Last edited 23 Mar 2018

Right to payment

Contents

[edit] Introduction

The contractor’s right to payment is dependent upon the type of contract, its wording, and the method of determining the amount as compensation for the work that has been performed. While the parties can, as long as they remain legal, agree to any arrangements that they see fit, there are a number of standard types of agreement that determine the right to payment:

Contractual agreements will typically set out the circumstances in which payments should be made, additional amounts that might be payable, and deductions that might be made.

In addition, the Scheme for Construction Contracts either supplements the provisions of a contract where it has deficiencies relative to the requirements of the Housing Grants, Construction and Regeneration Act, or replaces the contract where it is non-compliant.

[edit] Types of agreement

[edit] Quantum meruit

Quantum meruit means ‘the amount deserved’ or ‘what the job is worth’, and refers to a claim for a reasonable sum which is not determined by a contract. A claim may arise in circumstances, including:

  • Where there is a quasi-contract (e.g. where some contractual terms have been agreed but price has not).
  • Where no price has been fixed.
  • Where there is work done that falls outside the contract.
  • Where there is work done under a void or unenforceable contract.

For more information, see Quantum meruit.

[edit] Lump sum contract

Under a lump sum contract, a single ‘lump sumprice for all the works is agreed before the works begin. The contractor agrees to carry out the works for a 'fixed' amount and accepts the risk that the actual works may cost more than this. However, where additional work is performed outside that originally agreed, the contractor may be entitled to additional compensation.

For more information, see Lump sum contract.

[edit] Cost reimbursable contract

A cost reimbursable contract (sometimes called a cost plus contract), is one in which the contractor is reimbursed the actual costs they incur in carrying out the works, plus an additional fee.

A cost reimbursable contract might be used where the nature or scope of the work to be carried out cannot be properly defined at the outset, such as, emergency work (for example, urgent alteration or repair work, or if there has been a building failure or a fire requiring immediate reconstruction or replacement of a building so that the client can continue to operate their business).

For more information, see Cost reimbursable contract.

[edit] Measurement contract

Measurement contracts (sometimes called ‘re-measurement’ or ‘measure and valuecontracts) can be used in situations where the design (or type of works) can be described in reasonable detail, but the amount cannot. For example, excavation works where the quantity of excavation required is difficult to assess until after the works have begun, or refurbishment projects where there are some uncertainties about the works that will be required.

For more information see: Measurement contract

[edit] Guaranteed maximum price.

A guaranteed maximum price (GMP) is a form of agreement in which it is agreed that the contract sum will not exceed a specified maximum. If the actual cost of the works is higher than the guaranteed maximum price, then the contractor must bear the additional cost. If the cost is lower than the guaranteed maximum price, then the contract should set out whether the savings made go to the client, to the contractor or are shared.

For more information, see Guaranteed maximum price.

[edit] Others

For other forms of agreement, such as target cost contracts, see: Procurement route.

[edit] Contract clauses

[edit] Interim payments

Interim certificates provide a mechanism for the client to make payments to the contractor before the works are complete. The Housing Grants, Construction and Regeneration Act, states that a party to a construction contract in excess of 45 days is entitled to interim or stage payments.

Interim payments can be agreed in advance and paid at particular milestones, but they are more commonly regular payments the value of which is based on the value of work that has been completed (this is the actual value of the work completed, taking into account variations, etc.).

For more information see: Interim payments.

[edit] Variations

It is common that a contractor may have to carry out extra work which they consider as entitling them to payment that is additional to the original contract sum. The contractor must be able to prove the following:

  • The contract sum does not include the additional work.
  • There is an express or implied promise to compensate the contractor for the work.
  • The work was instructed by an authorised agent.
  • Any conditions precedent to payment, as imposed by the contract, have been fulfilled.

Variations may give rise to additions or deductions from the contract sum. The valuation of variations may include not just the work which the variation instruction describes, but other expenses that may result from the variation, such as the impact on other aspects of the works. Valuations of variations are often based on the rates and prices provided by the contractor in their tender, provided the work is of a similar nature and carried out in similar conditions.

For more information, see Variations.

[edit] Damages

If the contractor fails to complete the works described in the contract by the completion date that was last agreed (the original completion date may have been adjusted during the course of the works), the client may be entitled to deduct liquidated and ascertained damages from payments otherwise due to the contractor, providing that an appropriate notice has been issued (a pay less notice) setting out the basis of the calculation.

For more information, see Liquidated and ascertained damages.

[edit] Retention

Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client.

The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract. Half of the amount retained is released on certification of practical completion and the remainder is released upon certification of making good defects.

For more information see: Retention

[edit] Loss and expense

Where the progress of the works is materially affected by matters for which the client is responsible, the contractor may be entitled to claim direct loss and expense incurred. Such matters might include:

For more information see: Loss and expense.

[edit] Fluctuations

On larger projects, the contractor may be asked to tender based on current prices (prices at an agreed base date) and then the contract makes provisions for the contractor to be reimbursed for price changes to specified items over the duration of the project (a fluctuating price).

For more information see: Fluctuations.

[edit] Others

For other matters see: Contract clauses.

[edit] Late payment

There are a number of protections against and remedies for late payment, including:

For more information see: Remedies for late payment in the construction industry.

[edit] Find out more

[edit] Related articles on Designing Buildings Wiki