Avoid creating undue financial pressure on construction and engineering contractors through aggressive amendment of standard form payment provisions

I recently published an overview perspective on strategies that purchasers of construction and engineering services may adopt to help mitigate their exposure to main contractor insolvency risk.  In this first follow-up perspective, I consider the importance of the employer paying promptly and resisting the temptation to extend payment periods.

The payment periods under the most widely used Scottish design and build standard forms contracts are very similar:

• The Contract Particulars in DB/Scot 2016 will identify an Interim Valuation Date, for the first interim payment.  In subsequent months, the IVD will be the same or nearest Business Day.  Under clauses 4.7.2 and 4.7.3, the due date for payment is 7 days after the relevant IVD or, if later, 7 days after the Employer’s receives the Contractor’s Interim Payment Application.  Under clause 4.7.5, the Employer must issue a Payment Notice not later than 5 days after the relevant due date.  Clause 4.9.5.1 requires issuing of any pay less notice not later than 5 days before the final date for payment.  Finally, under clause 4.9.1, the final date for payment is 14 days after the relevant due date.
• Under nec 4 ECC Option A clause 50.1, the Project Manager must assess amounts due at each assessment date.  Assessment dates are determined by applying the assessment interval stated in Contract Data Part one (and typically fall every 4 weeks or monthly).  Clause 50.2 requires the Contractor to submit an application for payment before each application date and clauses 50.3 and 50.4 deal with the consequences where the Contract complies and does not comply with that requirement respectively.  Under clause 51.1 the Project Manager must certify payments within one week of the assessment date and that is also the due date for payment (under option clause Y2.2).  The Client is to pay certified amounts within 3 weeks of the assessment date, unless Contract Data Part one specifies a different period (clause 51.2).  Similarly, clause Y2.2 provides for the final date for payment being 14 days after the due date, unless the Contract Data states a different period.  Under Clause Y2.3, any pay less notice must be issued not later than 7 days before the final date for payment.

The “unamended” standard form contracts, therefore, provide for 21-day payment terms. 

Amending clause 4.9.1 to increase the period between the due and final dates for payment is one of the amendments to DB/Scot most commonly sought by contract negotiation lawyers.  Similarly, the default payment periods applicable under nec ECC are frequently increased in the completed Contract Data Part one.  The Employer may have a number of genuine commercial and operational reasons for seeking more time to pay (e.g. concerns over the time it may take to draw down funds required to make the payment under any development loan facility or grant agreement).  In many cases, however, and in particular for large public sector organisations, the concerns are entirely more practical in nature – along the lines of being able to process payments through accounts teams on time.

The strategies we recommend to mitigate against main contractor insolvency risk (that will be covered in subsequent perspectives) focus on securing fast flow down of funds to the supply chain.  It is much more difficult to persuade the main contractor to accept clauses implementing those strategies where the Employer wishes to have a longer period to pay than applies under standard form.  Aside from contractual protections, prompt payment by the Employer should serve to reduce the risk of main contractor insolvency happening in the first place.

In contracts based on DB/Scot, we have recently focused on the importance of clause 4.7.4 (i.e. the statement that Interim Payment Applications “shall be accompanied by such further information as may be specified in the Employer’s Requirements”).  We have encouraged clients to consider the information needed to support valuation of IPAs and to ensure the ERs clearly describe that information.  Clause 4.7.3 has also been amended so commencement of the 7-day period leading to the due date is dependent upon the Contractor providing the clause 4.7.4 information, as well as the IPA itself.  If the Contractor provides good quality substantiating information, in the format expected by the Employer, this should ease the Employer’s task of valuing the Works and issuing the Payment Notice on time.

One “old school” amendment we have retained, however, is the change allowing more time for the Employer to issue a pay less notice.  Most clients, when pushed, can manage the payment process within the overall 21 days period.  Under the above standard form provisions, however, the “gap” between issue of the payment notice (DB/Scot) and the PM’s assessment (nec ECC) and the cut-off date by which a pay less notice must be issued is only 9 and 7 days respectively.  This is not a lot of time in which to undertake further examination of the amount of payment applied for by the Contractor and to decide whether the amount initially valued/assessed requires to be reduced through the medium of a pay less notice. 

Extending the deadline for issuing a pay less notice can assist the Employer considerably, although it is not practical or reasonable to leave this to the very last minute, otherwise the Contractor’s ability to action any such notice with its supply chain may be compromised and potentially impact on the overall objective of ensuring prompt flow down of the Employer’s payments to those sub-contractors.