In the second part of our series on contract management pitfalls, we look at the risks and opportunities presented by payment mechanisms in construction contracts.

One of the most common causes of construction disputes is the failure to properly administer contractual payment mechanisms. The good news is that with a little preparation and training, not only can this risk be managed (by properly administering the payment mechanism), but social housing providers can use payment mechanisms to enforce their wider contractual rights and exert cost control on their projects.

The number of notices and deadlines involved in administering the interim payment mechanisms contained in construction contracts creates the potential for mistakes, particularly as some deadlines may be set by reference to calendar days rather than working days. Furthermore, since 2014, the courts have emphasised that a failure to comply with payment mechanisms will have severe consequences. In particular, a notice which is issued out of time or does not properly state the sum due and the basis on which it is calculated, will not be valid. The consequence of this is that, should an employer fail to issue a valid Payment Notice or Pay Less Notice, they will be required to pay the sum identified in the contractor (or consultant’s) Default Payee Notice, regardless of whether that sum accurately reflects the value of work delivered.

To manage this risk, employers should ensure that they:

  1. Understand their contractual payment mechanisms;
  2. Have appropriately resourced teams (or external consultants) to manage the interim payment process; and
  3. Issue Payment Notices on time, and in the correct form, every interim payment cycle.

Administering the payment mechanism should not just be treated as a paper exercise, as it can be a valuable project management tool if used appropriately. This is because the interim payment process provides a regular opportunity to audit the value of works or services delivered against the value paid to contractors and consultants, and can provide an early warning tool if contractors are submitting invoices which are unsubstantiated or do not reflect the works delivered.

Equally, depending on the precise wording of your contract, the payment mechanism can be used to enforce contractual rights such as the provision of parent company guarantees, performance bonds and collateral warranties, or deducting liquidated damages for late completion.

We regularly deliver training to social housing providers in relation to the administration of payment mechanisms, contract management risks, and dispute resolution.

For more information

If you have any questions regarding the issues raised in this briefing or would like to find out more about our bespoke client training programme, please contact Andrew Lancaster.