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Last edited 06 Oct 2020
Remedies for late payment in the construction industry
Late payment of invoices is a problem for most suppliers of goods and services. In tough economic times the problem gets worse as cash retention becomes a greater priority. It is frequently the largest and most powerful client groups who are the worst culprits.
In the construction industry squeezing sub-contractors and suppliers is almost 'accepted practice'. A survey of 250 small construction companies in November 2012 found that 97% felt unfairly treated by main contractors, and just 5% of all work was paid for within 30 days.
 The Late Payment of Commercial Debts (Interest) Act
The Late Payment of Commercial Debts (Interest) Act provides for simple interest to be payable on outstanding debts at a penal rate of 8% above the Bank of England base rate. Additional penalties can also be levied.
Introduced in 2013, The Late Payment of Commercial Debts Regulations bolster the provisions of the Late Payment of Commercial Debts (Interest) Act. The Regulations amend the Act by imposing limits on payment periods of:
- 30 calendar days when the purchaser of goods/services is a public authority;
- 60 calendar days when the purchaser is another business, but this can be extended if expressly agreed in the contract and provided it is not grossly unfair to the supplier.
The Regulations also:
- Impose a limit of not more than 30 calendar days (before the payment period begins) for the purchaser to verify the conformity of goods/services are in accordance with the contract - but this period can be exceeded by agreement and provided it is not grossly unfair to the supplier.
- Allow the supplier compensation for its reasonable costs of debt recovery above the fixed costs currently recoverable under the Act (£40 for debts of under £1,000, £70 for debts of under £10,000 and £100 for debts over £10,000).
The Housing Grants, Construction and Regeneration Act 1996 (HGCRA also known as the Construction Act) includes provisions to ensure that payments are made promptly throughout the supply chain. These provisions include:
- The right to be paid in interim, periodic or stage payments.
- The right to suspend (or part suspend) performance for non-payment and to claim costs and expenses incurred and extension of time resulting from the suspension.
- The client must issue a payment notice within five days of the date for payment, even if no amount is due. Alternatively, if the contract allows, the contractor may make an application for payment, which is treated as if it is the payment notice.
- The client must issue a pay less notice if they intend to pay less than the amount set out in the payment notice, setting out the basis for its calculation.
- The notified sum is payable by the final date for payment.
- If the client (or specified person) fails to issue a payment notice, the contractor may issue a default payment notice. The final date for payment is extended by the period between when the client should have issued a payment notice and when the contractor issued the default payment notice. If the client does not issue a pay less notice, they must pay the amount in the default payment notice.
- Pay when certified clauses are not allowed, and the release of retention cannot be prevented by conditions within another contract.
Interestingly, the HGCRA does not stipulate payment periods, simply providing that parties are free to agree what payments are due and when, i.e. the contract must set out an adequate mechanism for determining these matters. In default, the Scheme for Construction Contracts applies providing a payment period of 17 days from the due date to the final date for payment.
For small debts (below £5,000) the Small Claims Court offers a simple and inexpensive route to obtain judgment where a sum remains outstanding beyond the contractual position. An assessment must, of course, be made as to the merits of taking such action, particularly if the client is a source of on-going work but in the absence of best practice being adopted more widely, the problem of late payment will have to be tackled, at least in part, by suppliers standing up for their legal rights more vigorously than in the past.
All suppliers should read contracts carefully and ensure that they are content with payment terms and conditions before signing. For statutory or contractual rights to be capable of being enforced swiftly it is imperative that a contract sets out explicitly the terms and conditions for payment for the services or goods to be supplied. It should also clearly set out what must be done in the event of a dispute over an invoiced amount.
NB: A lien is a right to retain possession of another person’s property pending payment of a debt. For example, a garage might not allow the owner of a car to retrieve it until the work they have done has been paid for. The holder of the property is not usually able to deal with it unless there is a contractual or statutory provision permitting this.
The Prompt Payment Code (PPC) was created by the UK government in 2008 in response to a call from businesses for a change in payment culture. It established a set of principles for businesses when dealing with and paying their suppliers that commit them to paying on time and fairly. The Code is administered by the Institute of Credit Management (ICM) on behalf of the Department for Business Innovation & Skills (BIS).
For more information see: Prompt payement code.
The government launched a new Construction Supply Chain Payment Charter in April 2014. This builds upon payment provisions set out in the Housing Grants, Construction & Regeneration Act 1996 (as amended); the Late Payment of Commercial Debts Regulations 2013; the Fair Payment Charter; Cabinet Office Procurement Information Note 2/2010; and the Prompt Payment Code.
The Charter sets out 11 fair payment commitments. Clients, contractors and sub-contractors in the public and private sector can sign up to the Charter. However, when it was launched, just nine companies had committed to adopting it.
In May 2014, in Building a responsible payment culture, Government response, the government cited this ‘success’ with the construction industry, but said it would bring forward legislation for further reforms, including:
- Requirements for public authorities to accept e-invoices.
- Requirements for public authorities to run timely and efficient procurements.
- Greater powers for Ministers to investigate complaints raised by the Cabinet Office’s ‘Mystery Shopper’ scheme.
It also suggested that there was strong support for increasing transparency on payment practices and as a result, it would work with business to develop a robust reporting framework enforced by a legislative underpinning.
- Payment practices and policies relating to relevant “Qualifying Contracts” (a broad definition) and;
- The company’s performance by reference to those practices and policies.
- The standard payment terms of the company and any which are not standard;
- Comment on any disputes relating to the payment of invoices;
- A statement as to whether the Qualifying Company’s payment practices and policies provide for the deduction of a sum from a Qualifying Contract.
 Late payment initiatives
In November 2018, Minister for Implementation Oliver Dowden announces that failure of companies to demonstrate prompt payment to suppliers could result in them being prevented from winning government contracts. A new prompt payment initiative will come into force on 1 September 2019. Ref https://www.gov.uk/government/news/crack-down-on-suppliers-who-dont-pay-on-time
On 23 May 2019, speaking at the Royal Institution of Chartered Surveyors’ annual construction conference, Oliver Dowden reiterated: “Small businesses are the back-bone of the UK’s economy, so it’s vital that we support them – and one of the key elements of that is making sure they are paid on time… That is why I have warned big businesses they must do their bit and I’ve been clear that they could lose out on valuable government contracts if they don’t.”
The initial proposal was to require that 95% of invoices where paid within 60 days. However, when the new rules came into force on 1 September 2019, they had been watered down, requiring that main contractors demonstrate that at least 75% of invoices were paid within 60 days in at least one of the two previous six month reporting periods, and to demonstrate that an action plan is in place to meet the 95% standard in future.
 Related articles on Designing Buildings Wiki
- 37% of SMEs suffer mental health problems due to pay issues.
- Causes of construction disputes.
- Collaborative practices.
- Construction invoice fraud.
- Construction supply chain payment charter.
- Contract claims.
- Fair payment practices.
- Financial hedging.
- Housing Grants, Construction and Regeneration Act.
- Main contractor’s discount.
- Mechanic’s lien.
- The Late Payment of Commercial Debts Regulations 2013.
- Payment notice.
- Payments to nominated sub-contractors.
- Pay less notice.
- Project bank accounts.
- Prompt payment code.
- Provisional relief.
- Scheme for construction contracts.
- Small Business, Enterprise and Employment Bill.
- The causes of late payment in construction.
 External references
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