What has Changed Since the Amendments to the Construction Act?
The new suite of JCT Contracts 2011 was brought about due to the changes of The Construction Act 1996 as amended by The Local Democracy, Economic Development and Construction Act 2009 (“the Act”). The main changes relate to payment.
This article will focus on the JCT Design and Build Contract 2011 and JCT Standard
Building Sub-Contract 2011.
Notices and Payment Notices
It is a requirement under the JCT Design and Build Contract for the Employer, not later than five days after the due date to give a Payment Notice to the Contractor for payment. Payments become due on the date the Employer receives the Contractor’s Interim Application, and the final date for payment is 14 days later.
The Standard Building Sub-Contract makes it optional for the Sub-Contractor to make a Payment Application. The Contractor is required to serve a Payment Notice not later than five days after the due date for payment, regardless of whether the Sub-Contractor submits a Payment Application or not.
In accordance with the Act, Payment Notices must specify the sum which the payer considers to be due and the basis on which that sum has been calculated.
The amount due to the Contractor if the Employer fails to serve a Payment Notice under the Design and Build Contract becomes the amount claimed in the Interim Application, subject to any Pay Less Notice served by the Employer.
Under the Standard Building Sub-Contract, if the Contractor fails to serve a Payment Notice not later than five days after the due date, the amount specified in the Sub-Contractor’s Payment Application automatically becomes due, subject to any Pay Less Notice served by the Contractor.
However, submitting a Payment Application is optional and it may be that the Sub-Contractor has not made a Payment Application. If this is the case, if the Contractor fails to submit a Payment Notice, the Sub-Contractor is then required to submit a Payment Application, which constitutes the default notice, setting out the sum it considers to be due and the basis on which that sum was calculated. The final date for payment is then postponed by the number of days that pass between the date the Contractor should have served the Payment Notice and the date the Sub-Contractor submits his default Payment Application.
Sub-Contractor’s are strongly advised to submit their payment applications to potentially, avoid the final date being extended inadvertently, if they submit a default payment notice.
Under both the Design and Build Contract and the Standard Building Sub-Contract, the payer can, subject to serving a pay less notice, withhold monies from the payee if they serve a pay less notice no later than five days before the final date for payment. This pay less notice must state the sum which the payer considers to be due to the payee and the basis on which that sum was calculated.
This requirement will be included in all new JCT contracts.
In accordance with the Design and Build Contract and the Standard Building Sub-Contract, the payment notices and pay less notices must still be served even if the balance is zero.
Unlike the Standard Building Sub-Contract, where payment notices and pay less notices must be served by the contractor, the Design and Build Contract allows payment notices and pay less notices to be served by anyone who has been notified to the contractor as being authorised to do so, on the employer’s behalf.
JCT have had to make significant changes to how retention is now dealt with as a result of the changes to the Act. Under the JCT Sub-Contracts the first half of the retention is triggered by practical completion of the Sub-Contract Works. The second half of retention is now triggered for release on the “Retention Release Date” which is specified in the Sub-Contract Particulars. The second half of the retention will be paid to the Sub-Contractor on the next interim payment date, provided there are no defects in the Sub-Contract Works at the Retention Release Date.
The term “Minimum Retention Amount” is now incorporated in the JCT Sub-Contracts which means the amount to be agreed by the parties and specified in the Sub-Contract Particulars. If the total amount of retention that would be deducted is less than the sum stated in the Minimum Retention Amount then no retention can be deducted. If the balance being held falls below the specified Minimum Retention Amount, once the first half of the retention has been paid, the balance of retention must also be released to the Sub-Contractor. The default amount is £250 if an amount is not specified in the Sub-Contract Particulars.
Whilst the JCT has made changes in respect of retention to comply with the changes made to the Act, it’s arguable whether these changes will benefit sub-contractors as contractors are still free to specify a Retention Release Date where they could potentially specify a date so far in the future so as to guarantee that the contractor will not have to release retention to the sub-contractor under the sub-contract until retention has been released under the Main Contract.
To reflect the provisions enshrined in the Act, all JCT 2011 contracts, contain a provision allowing payees to suspend performance of any or all of his obligations under the contract if the payer has not made payment by the final date for payment and the failure continues for seven days after the payee has given notice to the payer of his intention to suspend the performance of his obligations and the grounds on which it is intended to suspend performance.
The payee is entitled to a reasonable amount in respect of costs and expenses reasonably incurred as a result of exercising their right.
To ensure that the provisions dealing with final payment are not linked to the issue of the final certificate under the main contract, JCT have had to revise their Standard Building Sub-Contract. As such, the due date for the final payment is two months after whichever of the following occurs last; (a) the retention release date or (b) the date of issue of the contractor’s statement in respect of the calculation of the final contract sum.