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Last edited 15 Mar 2019
Right to payment
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:
- Quantum meruit (a claim for a reasonable sum).
- Lump sum contract.
- Other forms of contract such as a guaranteed maximum price, cost reimbursable works, target cost and so on.
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.
- 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.
Under a lump sum contract, a single ‘lump sum’ price 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.
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).
Measurement contracts (sometimes called ‘re-measurement’ or ‘measure and value’ contracts) 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.
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.
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.).
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.
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.
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.
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:
- The client instructing variations in the works.
- Failure by the consultant team to provide information.
- Delay on the part of a nominated sub-contractor.
- Failure by the client to supply materials or goods.
- Delay in giving the contractor possession of the site.
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 other matters see: Contract clauses.
There are a number of protections against and remedies for late payment, including:
- The Late Payment of Commercial Debts (Interest) Act.
- The Late Payment of Commercial Debts Regulations.
- The Housing Grants, Construction and Regeneration Act.
 Related articles on Designing Buildings Wiki
- Campaign for cash retentions reform.
- Cash flow in construction.
- Construction (Retention Deposit Schemes) Bill 2017-19
- Construction contract.
- Contract conditions.
- Contract sum.
- Cooling off period.
- Fair payment practices.
- Loss and expense.
- Payment for extra work.
- Quantum meruit.
- Retention held in trust fund.
- Six steps to combat late payment.
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