The Construction Act
The Construction Act Changes Can Improve Payments for Specialist Sub-Contractors!
But only if you know how to benefit…
On the 1 October 2011 The Construction Act changed.
The Construction Act changes affect YOU!
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“10 Key Things You Must Know About The New Construction Act”
Changes to the Construction Act 2011 are a major opportunity for Sub-Contractors
But beware – if you sub-let any work at all YOUR subcontracts also need to comply
You need to know about the Construction Act changes so you can benefit from them, and to make sure you don’t get caught out by them.
If you have any questions or problems relating to the changes to the New Construction Act then please use the Ask Streetwise service to get an answer for Free!
What the Commentators are saying
The New Construction Act 2011
The long wait is over. After lengthy consultation and debate, the Statutory Instrument confirming the implementation date of Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (LDEDCA) has now been published.
The LDEDCA makes changes to the adjudication, payment and suspension provisions contained in the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act). Those changes will take effect from 1 October 2011 in England and from 1 November 2011 in Scotland. All construction contracts entered into after 1 October 2011 will need to comply with the new Construction Act.
Wragge & Co July 2011
The main changes brought about by the New Construction Act affect the payment terms. The contract still has to have an adequate mechanism for determining when payments become due and the final date for payment. Within no more than 5 days of the “payment due date” the payer must be required by the contract to give a payment notice which states the sum due at the payment due date and the basis on which that sum is calculated. Alternatively the contract must enable the receiving party (the payee) to give the payment notice. Failure in the contract to provide for a payer payment notice means the relevant provision of the amended Scheme will apply.
Under the “old” 1996 Construction Act there was no sanction if the paying party failed to serve a notice. Now if the payer does not give its payment notice on time, the payee may give a payee notice in default. This has the effect of postponing the final date for payment by the same number of days e.g. The contract provides for a 5 day payment notice; the payer defaults, 2 days later the payee gives a payee notice in default. The final date for payment is extended by 2 days.
There is no provision for a payee notice in default under the amended Scheme.
Where the contract enables or requires a payee notice before the payer notice i.e. an application for payment, and the payee provides such, then it is not necessary for the payee to give another notice if the payer defaults.
Pay Less Notices
Under the New Construction act we now have new terminology for the amount due. It is now the “notified sum”. Paying parties need to be aware that they no longer get a second bite of the cherry if they fail to pay, by making the payee prove the “amount due”. An adjudicator or judge will simply award the notified sum.
If the payer wants to pay less than the notified sum it must give another notice. The “pay less” notice must specify the sum it now considers due at the date of the pay less notice and the basis on which that sum is calculated. This is a different approach to the “withholding notice” under the 1996 Act which must state the amount being withheld rather than the amount due.
The parties remain free to agree the period for the pay less notice. The default position under the Scheme remains 7 days before the final date for payment.
The contract may specify a “specified person” who can give notices on behalf of the payer. The Act also allows the “specified person” to be “determined in accordance with the provisions of the contract”, but it is not clear who does the determining!
If the notified sum is not paid by the final date for payment, the New Construction Act puts the payee in a stronger position than before. It can now suspend performance of any or all of its obligations, not just the work. The contractor can stop insuring the works, postpone applying for a necessary consent or refuse to implement a variation instruction – whatever will have the most impact on the project. Moreover the payee will now be entitled to a “reasonable amount” for its re-mobilisation costs, as well as an extension of time.
It is no longer possible to link payment to an obligation under another contract e.g. pay when certified. This means contractors are looking for innovative ways to hold on to subcontractors’ retention monies.
There are a couple of key changes. The contract (even if oral or only partly in writing) must provide in writing for adjudication otherwise the adjudication provisions of the Scheme will apply. The contract must also provide a “slip rule” and if it does not, all it’s adjudication provisions will fall away and be replaced by the Scheme’s adjudication provisions. So if you have bespoke adjudication provisions make sure you have included a slip rule!
The intention of the new Act is to outlaw “Tolent” clauses which had the unfair impact of making the referring party pay all the costs. It is debatable whether the Act achieves this aim and we may see reliance on Yuanda and new case law in this area in due course.
Agreements in Writing
The restriction in the old 1996 Construction Act that it only applied to contracts in or evidenced in writing has been removed. The payment and adjudication provisions of the new Act will apply to oral or partly written agreements.
This gives a whole new battlefield for adjudicators to play on, deciding whether a contract exists, and if so what it’s implied and express terms are, and all within the same 28 day period!
Cripps Harries Hall LLP
How Payment Provisions Will Change In The New Construction Act
The introduction of the new Local Democracy, Economic Development and Construction Act 2009 (LDEDC) promises to change and simplify payment mechanisms for the construction industry – but what does this mean for you?
The first big change is that there will be no more Withholding Notices, a new notices regime will be introduced and, in some cases, a contractor may have an entitlement to the amount identified in the application.
Also significant for the industry is that it will no longer be necessary for the contract to be in writing for the Act to apply. The payment and notices regime will apply even if there is only a verbal agreement.
What is the position now?
A quick reminder, a payer, for example a developer, has to issue two types of notice. Firstly, a “payment notice”, issued within five days after the date a payment becomes due to the payee, for example a contractor, identifying the amount that will be paid. One of the problems currently is that there is no sanction for failure to issue this notice and this creates uncertainty.
Secondly a “withholding notice”. This must be issued if any payment is to be withheld, with the reasons for withholding, for instance if there has been delay on the project and the developer believes it is the contractor’s fault. If a valid withholding notice is not issued, the developer cannot withhold and payment can be recovered through adjudication or a notice to suspend the works can be issued.
What are the proposed changes?
Once the changes come into force, there will be a new form of payment notice which effectively combines both the payment and withholding notices. You will still need to serve it in the same manner as before, so no later than five days after the specified due date, stating the amount due, the basis on which that amount is calculated and identifying sums not being paid. It will also be possible, to identify in the contract another person to issue the notice, such as the engineer or architect.
The crucial change is that if the developer (to use the same example as above) fails to issue that notice, the contractor (the receiving party) can issue its own payment notice (known as a “notice in default”) identifying what it believes to be due. If the contract provides for applications to be made, it will not be necessary for the contractor to issue a new notice. The contractor will simply become entitled to be paid the sum it asked for in its application.
The potential to be paid the sum you apply for is a very significant change. However, take note, the payer can still avoid that result if he issues what will be known as a “Notice of Intention to Pay Less”. This notice does exactly what you might expect and to be valid it will need to identify any different amount and the basis on which that amount is calculated. This is fairly similar to the current withholding notice and will need to be served not later than seven days (or another period agreed by the parties) before the final date for payment.
The changes will also prohibit clauses that make payment conditional on other contracts, such as “pay when certified” clauses. The current Act only prohibits “pay when paid clauses” and this change is intended to increase the protection for receiving parties.
In addition, the right to suspend work for non payment has been enhanced. It will be possible to suspend all or part of the works on a project, this will allow strategic suspension, for example a contractor, who has not been paid, could refuse to implement a particular change requested by a developer whilst continuing with the rest of the works. Also, importantly, the suspension will result in an extension of time and an entitlement to prolongation and disruption costs.
It seems unlikely the changes will come into force until 2011 at the earliest. When the changes are implemented, parties will need to ensure that their contracts comply with the new provisions. Just as importantly, the parties will need to be aware of the potential for the application to determine the sum to be paid if the correct notices are not issued.
The New Construction Act – How Will It Affect Plant Hire?
The new Construction Act came into force on 1 October 2011, significantly amending the existing Construction Act 1996. It is crucial that all companies involved in the construction industry are aware of these changes.
Application to plant hire contracts
Contracts for the hire of plant alone are unlikely to be covered by the provisions of the Construction Act. However, where the plant owner supplies a driver or operator in addition to plant, in many cases it is likely that this will fall within the definition of “construction operations” set out in the Construction Act. This means that a contract for the supply of plant plus a driver or operator may be classed as a “construction contract” and subject to the new provisions of the Construction Act.
Companies who regularly provide or hire plant with an operator should understand the new provisions which will regulate payment. If payment terms are not agreed and set out in a contract, the provisions of the amended Scheme for Construction Contracts (the “Scheme”) will dictate the payment terms which apply to the hire contract.
It is important to note that the CPA Model Conditions do not include the payment provisions required by the Construction Act, so payment under contracts incorporating the CPA Model Conditions will also be governed by the Scheme, unless appropriate payment terms are agreed between the parties to the hire contract.
Changes to Payment Provisions
The new Act introduces two payment procedures. One of these procedures must be incorporated into every construction contract, and companies can choose which procedure they wish to use. Contracting parties are still free to choose the due date and final date for payment.
The “Payer-Led” Procedure
Under this procedure, the payer (i.e. the hirer) must issue a Payer’s Notice not later than 5 days after the payment due date. The Payer’s Notice must specify the sum the hirer considers to be or have been due at the payment due date and the basis on which that sum is calculated. Then, if the hirer decides that the sum set out in its Payer’s Notice is too high, the hirer can issue a Pay Less Notice prior to the final date for payment specifying the lower sum the hirer intends to pay.
However, if the hirer fails to issue a Payer’s Notice, the sum which becomes due for payment is dictated by the payee (i.e. the plant owner). If the owner has already submitted an application for payment in accordance with the contract (such as an invoice), then provided the application specifies the sum the owner considers to be due and the basis on which that sum is calculated, the sum claimed in the owner’s application will become due.
Alternatively, if no application has been submitted, or an application has been submitted but it does not comply with the contract, the owner is able to issue a Payee’s Default Notice setting out the sum it considers to have been due at the payment due date and the basis on which that sum is calculated. If a Payee’s Default Notice is issued, the final date for payment will then be postponed by the number of days which pass between the date the hirer should have served its Payer’s Notice and the date the owner serves its Payee’s Default Notice.
The “Payee-Led” Procedure
Under this procedure, the owner issues a Payee’s Notice specifying the sum it considers to be due on the payment due date and the basis on which that sum is calculated. The Payee’s Notice must be issued not later than 5 days after the payment due date. The hirer is not required to issue a Payer’s Notice. Instead, the sum set out in the Payee’s Notice becomes due for payment. If the hirer wishes to pay less than the sum specified by the owner, it is critical for the hirer to issue a Pay Less Notice.
Payment Under The Scheme
If your hire contract does not include specific payment terms, the provisions of the amended Scheme will dictate how payment should be made.
Where no payment periods have been agreed, the Scheme splits long term hire contracts into 28 day periods. Payments become due on the later of either:
a) the expiry of 7 days following the expiry of each 28 day period; or
b) the making of a claim by the payee (the owner).
Submitting an invoice is likely to be sufficient for the purposes of ‘making a claim’, so it is important for plant owners to ensure they do this promptly following the expiry of each 28 day period so that payment is not delayed unnecessarily.
As the Scheme operates under the Payer-Led procedure, the hirer is required to issue a Payer’s Notice no later than 5 days after the due date for payment. If the hirer does not issue a Payer’s Notice, then the sum specified in the owner’s invoice/application for payment may become due automatically, provided that the owner’s invoice specified the sum the owner considers to be due and the basis on which that sum was calculated.
Alternatively, if the owner’s invoice/application for payment does not specify the sum the owner considers to be due and the basis on which that sum is calculated, it is likely that the owner will be required to issue a Payee’s Default Notice. It is important to ensure that this is done as quickly as possible to ensure that the final date for payment is not delayed.
The final date for payment under the Scheme is 17 days after the due date. If the hirer wishes to pay less than the sum set out in its Payer’s Notice (or, if no Payer’s Notice was issued, the sum set out in the owner’s Default Notice or the owner’s invoice), the hirer must issue a Pay Less Notice no later than 7 days before the final date for payment.
If you do not want the Scheme to govern payment under your hire contract, you should ensure that it includes appropriate payment terms. It is likely that the most straightforward option would be the Payee-Led procedure. The owner’s invoice would effectively be a Payee’s Notice, provided that it specifies the sum considered to be due and the basis on which that sum is calculated. Under the Payee-Led procedure, the owner’s invoice would be binding on the hirer unless the hirer issued a Pay Less Notice.
- Where plant is provided with an operator, it is likely that the payment provisions set out in the Construction Act will apply to the hire contract.
- If the hire contract does not specify a due date for payment and a final date for payment, and incorporate either the Payer-Led or Payee-Led process, the provisions of the Scheme will dictate how payment should be made.
- Under the Scheme, the onus is on the hirer to issue a Payer’s Notice specifying the sum that is payable. The owner can only specify the sum which is payable if the hirer fails to issue a Payer’s Notice.
- If the Payee-Led procedure is incorporated into the hire contract, the owner is able to specify the sum which is payable and the hirer is only able to challenge this by issuing a Pay Less Notice.
The Government has passed an order confirming that 1st October 2011 will be the date for the long anticipated implementation of the New Construction Act.
The changes to the Construction Act will apply to the majority of construction professional appointments as well as main, sub and other forms of building contract. By the time that the New Construction Act comes into force, current standard forms of construction related agreements will need to be revised to reflect the requirements of the New Construction Act which relate to the way that payment and dispute resolution provisions are dealt with and operated.
Publishers of industry standard building contracts, such as the JCT, as well as those that publish professional appointment contracts such as RIBA, have already been issuing guidance and suggested revisions to their standard contracts in anticipation of the changes to the Construction Act becoming effective, but up until now at least the actual date for implementation of the new Construction Act had not been known.
The JCT; one of the main publishers of building contracts, produced tracked up versions of its contracts which illustrate the changes to existing terms that will take effect after 1st October. Now the whole suite of JCT contracts, along with other forms of industry standard form building contracts and consultant agreements, has been revised and issued in updated formats.
Contracts entered into after 1st October that have not been updated will be non compliant with the new Construction Act.
Hewitsons July 2011
JCT has announced a new edition of JCT Contracts, ‘JCT 2011’, which will cover the new payment legislation and other updates being introduced by the new Construction Act.
The publication date for JCT 2011 will be announced as soon as the operative date for the new Construction Act is made known by Government. Currently, the Department for Business, Innovation and Skills (BIS) is working towards an implementation date of October this year.
- Although Oral agreements can be adjudicated, where the rules differ from The Scheme the rules must be in writing at the time the contract is entered into.
- Obvious errors in an adjudicator’s decision can be corrected i.e. arithmetic errors.
- Restricting the parties’ right to agree who pays the costs of the adjudication until after the notice of adjudication is given.
- Introducing new rules on payment and withholding notices. The ‘payee’ may initiate payment process.
- Including a requirement for the paying party to pay the notified sum.
- Including new rights for a contractor who suspends performance for non-payment
- Once issued, the main areas of change to the New Construction Act are those relating to payment and adjudication and these will be addressed by the creation of a replacement Scheme, which will apply where the parties’ contracts are found to be at odds with the terms of the new Act.The amended Construction Act will amongst other things:
apply to oral, partly oral and written construction contracts rather than currently only applying to written contracts. A compliant adjudication procedure will, however, still need to be included in writing otherwise the procedure under the Scheme will be implied.
where a contractor has not been properly paid and has suspended work as a result, he will be entitled to recover his re-mobilisation costs and obtain an extension of time.
allow contracting parties to agree that the adjudicator can determine how adjudication costs should be allocated.
clarify the effect that contractor insolvency will have on the obligation to make payment by the Employer further to the Melville Dundas v George Wimpey  UKHL 18 case.
make considerable changes to the payment regime and withholding notice provisions currently in existence.
exclude the use of “pay when certified clauses”, which could have significant implications for PFI projects and the payment regimes often used in respect of them, where the contractor only becomes entitled to payment by the project company once it has become entitled to such payment under the project agreement.
The New Construction Act came into force on 1 October 2011
Taking advantage of the provisions of the new Construction Act should be a priority for all Specialist Sub-Contractors.
1 Get Paid What’s In Your Application With Default Payment Notices!
Just when we thought we had got the hang of things, the payment provisions introduced by changes to the Construction Act have been ‘simplified’!
You will now be able to serve “default” payment notices if the Contractor/payer fails to serve a payment notice within the required timescale prescribed by the contract.
This should be great for you and problematic for Contractors or other payers. But watch-out because the service of a “default” notice by you causes the final date for payment to change, so if the Contractor doesn’t serve a proper payment notice, and you don’t serve a “default notice” then the payment clock doesn’t start ticking!.
However, it is important to note that a “default” notice can only be served in circumstances where you have not already submitted an application for payment prior to the date for service of the payment notice. Since it is very common for contracts to stipulate that you must submit an application for payment to the Contractor/payer prior to service of the payment notice, it may well be that service of “default” notices is relatively rare in practice.
2. Withholding Notices are Replaced by Pay Less Notices
“Withholding” notices in contracts are now a thing of the past and have been replaced with “pay-less” notices. Crucially, the information required to be given in a “pay-less” notice (i.e. details of the sum proposed to be withheld and the basis on which that sum was calculated) will differ from the information which was to be included in a “withholding notice”.
Contractors/payers need to get this right otherwise you will be able to show that their “pay-less” notices are not compliant with the new Construction Act.
3. Wider Rights to Suspend
You are now entitled to suspend performance of any or all of your obligations under the contract, (not just the work on site) and to recover your reasonable costs and expenses arising out of the suspension.
That could be quite useful if you have finished the work but haven’t submitted test results or as fitted drawings and other information. You can then use this bargaining chip to get paid!
Watch out though, because in an attempt to control this extended freedom to suspend for non-payment, it may become more common to increase the period of notice which you are required to give before suspending your obligations.
4. Watch Out if the Employer Becomes Insolvent!
Bad news for Sub-Contractors is that new rights under the Construction Act allow for the contract to permit the payer to refuse to make payment of sums due if the payee becomes insolvent after the date a “pay-less” notice was due to be served, even if no “pay-less” notice has been issued!
This is likely to be a popular with Contractors as it provides additional protection for them as the payer in insolvency situations. But in order to benefit from this right the Contractor needs to draft it into the contract.
So, our advice is watch out for these provisions and try and negotiate them out. If you can’t do that then you need to know about the finances of whoever is paying the Contractor. If they fail you won’t get paid!
5 Get Your Retention Quicker!
Conditional payment provisions will no longer be permitted. Contractors cannot now rely on “pay when certified” which is where an event in another contract is used to trigger entitlement to payment, meaning that any contract containing a “pay when certified” payment mechanism is no longer effective.
It will no longer be permitted for the release of retention to be triggered by an event occurring pursuant to an upstream contract.A typical example would be a sub-contract, which relies on Practical Completion under a main contract to trigger release of the first moiety of retention.
6. Amending Contracts
The provisions of the new Construction Act will apply automatically to all new construction contracts formed from 1 October 2011, with the amended provisions of the Scheme “filling the gaps” in contracts which do not comply with the new Act.
If you sub-let work you will need to amend your bespoke sub-contracts to expressly reflect the provisions of the new Act. Payment provisions in particular will require substantial amendment. Contracts can be amended either by issuing completely new updated versions of contracts or by creating schedules of amendments to be incorporated into standard contracts.
If you haven’t got your own terms and conditions of sub-contract then please contact us for details of how we can provide this for you very economically.
7. Changes to Adjudication
The new Construction Act is intended to outlaw what have become known as “Tolent clauses”. In other words provisions which require the referring party to pay the responding party’s legal costs, irrespective of the outcome!
There has been some debate about whether the wording of new section 108A does effectively prohibit the use of Tolent clauses. However, it was quite clear that Parliament intended to outlaw Tolent clauses when it created the new Act and on that basis, the courts should be quick to deal with this when the chance arises!
They have already shown some appetite for this recently – the decision in WW Gear v Yuanda stated that certain types of Tolent clause would be struck out based on the HGCRA as it stood prior to the changes.
But, our advice is; you don’t want to leave anything to chance so it is preferable to check the adjudication provisions prior to entering into the contract.
The new look Act also introduces the “slip rule”, which allows adjudicators to correct clerical or typographical errors in their decisions. The slip rule will be included in the updated Scheme for Construction Contracts and therefore no amendment will be necessary for contracts where adjudication is governed by the Scheme.
8. Changes to Standard Form Contracts
The new Construction Act will necessitate amendments to all standard form contracts. The JCT has already published revised versions. The NEC will be publishing amendments to its existing contracts on its website.
If you are asked to use these contracts you will need to review and familiarize yourself with these changes.
9. No retrospective Application
Only contracts entered into from 1 October 2011 will be subject to the new Construction Act. If you are still negotiating the terms of prospective contracts you need to keep the provisions of the Act in mind.
10. What You Need To Do Next
The payment provisions of the new Construction Act represent a substantial departure from the current regime.
It is crucial to ensure that all employees involved in the payment process are up to speed on the changes and how these will impact on your business.
You may need to implement new company procedures so you can be confident that everyone in your organisation will be maximizing the benefit of the Act.
How We Can Help?
Contract Reviews: for a fixed fee we will review the terms of any contract, you are offered and/or your own sub-contracts to identify the provisions which will require altering and make the necessary amendments to ensure compliance with the new Act.
Bespoke In-House Training: for a fixed fee our expert Consultants will provide practical advice and guidance on the provisions of the new Construction Act and what it means for your business, at your own location and focusing on your own specific conditions and procedure.
If you have any questions or problems relating to contracts or subcontracts then please use the Ask Streetwise service to get an answer for Free!
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