Payment notices and pay-less notices: a practical guide to the Construction Act

On most commercial projects in England and Wales, whether you get paid, and how much, is decided as much by notices and dates as by the value of the work. Miss a notice by a day and the sum you have to pay, or can claim, can change dramatically. This guide explains how the payment rules in the Construction Act work in practice, for both sides of the payment chain.

Where the rules come from

The rules are in Part II of the Housing Grants, Construction and Regeneration Act 1996 (the "Construction Act"), as amended by the Local Democracy, Economic Development and Construction Act 2009. The amended rules apply to construction contracts entered into on or after 1 October 2011 in England and Wales. Where a contract does not contain compliant payment terms, the relevant parts of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the "Scheme") are implied to fill the gaps.

The Act covers most contracts for "construction operations", including subcontracts. An important exception is a contract with a residential occupier for work on the home they live in, or intend to live in. Some specialist operations are also excluded, so check before relying on the Act.

The payment cycle in five dates

If the work is to last 45 days or more, you are entitled to interim or stage payments (section 109). Every construction contract must set out an adequate mechanism for working out what becomes due and when, and must give a final date for payment (section 110). In practice each payment cycle works like this:

• Application: many contracts ask the payee (the contractor or subcontractor being paid) to submit an application before a set date.
• Due date: the date the payment becomes due. Under the Scheme, if the contract does not say, an interim payment becomes due on the later of 7 days after the end of the relevant period (28 days, unless the contract says otherwise) or the payee making a claim.
• Payment notice: no later than 5 days after the due date (section 110A).
• Pay-less notice: no later than the agreed period before the final date for payment or, if none is agreed, no later than 7 days before it (section 111 and paragraph 10 of the Scheme).
• Final date for payment: the last day on which payment can be made. The parties are free to agree the gap between due date and final date. If they have not, the Scheme sets it at 17 days after the due date.

"Pay when paid" clauses, which make your payment depend on the payer being paid by someone else, are generally ineffective unless the third party is insolvent (section 113).

The payment notice

The contract must require the payer, or a "specified person" such as a contract administrator or quantity surveyor, to give a payment notice no later than 5 days after the payment due date. Alternatively, the contract can make the payee responsible for giving the notice. The notice must state the sum considered to be due at the due date and the basis on which it is calculated. The sum can be zero, but the basis must still be given.

A bare figure with no explanation risks being found invalid. A short covering note that points to an attached valuation, measure or schedule is normally the safest approach.

The payee's notice in default

If the payer fails to give a payment notice on time, section 110B allows the payee to give its own notice at any time afterwards, stating the sum it considers due and how it is calculated. The final date for payment is then pushed back by the same number of days that the notice was late.

Many contracts, including the standard JCT forms, require or allow the payee to submit an application before the payer's notice is due. Where that happens and the application complies with the contract, the Act treats the application itself as the payee's default notice. This is why a properly made application for payment is so important: if the payer then serves nothing, the application can become the sum that must be paid.

The notified sum and the pay-less notice

Section 111 requires the payer to pay the "notified sum" on or before the final date for payment. The notified sum is the amount in the payer's payment notice or, where the payer has not given one, the amount in the payee's valid notice or application.

If the payer intends to pay less than the notified sum, it must give a pay-less notice stating the sum it considers due on the date of the notice and the basis of the calculation. This is where deductions for defects, delay damages or other cross-claims usually belong. The notice must be given no later than the agreed period before the final date for payment, or 7 days before it if nothing is agreed. A late pay-less notice is generally treated as no pay-less notice at all.

What happens if a notice is missed: smash-and-grab adjudication

If the payer serves no valid payment notice and no valid pay-less notice, the payee can usually refer a "notified sum" dispute to adjudication. This is often called a "smash-and-grab" adjudication. The adjudicator does not decide what the work is really worth; the question is whether the notices were served properly and on time. If not, the payer must pay the notified sum, even if it is more than the work is worth.

True value adjudication and the Grove principle

For some years after 2011 there was uncertainty about whether a payer who had missed its notices could start its own adjudication to establish the true value of the work. The position was settled in Grove Developments Ltd v S&T (UK) Ltd [2018] EWHC 123 (TCC) and, on appeal, S&T (UK) Ltd v Grove Developments Ltd [2018] EWCA Civ 2448.

The Court of Appeal confirmed that a payer can bring a true value adjudication, but it must first comply with its immediate obligation to pay the notified sum. In short: pay now, argue later. Once it has paid, the payer can seek a decision on the true value and, if that decision goes its way, recover any overpayment.

Later cases in the Technology and Construction Court have built on this:

• Bexheat Ltd v Essex Services Group Ltd [2022] EWHC 936 (TCC): the payer could not rely on an earlier true value adjudication decision to avoid paying a later notified sum. It should have raised the point in a pay-less notice.
• Lidl Great Britain Ltd v Closed Circuit Cooling Ltd [2023] EWHC 3051 (TCC): the Grove principle is not a blanket ban on every adjudication while a notified sum is unpaid. It covers matters that could have been included in a pay-less notice for that payment, such as valuation, defects or delay that had already arisen. Claims that could not have been included in that pay-less notice may fall outside it.

The practical message for payers is that a missed notice normally means paying first. For payees, a valid application and careful diary management are worth a great deal.

The right to suspend performance

If the notified sum is not paid in full by the final date for payment, section 112 gives the payee the right to suspend any or all of its obligations under the contract. It must first give at least seven days' notice of its intention to suspend, stating the ground or grounds. The right ends when payment is made in full.

Where the right is properly exercised, the party in default must pay a reasonable amount for the costs and expenses reasonably incurred as a result. The period of suspension is also disregarded when calculating contractual time limits for completing the affected work. Suspension is a serious step. A notice that is wrong, premature or unclear can leave the payee in breach, so check the dates and the wording carefully first.

Practical tips

• Build a payment calendar for each contract at the start, showing every due date, notice deadline and final date. Check how the contract counts days, including weekends and bank holidays.
• Read the notice clause. Many contracts say how and to whom notices must be sent. A notice emailed to the wrong person, or not in the required form, may not count.
• Always state the basis of calculation. Attach the valuation or a clear breakdown, whichever side you are on.
• Payees: make each application in exactly the form and at exactly the time the contract requires. Label it clearly as an application for payment and keep proof of delivery.
• Payers: do not rely on a payment notice alone if deductions are likely. Diarise the pay-less deadline and make sure the notice explains each deduction.
• Do not let a smash-and-grab drift. Adjudication moves quickly, normally 28 days from referral unless extended, so get advice early.
• Keep good records of variations, instructions and delays. True value arguments are won on evidence.

How Building Contract Clinic can help

I am Malcolm Blackburn AssocRICS, a quantity surveyor with 44 years of experience in valuations, payment, variations and final accounts. I support contractors and subcontractors in England and Wales with payment applications, payment and pay-less notices, valuation disputes and preparation for adjudication. In a fixed-fee £150 initial consultation we can review your contract's payment terms and the notices served, and agree the sensible next steps. Any further work is scoped and priced before you decide whether to proceed.

Important: This guide is general information about practice in England and Wales as at the date shown. It is not legal advice and does not take account of your particular contract or circumstances. Where legal rights, deadlines or court proceedings are involved, take advice from a qualified solicitor. Building Contract Clinic provides quantity surveying, cost and building contract support.