6
Payment and certification
6.1 In any building contract, the key obligation of the client is to ensure the contractor is paid according to the contract, both in terms of the amounts paid and the timing of these payments. To pay the contractor less than it is rightfully due or to pay the right amounts but later than agreed will put financial strain on the contractor (normally through increased borrowing costs), which in extreme cases could result in bankruptcy. On the other hand, paying too much, or too early, will put the client at risk; should the contractor repudiate the contract it will be difficult, and in some cases impossible, to recover the money.
6.2 The RIBA Building Contracts contain detailed provisions concerning the appropriate amounts due to the contractor, how and when these amounts are to be assessed, when they become due and the procedures for payment, all of which are discussed below.
6.3 Both contracts offer a choice between monthly certification based on the value of work completed, a single interim payment following practical completion, or milestone payments. In addition, CBC offers an option of making an advance payment.
6.4 CBC also includes provision for the contractor to make applications for interim payments, and the timing and detail of the procedure to be followed are more complex. As this is an area where CBC and DBC differ from one another in several respects (see Table 6.1), separate sections are used to cover certification and payment for each version.
The contract price
6.5 The ‘Contract Price’ is defined in both contracts as ‘the amount that the Employer/Customer shall pay the Contractor for carrying out and completing the Works in accordance with the Contract’. The Agreement states ‘the Employer/Customer shall pay the Contractor the Contract Price, which will be calculated in accordance with the Contract’.
6.6 The Contract Price is set out in item O of the Contract Details of both contracts. This can be either a fixed amount (a sum is inserted) or an amount calculated in accordance with a schedule of rates. In the latter case, the amount due will be calculated in relation to the quantity of work actually carried out, based on the schedules of rates and prices provided by the contractor at tender. However, even if ‘fixed’, the contract price will be subject to change, as a result of any change to works instructions, claims for additional payment and other mechanisms, as discussed below.
Adjustments to the contract price
6.7 References to adjustments to the contract price can be found in the following clauses:
- (cl 3.4) contractor’s proposed changes that will improve quality and/or reduce the contract price;
- (cl 5.7, CBC; cl 5.5, DBC) costs resulting from instructions regarding tests, etc. being added to the contract price;
- (cl 5.8, CBC; 5.5.3, DBC) adjustment to the contract price following the contract administrator’s acceptance of non-conforming work;
- (cl 5.12, CBC; 5.9, DBC) adjustments due to change to works instructions;
- (cl 9.13) ‘an event attributable to the Employer [Customer] or its agents’ adding costs and expenses to the works, entitling the contractor to apply for an adjustment (additional payment).
6.8 There are no ‘fluctuations’ clauses in either version of the contract, therefore the fact that the price of materials or labour may have changed since the contractor tendered would not be reason for the contract price to change.
Contractor’s proposed changes
6.9 As part of the Collaborative Working section, the contractor is encouraged to propose changes to the works that will improve quality and/or reduce the contract price (cl 3.4). The clause then states that if such proposals are made, the client may seek the advice of the contract administrator and/or accept the proposed changes and have the contract administrator issue the necessary instructions to implement them. The wording of this clause may be of some concern to the contract administrator, as it certainly implies that the matter could be agreed between the contractor and the client before the contract administrator learns of it. It is suggested that the client would be wise to always consult the contract administrator before any proposals are accepted, in case they have adverse affects on other aspects of the design or result in increased costs in other aspects of the project.
6.10 In any event, the accepted proposals will ultimately be covered by an instruction, which ought to confirm the exact details of the change and the reduction to the contract price. Clause 3.5 states that any cost saving is to be divided equally between the parties. The contractor should, therefore, show in its proposal exactly how any savings are calculated. If there is any subsequent negotiation of the savings, the final reduction should be recorded before the instruction is issued.
Costs resulting from instructions regarding tests, etc.
6.11 Under clause 5.7 in CBC or clause 5.5 in DBC, the contract administrator may instruct that work is uncovered or tested (see paras. 5.18–5.20). If the work turns out to be in accordance with the contract, the costs resulting from the instruction are to be added to the contract price. The costs would include not only those of the uncovering and the tests themselves, but also for reinstating the work, making good any damage and disruption to general progress. If these are likely to be significant, the contract administrator could ask the contractor for an assessment of costs before issuing the instruction, in order to fully inform the client regarding the risks and benefits of the instruction prior to proceeding.
Acceptance of non-conforming work
6.12 As noted in paragraph 5.20, the contract administrator has the power to accept work that does not accord with the contract ‘and adjust the Contract Price accordingly’ (cl 5.8, CBC; cl 5.5.3, DBC). Care should be taken when doing this. The contract administrator should obtain both parties’ agreement, and ensure that its proposed adjustment to the contract price is agreed and confirmed in writing. The client may not be happy to accept the work (or may later forget that it agreed to it). The contractor may prefer to correct the work, especially if the proposed reduction in the contract price is significant, and in general it cannot be denied the opportunity to do so (Mul v Hutton Construction Limited).
Mul v Hutton Construction Limited [2014] EWHC 1797 (TCC)
This case concerned what constitutes an ‘appropriate deduction’ when an employer decided to accept non-conforming work. Although decided in relation to a JCT contract (the JCT Intermediate Building Contract 2005), it is nevertheless applicable to the RIBA Building Contracts. The project concerned an extension and refurbishment work to a country house. A practical completion certificate was issued with a long list of defects attached, and during the defects liability period the employer decided to have this work corrected by other contractors. The employer then started court proceedings against the contractor, to claim back the costs of this work.
A key issue was the interpretation of clause 2·30, which provides that the contract administrator can instruct the contractor not to rectify defects and ‘if he does so otherwise instruct, an appropriate deduction shall be made from the Contract Sum in respect of the defects, shrinkages or other faults not made good’. In this case the contractor argued that an ‘appropriate deduction’ was limited to the relevant amount in the contract rates or priced schedule of works. The court disagreed. It decided that ‘appropriate deduction’ under clause 2.30 meant ‘a deduction which is reasonable in all the circumstances’, and could be calculated by any of the following: the contract rates or priced schedule of works; the cost to the contractor of remedying the defect (including the sums to be paid to third party subcontractors engaged by the contractor); the reasonable cost to the employer of engaging another contractor to remedy the defect; or the particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.
However, the judge also pointed out that the employer will still have to satisfy the usual principles that apply to a claim for damages, which include showing that it mitigated its loss. If the employer unreasonably refused to let the contractor rectify defects, then it is likely to find its damages limited to what it would have cost the contractor to put them right.
Change to works instructions
6.13 The process for assessing an adjustment to the contract price as a result of a change to works instruction is covered by clause 5.12 in CBC and clause 5.9 in DBC:
The clause goes on to state that ‘After this period the right to a Revision of Time and additional payment will be lost’. Just below this (cl 5.13.2, CBC and/or in DBC cl 5.10.2, DBC), the contract states that if the contractor fails to submit the calculation within the time period, or the contract administrator and contractor are unable to agree the revision/payment, ‘the Architect/Contract Administrator shall determine the appropriate adjustment’. This requirement is not discretionary, but imperative: the contract administrator must make this determination.
6.14 There are therefore two apparently conflicting statements that apply when the contractor submits its calculation late: under clause 5.12 (CBC) and clause 5.9 (DBC) the contractor loses the right to any additional payment, but under clause 5.13.2 (CBC) and clause 5.10.2 (DBC), the contract administrator is required to assess how much it should be paid.
6.15 As noted in relation to the equivalent ‘time-bar’ clauses relating to revisions of time (see paras, 4.31–4.33), given the clear wording of clause 5.12 in CBC and clause 5.9 in DBC it is suggested that only in exceptional circumstances should the contract administrator decide that the value of the late application is anything other than zero.
Additional payment
6.16 Clause 9.13 (both contracts) is headed ‘Additional Payment’ and states:
It should also be noted that in the case of additional costs due to change to works instructions, an assessment is required within 10 days of receiving the instruction (cl 5.12 CBC, cl 5.9 DBC see para 5.31), or the right to a revision will be lost.
6.17 The ‘additional payment’ clauses are intended to be a means of dealing with what is usually referred to as ‘loss and/or expense’. A clause 9.13 ‘event’ is not defined in the RIBA Building Contracts (unlike JCT contracts, there are no listed ‘relevant matters’); however, it is suggested that this term is wide enough to include any action by the client or its agents (which would include the contract administrator), including the issue of a change to works instruction. There is, therefore, some possible overlap between clause 9.13 and clause 5.12 (CBC) or clause 5.9 (DBC). However, in practice the contractor is likely to apply for all the consequences of a change to works instruction together (as the time limits are the same) and, as long as the contract administrator takes care not to duplicate any award for losses, there should be no difficulty. A similar procedure is followed regarding applications to that for revisions of time, and for change to works instructions, i.e. the contract administrator and contractor endeavour to agree, otherwise the administrator determines the appropriate amount (cl 9.14, see paras. 4.31–4.33 and 6.13–6.15 above). If the parties have agreed rules under optional clause A11, then obviously these should be used for the assessment where appropriate.
Certification and payment – CBC
6.18 As noted above, CBC includes several payment options. The default system is the usual one of payment at monthly intervals, but there is also an optional clause (cl A4) providing for a single payment on practical completion or for milestone payments. There is a further optional clause (A5) providing for advanced payment.
6.19 All procedures for payment in CBC are intended to comply with those set out in the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the Housing Grants Act); for a full explanation of this Act see paragraphs 1.14–1.19.
Advanced payment
6.20 Optional clause A5 provides for the employer to make a payment in advance of the start date. Item X of the Contract Details requires the parties to insert the amount, the date for payment and a schedule of repayment instalments, giving dates and amounts. It also provides an option for requiring an advance payment security. This would normally be in the form of a bond, and clause A5.2 states that the employer is not liable for any advance payment until ‘the Contractor has met the stated requirements for the Advanced Payment bond’. It is suggested that the advanced payment provisions are only used with a security, as making an advanced payment to the contractor is a significant risk for the employer (e.g. the contractor could become insolvent before the monies are expended on the employer’s behalf). Although many contractors will argue that they are required to pay out large amounts in advance to their subcontractors and suppliers, and are therefore out of pocket, it is generally better that they should take this risk. If a significant reduction in price is offered to the employer, the employer should consider the risks carefully before making a decision.
Interim payments – monthly certification
6.21 The dates for both certification and payment are related to ‘Due Dates’ (the term ‘Due Date’ derives from the Housing Grants Act, which requires all contracts to establish due dates for payment). The first due date is stated in the Contract Details (item P) and subsequent due dates are the same day on each subsequent month (cl 7.1). If no first due date is inserted, the default is 30 days after the start date. It should be noted that altering these periods, i.e. including a longer or shorter period before the first due date or increasing or reducing the intervals, would not constitute a breach of the Act, provided there were still regular payment dates.
6.22 The contractor is entitled to submit an application for payment, showing the amount it considers will be due and how it was calculated, but must do so at least ten days before any due date (cl 7.2). The contractor may prefer to do this, rather than simply wait for a certificate, as it gives it an opportunity to put forward what it thinks the correct figure should be, and why. This information may be very helpful to the contract administrator, but it is not binding; there is no contractual obligation on the contract administrator to accept it, or to provide a detailed rebuttal if it does not agree with the figures put forward (see Figure 6.1).
6.23 The contractor’s application is required to show the amount that will be due, not what is due at the time of application. As the contract administrator’s certificate (see next para.) is required to state the value up to the due date (cl 7.3), not at the date of certification, the contractor should likewise use the due date as its cut-off point when making its assessment of predicted value.
Figure 6.1 Interim certificate—CBC
6.24 Clause 7.3 states:
Clause 7.3 then lists what should be covered in the calculation of the amount due. The contract administrator should note that it does not have the power to include or deduct amounts not set out in the clause. In particular, the contract administrator should take care only to include amounts in respect of payments or deductions made by the employer for which it has received written notification, and this should be made clear on the certificate. The certificate should include:
6.25 Note that this should only be work that is in accordance with the contract, and the contract deliberately does not mention materials and goods that are stored on or off site but not yet incorporated in the works, nor does it mention prefabricated off-site items, therefore neither of these should be included in the certificate. This is an important difference to many other standard contracts, which typically require that at least on-site materials etc. are included in the payment certificate. 6.26 The RIBA Building Contracts, unlike some others, do not include ‘property vesting’ clauses, which provide that such materials and goods will become the property of the client once certified, even if, for example, the contractor has not yet paid its suppliers. Once materials have been fixed to the construction, they will become the property of the client, and cannot be removed by the contractor or a subcontractor. The employer could be at risk, however, where materials have not yet been built in, even where the materials have been certified and paid for. The contractor might not actually own the materials paid for because of a retention of title clause in the contract for the sale of the materials. Under the Sale of Goods Act 1979, sections 16 to 19, property in goods normally passes when the purchaser has possession of them, but a retention of title clause will be effective between a supplier and a contractor even where the contractor has been paid for the goods, provided they have not yet been built in. 6.27 Without property vesting clauses there is, therefore, a danger that unpaid suppliers may return and remove unfixed goods, despite the fact that the client has paid the contractor for them. As there is no requirement in the RIBA Building Contracts to include the value of any of these in interim certificates, normally it would be inadvisable to do so. 6.28 The contract administrator should only certify after having carried out an inspection to a reasonably diligent standard, and should not include any work that appears not to have been properly executed, whether or not it is about to be remedied, and even if the retention is adequate to cover any anticipated remedial work; retention is to cover latent (i.e. hidden) defects, not patent defects (those that are apparent, see Townsend v Stone Toms and Sutcliffe v Chippendale & Edmondson). Contract administrators should also note the case of Dhamija v Sunningdale Joineries Ltd, which stated that a quantity surveyor is not responsible for determining the quality of work executed. 6.29 Where work that has been included in a payment certificate subsequently proves to be defective, the value can be omitted from the next certificate. Under clause 7.3 the contract administrator has the power to issue a ‘negative’ certificate, although it is arguable whether this would result in an obligation on the contractor to make a repayment. This is because, unlike the final payment provisions (cl 7.15), clause 7.7 does not expressly refer to repayments. This clause derives from the Local Democracy, Economic Development and Construction Act 2009, and on balance it seems unlikely that the contract will be interpreted to allow for negative payments. If such a situation arises, it may be sensible for the employer to seek legal advice, particularly if the amount is significant. Dhamija v Sunningdale Joineries Ltd, Lewandowski Willcox Ltd, McBains Cooper Consulting Ltd [2010] EWHC 2396 (TCC)
An action was brought against the building contractor, the architect and the quantity surveyor (QS) (McBains) for defects in the design and construction of a home. There had been no written or oral contract with the QS, so the terms of its engagement would be those that would be implied. It was held that a QS’s contract of retainer would include an implied term that the QS acts with the reasonable skill and care of a QS of ordinary competence and experience when valuing the works properly executed for the purposes of interim certificates, but that the QS would not owe an implied duty to exclude the value of defective works from valuations, however obvious the defects. This was the exclusive responsibility of the architect appointed under the contract. Further, the QS owed no implied duty to report the existence of defects to the architect. 6.30 Clause 7.3 also requires the contract administrator to certify ‘any additional payments due’. This would cover amounts due to the contractor that are not related to the value of the works, for example the costs and expenses referred to in clause 9.13 (see para. 6.16). 6.31 The contract administrator must deduct ‘the total payment already certified’ (cl 7.3.1). As this deduction is made before retention is deducted, it should be the total gross value of work identified on the previous payment certificate, and before any other deductions are made. 6.32 The Explanation of Terms defines ‘Retention’ as ‘a percentage of the amount included in a Payment Certificate that is deducted from a payment in accordance with clause 7’. Under clause 7.4 the retention is set at 5 per cent up until practical completion, and 2.5 per cent during the defects fixing period. The wording does not make it clear exactly what the percentage is deducted from, but its position in the sequence in clause 7.3 suggests it is from the value of work properly carried out, before the other deductions are made (this would tie in with normal practice, e.g. as under JCT contracts). There is no opportunity to specify a different rate to 5 per cent; if a different rate is preferred then the contract would need to be amended. 6.33 If optional clause A5 has been selected, which allows for the employer to make a payment in advance (see para. 6.20), the parties will have set out a schedule of repayment instalments in item X of the Contract Details. Although clause A5.1 states that the employer should deduct the repayments from payment certificates, clause 7.3.3 requires that the deduction is included within the certificate. The contract administrator should take care when setting out the calculations to ensure that the contractor is not unintentionally repaid these deductions at a later stage. 6.34 Clause 7.3.4 requires the contract administrator to deduct ‘any other payments notified to the Architect/Contract Administrator by the Employer’. This might include payments made to the contractor as a result of a payment notice, in situations where the contract administrator has failed to issue a payment certificate (see para. 6.79). 6.35 However, there should not be any other payments to the contractor of which the contract administrator would be unaware unless ‘notified’. Sometimes, on smaller projects, the employer may ask the contractor to, for example, purchase items of equipment not included in the contract documents. This type of direct arrangement should be avoided; all items should be handled through the contract administrator by means of a change to works instruction, as otherwise there are issues as to whether this forms part of the works and is therefore covered by such matters as liability for defects and insurance. However, should such situations inadvertently arise, the clause would enable the contract administrator to deal with them under the main contract, if the parties and the contract administrator agree that it is appropriate. 6.36 There are three key areas of deduction that might be intended in clause 7.3.5:
6.37 In the case of the first deduction, the contract does not state how the costs are to be recovered, but it would be reasonable for the employer to deduct them from payments due. For the other two, however, the contract specifically states that they are to be deductions made by the employer. 6.38 Although there does not appear to be any reason why the deductions cannot be made on the face of the payment certificate, in practice it is more usual, and more sensible, for the employer to make a deduction by means of a pay less notice (see para. 6.51). Whether to make the deduction is entirely a decision for the employer, so if it is made on the certificate, the contract administrator must consult with the employer and ensure that there is a written record of the employer’s decision. Alternatively, for clarity the contract administrator could note on the certificate what employer deductions have been made from earlier certified amounts; however, this would simply be a record for information, and would not affect the calculation of the total certified amount.
The total value of work carried out
Any additional payments due
The total payment already certified
Any applicable retention
Any applicable advanced payment repayment sum
Any other payments notified to the contract administrator
Any deductions required in accordance with the contract
Interim payments – payment on practical completion
6.39 Optional clause A4.1 states:
6.40 Although the clause does not specifically state this, it is clear from the guidance notes that this is intended to replace monthly certification with a single payment at practical completion. As such, it should only be selected when the contract period is very short, and no longer than 45 days (as otherwise the contract must comply with the Housing Grants Act). Unlike in DBC, there is no reference to issuing a certificate to cover this payment, but it is suggested that it would be essential that the contract administrator issues a payment certificate in accordance with clauses 7.3 and 7.4, as discussed above. This payment certificate would, therefore, show the adjusted contract price, with any applicable deductions as listed in clause 7.3, and with 2.5 per cent retention.
Interim payments – milestone payments
6.41 As an alternative to the monthly due dates, the contract allows for payment by milestones (cl A4). If adopted, the parties must define the milestones in detail (item W2 in the Contract Details). The milestones will normally be identifiable points in the completion of the project, for example completion of: (1) foundations and groundworks, (2) ground floor slab and walls up to the damp proof course, (3) external walls, (4) roof, etc.
6.42 Linking payment to milestones introduces an incentive to the contractor to maintain steady progress throughout the project (whereas the threat of liquidated damages applies only to achieving practical completion).
6.43 The exact work that must have been correctly completed for a milestone to be achieved should be set out in detail in item W2. In addition, the parties are required to set out the payment that will be made on achievement of the milestone, either as a value or as a percentage of the contract price. It is suggested that the latter will be more workable, because if the contract price is adjusted due to, for example, variations in the specification, there is no means of adjusting the milestone values, whereas under the percentage system the amount will adjust automatically.
6.44 The corresponding optional clauses for item W2 state:
- A4.2 If item W2 is selected in the Contract Details then item P and clauses 7.1, 7.2 and 7.3 on how Due Dates are calculated shall not apply.
- A4.3 If item W2 is selected, the Parties will set out the anticipated dates for completion for all milestones and these shall be the Due Dates for payment.
- A4.4 When the Architect/Contract Administrator is satisfied that a milestone has been achieved it shall include the payment for that milestone in the Payment Certificate issued for the relevant Due Date.
6.45 Clause A4.3 will need to be applied with care. First, there is no place in item W2 of the Contract Details to insert the ‘anticipated dates’, therefore these would need to be set out in a separate document. The tense of the clause suggests that this is an obligation on the parties after the contract is formed, but (as with dates for normal monthly certification) it would be more sensible to do it before, in order to avoid any misunderstandings.
6.46 Second, if certification is dependent on actual achievement of the milestones (cl A4.4), what is the purpose of agreeing the anticipated dates? In other words, are the certification points: (a) when milestones are actually achieved, or (b) when it is anticipated they will be achieved. This question was raised with the RIBA, which confirmed that (b) is the correct position. If the agreed due date arrives and its associated milestone has not been reached, the payment certificate is nevertheless issued, but showing a value of zero for that milestone. Presumably the contractor will have to wait until the agreed due date for the next milestone to arrive before being paid for the previous one (the RIBA explained that it was necessary to structure the provisions in this way in order for the contract to comply with the Housing Grants Act).
6.47 The milestone payment certificates will therefore state the agreed value or percentage for that stage, once the milestone has been reached. Although the contract does specifically state this, it is suggested that the deductions listed in clauses 7.3.2 to 7.3.5 should also be included, and that retention as set out in clause 7.4 should be applied (clause A4.2 states only that ‘clauses 7.1, 7.2 and 7.3 on how Due Dates are calculated shall not apply’ [emphasis added]; all other aspects of those clauses still apply, as does clause 7.4).
Payment of interim payments
6.48 The employer is required to pay the amount shown on a payment certificate ‘on the Final Date for Payment of interim payments’, which is 14 days after the due date or any other number of days entered in item P of the Contract Details (cl 7.7). These time periods are quite short: if the contract administrator takes the full five days to issue the certificate, then this will leave the employer with only nine days to pay, which could of course include four weekend days. Clearly, the contract administrator should issue payment certificates promptly, or the parties could consider entering a longer period into the Contract Details.
Contractor’s invoice
6.49 Clause 7.8 requires the contractor to issue the employer with a valid VAT invoice, and the employer to pay the invoice promptly. The rules relating to VAT are beyond the scope of this book; if advice is needed the parties should contact HM Revenue and Customs or an appropriate expert. VAT is a matter of law, and any mistakes or attempt to avoid it would be a breach of the law; in this case it would also a breach of contract, allowing the parties to claim against each other for losses due to an infringement.
6.50 It is suggested that the requirement to pay the VAT invoice ‘promptly’ does not override the time limits as set out in clause 7.7; the employer should pay the amount shown on the payment certificate within 14 days of the due date, regardless of when the VAT invoice is issued. If it is issued shortly after the certificate, the VAT invoice could be paid at the same time, if it arrives later, the VAT will be paid separately.
Pay less notices
6.51 If the employer wishes to pay less than the certified amount, it must issue a ‘Pay Less Notice’ not later than five days before the final date for payment (cl 7.9.1), and may then pay the amount stated in the notice (cl 7.9.3). Alternatively, the employer may authorise another person to issue the notice on its behalf (cl 7.10). The pay less notice should state the amount the employer considers due, and how it was calculated (cl 7.9.2). The employer has the right to pay less than the certified amount, but only for reasons that can be justified under the terms of the contract. It is suggested that these could include that some of the work covered by the certificate was not in accordance with the contract, or if there was some error in the calculation of the payment certificate, or for any of the matters which might entitle the employer to a deduction, as noted at paragraph 6.36, namely:
- failure to make good defective work;
- failure to take out insurance;
- liquidated damages.
Payments following practical completion
6.52 Following practical completion, the due dates, and therefore certification, continue, but at two-monthly intervals (cl 7.1). With respect to milestone payments, as clause A4.2 states that ‘clauses 7.1, 7.2 and 7.3 on how Due Dates are calculated shall not apply’ there would be no further certificates until the final payment, unless the parties agree otherwise.
Final contract price and payment
6.53 Most contracts contain provisions for dealing with the final assessment of the contract price. In CBC, clause 7.11.1 requires the contractor to submit its calculation, along with the relevant supporting documentation, to the contract administrator within 90 days of the end of the defects fixing period. In reality, the contractor is likely to submit the material earlier to encourage early certification (see Figure 6.2).
6.54 The contract then requires the contract administrator and the contractor to endeavour to reach agreement on the final amount (cl 7.11.2). If they are unable to reach agreement, or the contractor fails to submit a calculation, the contract administrator should issue a ‘final Payment Certificate’ not later than ‘90 days after the Contractor’s submission period specified in 7.11.1’ (cl 7.11.3). It should be noted that the 90 days runs from the period, not from the contractor’s submission, so strictly speaking this allows 180 days from the end of the defects fixing period. In practice, however, if the contractor submits the application at an early point in the period, the contract administrator will probably issue the certificate before the full 180 days has run.
Figure 6.2 Final certificate – CBC
6.55 The contract then states: ‘The Due Date for final payment shall be the day on which the final Contract Price is agreed under clause 7.11.2 or issued under clause 7.11.3’ (cl 7.12.1; presumably this means ‘or [the day on which the final Payment Certificate is] issued’). If neither of these occurs, the due date is ‘the last day of the 90-day period stated in clause 7.11.3’ (cl 7.12.2). Clause 7.12 therefore sets up three possible due dates: at agreement, on issue of the certificate, or 90 days after the contractor’s submission period.
6.56 Clause 7.13.1 states: ‘No later than 5 days after the Due Date for final payment, the Architect/Contract Administrator shall issue a final Payment Certificate’. This makes sense with respect to the first and third possible due dates (i.e. if the final account is agreed or if no certificate is issued before the end of the period). However, the drafting needs some interpretation as, if followed literally in the case of the second due date, it would result in two final payment certificates; until this is tidied up it is suggested that users assume that clause 7.13.1 does not apply to situations where a payment certificate has already been issued. The employer is required to pay the amount shown on the final payment certificate ‘on the Final Date for Payment’, which is 30 days after the due date or any other number of days entered in item Q of the Contract Details, subject to any pay less notice (cl 7.15).
Certification and payment – DBC
6.57 The terms setting out payment in DBC are much simpler than those in the CBC. As with CBC, DBC offers the options of monthly certification, a single interim payment following practical completion or milestone payments. However, there is no system of setting up due dates to trigger contractor application, certification and payment deadlines, which makes the procedures more straightforward and easier for the customer to comply with.
Interim payments – monthly certification
6.58 The contract administrator is required to issue certificates at ‘the frequency specified in item O of the Contract Details’ (cl 7.1). This is either monthly (the default), or once, following practical completion. It is suggested that ‘monthly’ should be understood as on the same calendar date each month, not four-weekly (as this would reflect the provisions in CBC).
6.59 There is no indication of when the first payment certificate will be issued, and it might be sensible to clarify this in the tender documents. Normal practice is to issue the first certificate one month after the start date. There are, however, no provisions for advance payment in this contract, so in some projects the customer may be prepared to consider an earlier first certificate, for example two weeks after the start date, in order to help cover the contractor’s start-up costs.
6.60 Whether to select one payment following practical completion rather than monthly payments will depend upon the length of the project. For small works planned to take less than around six weeks, a single payment might be the most convenient for both parties.
6.61 Under clause 7.1, interim payment certificates should state:
6.62 Generally, clause 7.1 follows that in CBC (for a discussion of the valuation of work carried out and the listed deductions, see paras. 6.25–6.38). However, there is one significant difference; clause 7.1 refers to the ‘value of work carried out in accordance with the Contract to date’ [emphasis added], but the ‘date’ in question is not established; it could be either the date of the valuation or the date of the payment certificate. It is suggested that the former approach should be used.
6.63 Normal practice is that the contract administrator makes its valuation immediately following an inspection (in order to ensure that only work correctly carried out is included). For practical reasons this will almost certainly be a few days before the certificate date. Provided the gap is kept to a minimum, the value shown on the certificate will be close to the value of the work on the day the certificate is issued. However, for the contract administrator to attempt to guess exactly what work will have been carried out between the inspection/valuation and the certification date and to add that into the value shown could place the customer at risk. As with CBC, it is important that only work correctly carried out is certified, and that unfixed and off-site materials and goods are not included in the valuation (see the discussion of these topics under paras. 6.25–6.27).
6.64 There is one additional minor difference in wording that should be noted: clause 7.1.3 simply states ‘any notified payments’. It has been confirmed by the drafters that no difference in meaning was intended to clause 7.3.4 in CBC, discussed at paragraphs 6.34–6.35.
6.65 It should be noted that this contract does not include a provision allowing the contractor to submit an application for payment prior to the certificate date (which is included at cl 7.2 of CBC). There is nothing, however, to prevent the contractor from making such a submission, and in many cases a contractor will submit some form of valuation at regular intervals. In some cases this may be helpful to the contract administrator. However, the contract administrator should remember that this document is of no contractual effect, and should always ensure that the amount shown on a payment certificate is an independent and accurate assessment – the figures shown on the contractor’s version should never be simply ‘rubber stamped’.
Interim payments – milestone payments
6.66 As with CBC, there is an option for milestone payments (cl A4), which may provide a convenient means of introducing an incentive to progress the project, while also ensuring reasonably regular payment, for projects lasting longer than a few weeks (see paras. 6.41–6.47). Where milestone payments are used, the contract administrator is to issue a payment certificate once a milestone has been reached (cl A4.1; note that DBC does not suffer from the complications of agreeing ‘due dates’ that arise in CBC), which will state the agreed value or percentage for that stage. Although the contract does not specifically state this, it is suggested that the deductions stated in clauses 7.1.2 to 7.1.4 should also be included.
Payment of interim payments
6.67 Once a payment certificate has been issued, the contractor is required to issue the customer with an invoice. It is important to note that the customer’s duty to pay, and conversely the contractor’s right to be paid, depends on the customer having received the contractor’s invoice – otherwise there is no obligation on the customer to make any payment (there is no equivalent to cl 7.7 in CBC, where the employer’s obligation arises on issue of the certificate). The critical date is not the date of the certificate, nor the date of the invoice, but the date of its receipt. The onus is therefore on the contractor to ensure the invoice is issued and delivered promptly (see Figure 6.3).
6.68 Clause 7.3 sets out the procedure for payment as follows:
- 7.3.1 The Contractor shall issue the Customer with an invoice based on the Payment Certificate.
- 7.3.2 The Customer shall pay the invoice within 14 days of receipt.
Figure 6.3
Interim certificate—DBC
6.69 Clause 7.7 states:
- 7.7.1 The Contractor shall issue the Customer with a valid VAT invoice for every Payment Certificate.
- 7.7.2 The Customer shall pay the VAT invoice promptly.
Both clauses 7.3 and 7.7 refer to the contractor’s obligation to issue a payment invoice. These are not presented as alternative clauses, and on enquiry the RIBA has confirmed that it is intentional, and that if the contractor is VAT registered, a VAT invoice should be issued alongside the payment invoice. Nevertheless, it seems unnecessarily complicated, as it would be possible to deal with the matter with one invoice: a clause 7.3 invoice if the contractor is not VAT rated, and a clause 7.7 invoice if it is. It is suggested that the parties consider deleting one of the clauses as appropriate before executing the contract. Issuing two sets of invoices, one without VAT, could cause confusion, and even raise the suspicions of HM Revenue and Customs.
Customer deductions
6.70 Clause 7.6 deals with situations where the customer wishes to pay less than the certified amount. It states:
6.71 This differs from CBC in that the customer does not need to notify the contractor five days in advance of making the deduction; the explanation is given at the time of making the deduction, i.e. when making the payment (it is suggested that ‘the amount that it wishes to deduct’ should more accurately have stated ‘the amount it has deducted’). It should also be noted that the customer, not the contract administrator, must inform the contractor, and that there is no equivalent to CBC clause 7.10, whereby the employer can authorise another person to do this on its behalf.
6.72 The clause refers to two situations: deductions from a payment certificate, and deductions from a contractor’s application for payment. The second is unnecessary, unlike in CBC, as there is no obligation to make a payment following a contractor’s application; as explained above (para. 6.67), the obligation depends on a contractor invoice, which in turn depends on the issue of a payment certificate (which may follow an application). As with CBC, it is suggested that the only deductions that can be made are those allowable under the contract. These could include deductions for work included in the certificate that was not in accordance with the contract, to correct some error in the calculation of the certificate, or for any of the matters that might entitle the customer to a reduction, as noted at paragraph 6.36, namely:
- failure to make good defective work;
- failure to take out insurance;
- liquidated damages.
Payments following practical completion
6.73 DBC does not refer specifically to payments following practical completion but before the final payment, i.e. during the defects fixing period. In the absence of any limiting provision it appears as if payment certificates should continue to be issued at one-monthly intervals (unless milestone payments have been agreed, or a single payment following practical completion). With respect to milestone payments, as with CBC, no further payment certificates would be issued before the final payment, unless the parties agree otherwise.
Final contract price and payment
6.74 In DBC, clause 7.8.1 requires the contractor to submit its calculation, along with the relevant supporting documentation, to the contract administrator within 90 days of the end of the defects fixing period. In reality, the contractor is likely to submit the material earlier to encourage early certification.
6.75 The contract then requires the contract administrator and contractor to endeavour to reach agreement on the final amount (cl 7.8.2). If they are unable to reach agreement, or the contractor fails to submit a calculation, the contract administrator is required to issue a final payment certificate not later than 90 days after the contractor’s submission period (cl 7.8.3; apart from the numbering these clauses are identical to those in CBC).
Figure 6.4
Final certificate—DBC
6.76 Somewhat surprisingly, there appears to be no requirement to issue a final payment certificate if the parties do agree on the final amount (i.e. there is no equivalent to cl 7.13.1 in CBC). It is suggested that the contract administrator ought nevertheless to issue a final payment certificate once the amount is agreed (see Figure 6.4).
Conclusiveness
6.77 Unlike in other contracts, it should be noted that no payment certificates are stated to be conclusive evidence that any matters or duties under the contract have been finally discharged, which means that even after the final payment certificate is issued, it is possible for either party to raise a claim for breach of contract. Having said that, it should be noted that if a matter is raised that could have been raised under the currency of the contract, and there is no good reason why the contractual mechanisms were not used to resolve it at that time, then it is unlikely that the claim would be successful.
Non-payment and non-certification
6.78 The contractor is given various remedies should the above payment systems break down, which are different in the two versions of the contract.
Contractor’s remedy if no certificate issued
6.79 Under CBC, if no payment certificate is issued, and the contractor had made an application for payment under clause 7.2, then this is said to become a ‘Payment Notice’ (cl 7.5). The contractor may need to forward the application to the employer, if it has not already done so.
6.80 The employer must pay this amount on the final date for payment for interim certificates (cl 7.5), subject to any pay less notice. If no application had been made, the contractor may now issue a payment notice, showing the amount it considers due and how it was calculated (cl 7.6.1). In this case, the final date for payment is ‘extended by the same number of days that it took the Contractor to issue the Payment Notice after the 5-day period in clause 7.3 expired’, i.e. after the last date on which the contract administrator ought to have issued the certificate (cl 7.6.3). In either case the employer should notify the contract administrator that payment has been made, so that this can be taken into account in the next certificate. A similar system is set up for the final payment certificate; if the contract administrator fails to issue the certificate, the contractor may submit a final payment notice and the final date for payment is extended (cl 7.13.2 and 7.14).
6.81 Under DBC, which has no earlier right to make an application for interim payment, the equivalent clauses are slightly different. Clauses 7.4 and 7.5 state:
6.82 Although the intention is clear, there is a possible problem with clause 7.4: what is meant by ‘or the Contractor thinks it is due a payment’? As both monthly payments and milestones require a certificate, there could be no reason other than the lack of a certificate that would justify an application. The phrase could be disregarded, except that the contract administrator is obliged to respond to all applications by issuing a payment certificate, even if it disagrees that any certificate is currently due (e.g. because the contractor has applied at the wrong time). It is suggested that the simplest solution in this situation is for the contract administrator to issue a certificate showing a zero amount payable. In addition, the contract administrator should note that there is no obligation to agree with the amount applied for; the contract administrator should always reach its own objective view on what amount should be included.
6.83 If the contractor submits an application under clause 7.4, but the contract administrator does not issue a certificate, the amount applied for does not automatically become payable (unlike in CBC). The contractor’s remedy in this situation would be to take the matter to the selected dispute resolution procedure. DBC also provides a remedy if no final payment certificate is issued: the contractor may make an application for final payment showing the final contract price, the amount it considers due and how it was calculated (cl 7.8.4). In this case the customer is obliged to pay the amount shown on the application within 14 days, subject to any notice that it intends to pay less (cl 7.9).
Contractor’s remedy if payment not made
Right to interest
6.84 In CBC, if the employer fails to pay an amount that is due by the final date for payment, clause 8.2 makes provision for simple interest to accrue on any unpaid amount (there is no equivalent provision in DBC). The rate of interest can be set by the parties (e.g. they could adopt the rate stipulated in many JCT contracts, i.e. five per cent over the base rate of the Bank of England). If no rate is set in item R, the default is the statutory right to interest under the Late Payment of Commercial Debts (Interest) Act 1998. The interest accrues from the final date for payment until the amount is paid. The provisions apply to the final payment certificate as well as to interim certificates.
6.85 If the employer makes a valid deduction following a pay less notice, it is suggested that interest would not be due on this amount. The clause does not refer to the amount stated on the certificate but to ‘any unpaid amount’, which would take into account valid deductions.
Right of suspension
6.86 In both versions of the contract the contractor is given a ‘right to suspend’ under clause 8.1. If the client fails to pay the contractor by the required time limit, the contractor has a right to suspend performance of some or all of its obligations under the contract, which would not only include the carrying out of the work, but could also, for example, extend to any insurance obligations. In addition, under the CBC only, the contractor may request that the employer provides evidence of its ability to pay the contract price, and may suspend its obligations under clause 8 if the evidence is not provided (cl A6).
6.87 This non-payment is stated to be of ‘an amount that is due’ therefore the contractor may not suspend work if a valid pay less notice has been issued by the employer (CBC) or a notice to pay a lesser amount issued by the customer (DBC). The contractor must have given the client a written seven-day notice of its intention to suspend work and stated the grounds for the suspension, and the default must have continued for a further seven days. The contractor must resume work when the payment is made.
6.88 Under these circumstances the suspension would not give the client the right to terminate the contractor’s employment. The suspension will, however, give the contractor the right to a revision of time, and to reasonable expenses and costs arising out of the suspension (cl 8.3). This right is required by the Housing Grants Act, and therefore could be deleted in DBC if the client would prefer.
Termination
6.89 The contractor also has the right to terminate its employment if the client does not pay amounts due (cl 12.3, CBC; cl 12.5, DBC). The contractor must have given a 14-day notice of this intention, which must specify the default and refer to the specific clause. It should be noted that this right is not limited to non-payment of significant amounts, or to persistent non-payment, and so could be exercised for even minor non-payment, provided the notice is given. It would be unlikely, in practice, that the contractor would terminate for minor shortfalls, but it would be unwise for the client to take this risk.