In this new feature for JCT News, we break down some of the key sections and clauses within the JCT contract to explain and provide more information about how these elements function in practice. The issue looks in more detail at the process of interim payments.
Generally, the provisions relating to valuation, certificates, notices and payment (interim and final) are the same or similar for many of the JCT main and sub-contracts. In this article, we refer to the JCT Standard Building Contract, and the provisions of the With Quantities version (SBC/Q).
SBC includes detailed provisions for payment as the works progress. The payment cycle is based on the issue of interim certificates on a monthly basis.
Due dates for interim payments
SBC starts by defining the due dates for interim payments, which under the Construction Act must be fixed. For the period up to the final payment, the monthly due dates for interim payments are in each case the date 7 days after the relevant ‘Interim Valuation Date’ specified in the contract particulars.
The Interim Valuation Date system
The concept of interim valuation dates (IVD) was introduced in the 2016 edition of JCT contracts, in support of the government’s Construction Supply Chain Payment Charter. The IVD system is designed to streamline the payment process across the contractual chain, to allow for interim payments at main contract level and downstream to be assessed on the same date each month and paid shortly thereafter.
In SBC, the system works by requiring the parties to specify the first IVD in the contract particulars. JCT recommends the first IVD is not more than one month after the date of possession. Should the parties fail to agree on a date, a default date is provided, which is one month after the date of possession. Subsequent IVDs are then the same date in each month, or the nearest ‘Business Day’ in that month. Employers and (in relation to sub-contracts) contractors should take careful note of the fact the IVD is capable of being adjusted because any alteration in the IVD will directly affect the due date and, inter alia, the 5 day period for issue of the interim certificate, the last date for giving a pay less notice and the final payment date.
The payments can be streamlined between tiers by using JCT sub-contracts and sub-subcontracts which provide for the IVD under the main contract to apply to the payment process under the sub-contract/sub-subcontract.
It is to be noted that at each tier the payment provisions are designed to have payment periods not exceeding 30 days, so as to conform with fair payment principles. This is demonstrated in the following diagram.
Interim certificates and valuations
Under SBC, the payment related notice provisions are ‘payer led’. The architect/contract administrator is required to issue an interim certificate within 5 days of the due date, this being the maximum period allowed under the Construction Act (section 110A of the Act and clause 4.9 of SBC).
The quantity surveyor is responsible for preparing interim valuations whenever the architect/contract administrator considers them necessary for ascertaining the sum due in an interim certificate (clause 4.9).
Interim payments – contractor’s payment applications, payment notices and pay less notices etc.
Under SBC, in relation to any interim payment, the contractor may (not later than the interim valuation date) make an application to the quantity surveyor stating the sum that the contractor considers will be due at the due date and the basis on which that sum has been calculated (clause 4.10.1).
Clause 4.10.2 then sets out the default mechanism provided by section 110B of the Construction Act and deals with the role of contractor’s payment applications where there is no interim certificate. Under section 110B of the Construction Act, where a payer is required to give a compliant payment notice but fails to do so, the payee may serve a ‘payee payment notice’. This must state the sum the payee considers to be due at the payment due date and the basis on which that sum is calculated. Importantly, the effect of sections 110B(2) and 110B(4) of the Act is that if the payer fails to give a valid payment notice (as required) and the payee has already made an application for payment as the contract permits or requires, then that payment application will be deemed to be the ‘payee payment notice’ and the payee will not be required to give another notice. The amount specified in the payment application will therefore become due.
Reflecting the provisions of section 110B of the Act, clause 4.10.2 provides that if an interim certificate is not issued in accordance with clause 4.10.1:
- where the contractor has made a payment application in accordance with clause 4.10.1, that application becomes a payment notice
- where the contractor has not made a payment application, it may at any time after the last date for issue of the interim certificate give a payment notice to the quantity surveyor stating the sum considered to be due and the basis on which that sum has been calculated; and under clause 4.11.4 (section 110B(3) of the Act) the final date for payment will be postponed by the number of days after the last date for issue of the interim certificate that the payment notice is given.
The contract states that the final date for payment of each interim payment is 14 days from its due date.
If the employer intends to pay less than the sum stated as due in an interim certificate or payment notice, the employer must not later than 5 days before the final date for payment, notify the contractor, in a ‘pay less notice’, of the sum the employer considers is due and the basis on which it has been calculated. The time scale for issuing the pay less notice is short and the employer will need to act promptly if it believes it should pay less than the amount stated in the certificate or payment notice.
If there is no pay less notice within the stated time period, the employer must pay the sum stated as due in the interim certificate or payment notice by the final date for payment. Failure to do so would constitute a breach of contract, and there will be a number of remedies available to the contractor.
The contractor will be entitled to interest in the event of the employer’s failure to pay the whole or part of the sum due as an interim payment (clause 4.11.6). Interest is payable at 5% above the official bank rate of the Bank of England current at the date that a payment due under the contract becomes overdue.
If the employer fails to pay a sum payable to the contractor by the final date for payment and the failure continues for 7 days after the contractor has given notice to the employer, with a copy to the architect/contract administrator, of its intention to suspend the performance of its obligations (due to non-payment) and the grounds for the proposed suspension, the contractor may suspend performance of all or any of its obligations until payment is made in full. This right does not affect any other rights the contractor may have, such as the right to terminate its employment. The contractor has the right to claim costs and expenses reasonably incurred as a result of the suspension (clause 4.13.2). In practice (and as an alternative), consideration may be given to starting adjudication proceedings, as suspension causes considerable disruption to the works.
The information in this article is extracted from JCT Contracts Discovery education and learning module. The process of payment is also one element covered in the range of JCT Training courses and resources. Learn more here: https://corporate.jctltd.co.uk/initiatives/education-students/