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Last edited 06 Mar 2021
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.
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.
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.
See also: Down payment chain.
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