If you want to get paid on time, without deductions, then you need to take a strategic approach during all three key stages of contract inception, contract creation and contract operation.
Plan for It: Contract Inception
Before you agree to enter into a contract with a client, you should check out whether they are ‘good for the money’. If you have any doubts, you are risking your company’s future. No contract can protect you against the insolvency of the client. If in doubt, get a payment guarantee.
Ask your client to sign up to the Prompt Payment Code which includes obligations on the client to:
- make correct payment on time for all work that complies with the contract
- ensure withholding is proportionate, and justified by the contract
- not deliberately delay or unreasonably withhold payment
- not withhold cash retention
- issue any ‘pay less’ notices at the earliest opportunity and no later than 7 days prior to the final date for payment
- make payments electronically unless agreed otherwise
- adopt a transparent, honest, and collaborative approach when resolving differences and disputes.
Although this Code has not been universally approved, a refusal by a client to agree to its terms can be an early warning of possible trouble.
Agree It: Contract Creation
If you are in the UK construction industry, then the Construction Acts 1996 and 2009 require your contract to meet certain minimum requirements. You need to make sure that your contract includes:
- payment by instalments
- a mechanism for determining what those instalments will be: typically this is either stage payments or periodic valuations
- due and final dates for each payment
- notices from either the contractor or the client covering what will be paid (payment and default payment notices)
- notices covering what the client intends to withhold (a pay less notice).
But there are other clauses that you should ensure your contract includes:
- a no ‘set-off clause’ which prevents the client deducting sums from your payments for other projects you may be working on
- a right to issue your own payment notice if the client doesn’t issue a valuation or payment notice
- a right* to payment in full if the client does not issue a pay less notice
- a right* to suspend all or some of your duties for non-payment – the Acts require this to be after you give notice to the client
- a right to cancel or terminate the contract if the client fails repeatedly to pay your invoices
- a right* to interest on late payment at 5% above base rate
- a provision allowing you to retain title (ownership) of goods, materials or plant until you have been paid in full
- a right* to adjudicate disputes – as this can apply pressure to the client.
The rights marked * are mandatory for construction contracts as defined under the Acts, which means that even if your contract does not include those rights, you can rely on them and enforce them.
You should be wary of agreeing a contract that includes:
- conditions precedent – this is any requirement that you MUST comply with in a specific period before you will get paid
- excessive periods between the due and final date for payment (the Prompt Payment Code recommends maximum 45 days, reducing to 30 days in 2018)
- pay when paid clauses (which are not permitted under the Acts)
- pay if paid (which are also not permitted under the Acts).
Use It: Contract Operation
Once your contract has been agreed, you need to make sure the right people in your company know:
- when invoices should be submitted, in what format and to whom
- when those invoices are ‘due’
- the final date for payment of those invoices
- the date by which the client should send you a payment notice (so you can submit your own notice if needed)
- the date by which the client should send you a pay less notice
- all other obstacles you must comply with before being entitled to payment eg notices of delay or variation.
If your invoice is sent incorrectly, covers the wrong periods, includes items not yet agreed, is in the wrong format or does not contain the information that the contract says it should, then the client may ignore it or use those items as an excuse not to pay.
Your client must, irrespective of these errors, either issue its own payment notice or issue a pay less notice saying which items it disagrees with (and why).
Once you have sent a correct invoice to a client,then diarise the dates by which you are expecting their payment notice and/or their pay less notice. The dates will either be set out in your contract or determined by the Scheme for Construction Contracts 1998 (as amended).
Under the Scheme:
- the due date is either 7 days after the valuation period or when you submit your claim/invoice
- the final date is 17 days after the due date
- the payment notice should arrive within 5 days of the due date
- the pay less notice at least 7 days before the final date.
If the client pays late then your remedies will depend on your contract but will include:
- a right to be paid your invoice or the amount on the client’s payment notice IN FULL if the client does not issue a pay less notice in time
- a right to interest on any unpaid sums
- a right to suspend your duties if the client does not pay the amount due by the final date for payment.
Further information can also be found on the Designing Buildings wiki.