Payment and insurance issues

VAT

The key point is that the contract sum is exclusive of VAT, however, it is important that the rate of VAT and to what parts of the work VAT is applicable are resolved at an early stage. This affects the employer’s cash flow as well as the contractor’s cash flow.

Construction Industry Scheme (CIS)

From the contractor’s perspective it would be advisable to ensure that any adverse effects on cash flow as a result of the employer’s CIS status are known about. The Contract does allow the employer to change their status.

Interim payments - dates and certificates

Clause 4.3 states the requirement on the architect/contract administrator to issue interim certificates.

The regime starts with the first valuation date in the Contract particulars at clause 4.3. The parties are free to decide on the first interim valuation date. If the parties have not amended the Contract the default position is one month after completion on site and thereafter at monthly intervals.

The due date shall be 7 days after the relevant interim valuation date.

Not later than 5 days after each due date the architect/contract administrator shall issue an interim certificate for what is the value of the works.

The final date for payment shall be 14 days from its due date.

Parties need to be aware that there is an obligation that the certificate shall show '... the basis  on which that sum has been calculated, including the amount of each adjustment.'

Clause 4.3  allows the architect or contract administrator to include sums for materials brought to site, but there is no obligation to pay for materials already manufactured and awaiting delivery but that are off site, for example items at the place of fabrication.

Contractor's applications and payment notices

Clause 4.4.1 that the contractor may not later than its interim valuation date make an application stating the sum that the contractor considers due. There are 2 significant points to note. Firstly this serves as a basis for the contract administrator/architect to calculate and know the value of any expenditure. Secondly it serves as a payment notice under clause 4.4.2.1.

Clause 4.4.2.2 provides for the contractor to make such an application after the 5-day period referred to in clause 4.3 or 4.82.

Payments - amount and notices

Clause 4.5 state the obligation to make payment.

Clause 4.5.2 states that the contractor’s payment notice given under clause 4.5.4 is to be paid where no certificate is issued under clause 4.3 or 4.8.

Clause 4.5.5 provides for an employer to pay less subject to a notice which must be given not later than 5 days before the final date for payment. This is referred to as the 'payless notice'.

Clause 4.5.5 provides for the employer to authorise the contract administrator/architect to issue a pay less notice.

Clause 4.5.6 requires the issue of certificates regardless of the amount even if that amount is zero.

Failure to pay amount due

The provisions of clause 4.6 provide for the recovery of simple interest. These provisions state that the payment of interest does not act as a waiver to the entitlement to the full sum. It, in effect, prevents an employer arguing that ‘because he or she is paying interest he or she can be excused for the time being of having to pay the principle sum’. The reason for this is that by paying interest the contract could be construed as denying the contractor its rights to suspension or termination. This is not the case and where the employer has failed to pay the sums due in certificates the contractors rights to suspend or terminate are secure.

Contractor’s rights of suspension

Clause 4.7 provides the contractor with the right to suspend performance of the contract where the employer fails to make payment. The provisions are detailed and must be followed with care.

If the employer fails to make proper payment for 7 days after the contractor has served his or her notice of intention to suspend performance of his or her obligations under this contract, the contractor may suspend performance of any or all of those obligations until payment is made in full.

The notice can be issued 1 day after the final date for payment. The contractor is required to continue with the performance of the contract during the 7-day notice period. Failure to continue with the performance of the contract could put the contractor at risk of arguments that it failed to perform diligently with the works and/or other complaints. It is also the case that the right to suspend terminates once the employer has made payment in full.

On a practical note the contractor would be well advised not to undertake any work on site during the period of suspension as this could be taken to suggest that the contractor has waived his or her suspension and could lead to complications; as the site is still in the contractor’s possession, locking it up securely would ensure there is no ambiguity over the suspension.

Clause 4.7. provides for an entitlement to payment of a ‘reasonable amount in respect of costs and expenses reasonably incurred by him or her as a result of the exercise of the right’ (to suspend). This will allow recovery of costs of removal of hired plant, relocation of labour management time for which the contractor would be well advised to maintain accurate records.

Clause 4.7.3 requires the architect or contract administrator to ascertain (or agree) such costs and include these in the next interim certificate.

Final certificate and final payment

The effect of clause 4.8.1 determines the time period for the supply of documents, invoices, etc. for the computation of the final certificate. While the default period of 3 months may seem considerable for the contract it would be foolish on a practical level to try to shorten the period given that some invoices and subcontractor accounts do take time to materialise. It is prudent for a contractor to assess and know all its costs before submitting the documents and invoices for the computation of the final certificate.

Clause 4.8.2 states that the architect/contract administrator shall not later than 5 days after the due date issue a final certificate.

Clause 4.8.3 states that the final date for payment of the final payment shall be 14 days from its due date.

By contrast to other forms of contract the Minor Works does not state that the final certificate is binding after 28 days of issue as in the IFC form of contract. When using this form, architects and contract administrators should seek to reach written agreement on the final account as it is open to the contractor to potentially start an adjudication or arbitration at some point in time after the certificate issue (within the statutory 6 years).