served
These stage payments are called interim payments.
Interim payments are designed to protect subcontractors’ cash flow and operational efficiency. Otherwise, subcontractors may have to wait many months on remuneration for completed or partially completed work.
What Is an Interim Payment?
An interim payment is a stage payment or instalment paid by the main contractor, building owner or developer to subcontractors under a construction contract.
Under Section 110(1) of the Housing Grants, Construction and Regeneration Act 1996, every construction contract must provide a payment mechanism for determining what payments are due and a final date for payment of any owed sum.
Construction contracts often regulate lengthy and complex projects.
The provision for interim payments allows subcontractors to receive compensation for work as it is completed in stages rather than waiting until the job’s conclusion.
How Do Interim Payments Work?
Interim payments are designed to recompense subcontractors for work at intervals throughout the project, so they don’t have to wait until the end before they receive any money.
The contract should detail a schedule for each interim payment, stipulate the due date, and a final date for payment. The process for a subcontractor to apply for an interim payment — which the payee must adhere to — should be detailed in the agreement, as should the formal response procedure from the payer.
Who Can Get an Interim Payment?
It would be reasonable to assume that interim payments are only required to be made to certain parties identified within the agreement. However, interim payments are considered crucial to a subcontractor’s ability to operate. Any party to the construction contract is entitled to interim or stage payments under the legislation.
It is best practice for subcontractors to protect their interests by insisting on a payment schedule in the agreement before they sign.
If a construction contract fails to provide for an adequate payment mechanism, then the Scheme for Construction Contracts (England and Wales) Regulations 1998 shall apply as an implied term to create interim payment rights.
When Can Interim Payments Be Requested?
Subcontractors can request interim payments in accordance with the timetable set out in the contract. Because the payment schedule is enforceable at law, it’s crucial to negotiate favourable contract terms and conditions before the parties agree to be bound by them.
When contract terms are absent or fall below the minimum statutory standard, the legislation provides its own framework as follows:
- A ‘relevant period’ triggering a subcontractor’s entitlement to an interim payment falls due every 28 days.
- Each interim payment becomes due seven days after the end of the relevant period or seven days after the contractor claims payment.
- The final date for the interim payment is 17 days after the due date.
Payment timeframes devised by the main contractor and subcontractors are always subject to minimum statutory standards to protect the interests of both parties.
How is an Interim Payment Requested?
The majority of construction contracts stipulate a payment application procedure from the payee. The payee must follow the contract terms for the interim payment application to be valid.
Contract clauses should contain:
- Valuation method
- Criteria under which the contractor will make interim payments
- Timing of payments
- Any administrative or procedural requirements
The subcontractor will be required to provide a valuation of work completed by the specified date and submit the application within the deadline determined by the agreement.
The application must set out the sum the subcontractor considers due and the basis of their calculation. Typically, this includes a detailed breakdown of stage and/or labour and reimbursable expenses.
The subcontractor should follow the terminology and language of the contract when submitting their application for an interim payment. Valuation is the precursor to the issue of an interim certificate that authorises the interim payment.
Under the terms of the contract and in accordance with Section 110A of the Act, the Payer must also submit a Payment Notice no less than five days after the due date for payment.
The Payment Notice must specify the sum and the basis upon which it has been calculated — even if the sum due is zero.
The figure in the Payment Notice becomes the Notified Sum: the amount which must be paid on or before the final date for payment.
How Long Does It Take to Receive an Interim Payment?
The timespan for receiving an interim payment depends upon if the main contractor accepts the valuation of the works and the instalment amount the subcontractor has requested.
Payment should be in line with the specific contract terms and conditions. The only deviation should occur if the two parties are in dispute or the contractor mistakenly relies on waiting for payment from the building owner or developer first rather than making an interim payment application.
Before signing on the dotted line of any construction contract, protecting your business by negotiating secure stage payments is essential. Taking expert legal advice is imperative to safeguard cash flow and minimise risk.
The specialist construction team at Helix Law offers a dedicated service to preserve the interests of all parties in construction contracts: both pre-agreement, whilst the project is ongoing and in the event of a dispute.
Protect your interests and understand your options with prompt, professional advice. Contact Helix today.