Last edited 11 Aug 2020

Payment chain

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In the construction industry, payment can be the source of a great deal of controversy. Not only are the sums involved very large, and the duration of projects very long, but the total amount payable tends to change over time. In addition, contractors, subcontractors and suppliers face considerable risk when pricing construction projects, and optimistic pricing or late payments can quickly cause cash flow problems.

As a result, payments are often the source of disputes which can ultimately lead to a breakdown in relationships and even project or business failure.

The supply chain is the interconnected hierarchy of supply contracts necessary to procure a built asset. On large or complex projects, responsibility and performance generally cascades down the supply chain to a plethora of suppliers sometimes unknown to management at the top of the chain.

The payment chain refers to the accounting practices adopted during these long-term and sometimes difficult construction projects to allow payments to filter down through the chain of contracts.

This extended chain can cause cash flow problems as one supplier may struggle to pay the next supplier in the chain until they themselves have been paid. In the past this resulted in 'pay when paid' provisions, that meant those at the bottom of the chain could wait many months before being paid for works they had undertaken.

However, the Housing Grants, Construction and Regeneration Act 1996 included provisions to ensure that payments are made regularly and promptly throughout the supply chain. This includes disallowing pay when paid clauses.

In addition, 'pay when certified' clauses are no longer allowed, and the release of retention cannot be prevented by conditions within another contract. So for example work contractors on a management contract project must have half of their retention released when their part of the works reach practical completion, not when the project as a whole reaches practical completion.

Suppliers have the right to suspend work for non-payment or to suspend part of the works and to claim costs and expenses incurred and extension of time resulting from the suspension.

See also: Down payment chain.

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