Payment in construction is closely regulated because reliable cash flow is critical to keeping projects and supply chains moving. The Housing Grants, Construction and Regeneration Act 1996, commonly known as the Construction Act, therefore sets minimum requirements for how qualifying construction contracts deal with payment.

The framework can appear straightforward, but its operation depends heavily on dates and notices. Missing a payment notice or pay less notice deadline can affect how much must be paid, even where the parties disagree about the underlying value of the work.

Understanding the process is therefore important whether you are making or receiving payment. In this guide, we explain the Construction Act payment framework, how the payment cycle operates, what happens when contractual terms do not comply with the Act, and the options available when payment is not made.

What the Construction Act is and Why it Matters

The Construction Act was introduced to improve payment practices within the construction industry and support cash flow throughout the supply chain. It establishes minimum payment rights and procedures that qualifying construction contracts must follow, rather than leaving payment entirely to the terms negotiated between the parties.

The legislation applies to a wide range of contracts involving “construction operations”, including many building, civil engineering and professional services agreements. It can therefore apply to employers, main contractors, subcontractors and consultants. However, there are exclusions, including certain activities connected with mining, nuclear processing and power generation, as well as contracts with residential occupiers.

The original framework in the Housing Grants, Construction and Regeneration Act 1996 was significantly amended by the Local Democracy, Economic Development and Construction Act 2009. For contracts entered into from October 2011 in England and Wales, the amended rules strengthened the procedures governing payment notices and the sums that must be paid. They also extended the Construction Act to qualifying contracts that are partly or wholly oral.

For businesses working under construction contracts, this matters because the agreed wording is not necessarily the end of the story. If the payment provisions fail to meet the statutory requirements, provisions from the Scheme for Construction Contracts may apply instead.

Core Principles of the Payment Framework

The Construction Act establishes several basic principles for payment in construction contracts. These are intended to provide greater certainty over when money becomes due and prevent payment being delayed indefinitely as it moves through the supply chain.

For contracts expected to last more than 45 days, parties have a statutory right to payment by instalments, stage payments or other periodic payments. The contract must also provide an adequate mechanism for determining what payments become due and when, as well as establishing a final date by which each payment must be made.

The parties generally have freedom to agree their own Construction Act payment terms, provided they comply with these minimum requirements. Where they do not, the relevant provisions of the Scheme for Construction Contracts can be incorporated into the contract to make the payment mechanism compliant.

The Act also prohibits most “pay when paid” clauses, which make payment to one party conditional on the payer first receiving money from someone further up the contractual chain. There is a limited exception where that third party is insolvent. The 2009 amendments also restricted other conditional payment arrangements linked to obligations or decisions under another contract.

These rules help prevent payment construction arrangements from transferring too much cash-flow risk down the supply chain. However, the protection they provide still depends heavily on following the correct payment process and meeting the relevant deadlines.

The Key Payment Cycle Explained

The Construction Act payment process is built around a sequence of dates and notices. Although the parties have considerable freedom to set their own payment timetable, the contract must comply with the Act. Understanding how each stage relates to the next is essential because an error early in the cycle can affect what must be paid later.

Due Date

The due date is the date on which a payment becomes due under the contract. It provides the starting point for several subsequent deadlines, including the deadline for issuing a payment notice.

The parties can usually agree when the due date will occur. If the contract does not contain a compliant mechanism for determining when payments become due, the relevant Scheme for Construction Contracts payment terms apply instead.

This makes identifying the correct due date particularly important. It is not necessarily the date on which the payer must actually transfer the money.

Final Date for Payment

The final date for payment is the deadline by which the amount due must be paid. It is distinct from the due date, and the contract should provide a clear mechanism for determining it. If the contract does not provide a compliant final date, the Scheme provides a fallback of 17 days from the due date.

Confusing these two dates can have significant consequences because the deadlines for notices are calculated by reference to different points in the payment cycle.

Payment Notices

A payment notice establishes how much the person issuing it considers to be due and explains how that figure has been calculated. Under the Construction Act, the notice must be issued no later than five days after the due date. This five-day period applies even where the amount considered due is zero.

Depending on the contract, payment notices may be issued by the payer, a specified person such as an architect or engineer, or the payee. The amount identified through the notice process becomes the notified sum.

If the payer or specified person should issue the notice but fails to do so, the payee may be able to issue a default payment notice. Where the contract provides for an application for payment and a valid application has already been submitted, that application may itself become the relevant notice.

This is one point where contract administration can have immediate financial consequences. Your commercial team needs to know not only who is responsible for each payment notice, but also the contractual due date and precisely when the five-day period expires. Assuming that somebody else has issued the required notice can leave the payer exposed.

Pay Less Notices

A pay less notice allows the payer to state that it intends to pay less than the notified sum. The notice must specify the amount the payer considers due at the date it is served and explain how that amount has been calculated.

The deadline is determined by the contract. If the contract does not specify the relevant period, the Scheme requires the notice to be served no later than seven days before the final date for payment.

Timing is critical. If you disagree with the valuation but fail to serve a valid pay less notice within the required period, you may still have to pay the notified sum by the final date for payment. The underlying question of the correct valuation can potentially be addressed separately, but missing the notice deadline can determine what must be paid in the meantime.

The “Notified Sum” and Why it Drives Everything

The notified sum is the amount identified as due through the payment notice process. Once established, the payer must pay that sum by the final date for payment unless a valid pay less notice has been served.

Importantly, the notified sum is not necessarily the same as the underlying value of the work. It is the amount that the payment mechanism requires to be paid at that point in the cycle. This distinction is one of the reasons that complying with the notice requirements is so important.

For example, a contractor may submit an application for £100,000 while the employer considers only £75,000 to be due. If the contractor’s application becomes the notified sum and the employer fails to serve a valid pay less notice, the immediate obligation may still be to pay the £100,000. The dispute over the correct valuation does not necessarily remove that payment obligation.

This can have significant cash-flow consequences, particularly where the disputed amount is substantial. It can also lead to adjudication proceedings focused on whether the correct notices were issued rather than the underlying valuation itself.

For both payers and payees, the practical lesson is therefore the same: payment notices are not simply administrative paperwork. Establishing the notified sum correctly, and responding to it within the required timescales, can directly determine how much money must change hands.

What Happens If the Contract Gets it Wrong?

If a construction contract does not contain payment provisions that comply with the Construction Act, the parties are not simply left without a workable payment mechanism. Instead, the relevant provisions of the Scheme for Construction Contracts are incorporated into the contract.

Crucially, this does not always mean that the Scheme replaces the entire contractual payment process. Compliant terms can remain in place, while the Scheme fills gaps or replaces individual provisions that do not meet the Act’s requirements. The result can be a hybrid payment mechanism combining contractual and statutory terms.

This can create difficulties in practice. For example, if a contract contains a compliant final date for payment but fails to provide an adequate mechanism for establishing the due date, the Scheme may supply the due date while the contractual final date continues to apply. The parties must then work out their notice deadlines using this combined mechanism rather than relying solely on the timetable printed in the contract.

Problems can also arise where standard forms such as JCT or NEC contracts have been heavily amended. A change that appears relatively minor may affect how different parts of the payment process interact, particularly where amendments alter dates, notice requirements or responsibility for issuing notices.

Relying on the Scheme can therefore create more uncertainty rather than less. Ideally, the payment terms in construction contracts should be reviewed before work begins so that everyone administering the contract understands the same payment timetable. Where the Scheme does apply, identifying precisely which contractual provisions remain effective and which have been replaced is essential before calculating any payment or notice deadline.

Key Rules Introduced by the 2009 Amendments

The 2009 amendments strengthened the Construction Act payment framework, particularly around notices and enforcement. They were intended to improve clarity and prevent contractual arrangements from undermining the Act’s payment protections.

One important change was the introduction of a clearer notice procedure. If the payer or another specified person fails to issue the required payment notice, the payee can issue a notice in default. Where the contract allows, an application for payment can also fulfil this role where the contractual mechanism allows it.

The amendments also replaced the previous system of withholding notices with pay less notices. This reinforced the principle that the notified sum must be paid unless the payer follows the correct procedure to establish that it intends to pay less.

Another significant change was the removal of the requirement for construction contracts to be in writing before the statutory adjudication provisions applied. The Construction Act can now apply to contracts that are wholly or partly oral, although relying on an oral agreement can make establishing the agreed payment terms considerably more difficult.

The amendments also strengthened the right to suspend performance following non-payment. Together, these changes placed even greater importance on administering the payment process correctly, rather than relying solely on what the parties believe the underlying account should be.

Rights and Remedies for Non-Payment

If the notified sum is not paid by the final date for payment, the Construction Act provides remedies designed to help the unpaid party act quickly. These include the right to suspend performance and the right to refer a dispute to adjudication.

A party that has not received the amount due can suspend some or all of its contractual obligations after giving at least seven days’ notice stating the grounds for suspension. Following the 2009 amendments, the right is not limited to suspending the particular obligation affected by non-payment. The unpaid party can also recover reasonable costs and expenses resulting from exercising its statutory right to suspend.

Adjudication provides another route for resolving payment disputes. Because the Construction Act gives parties to qualifying construction contracts a right to adjudicate at any time, it can provide a relatively rapid decision while the project is still progressing.

One form of payment adjudication is commonly described as a “smash and grab” adjudication. This can arise where a valid payment application or notice establishes the notified sum, but the payer fails to issue the required payment or pay less notice on time. The adjudication may then focus on the payer’s obligation to pay that notified sum, rather than determining the underlying value of the work.

This does not necessarily settle the parties’ final entitlement. However, the immediate payment obligation can still have significant commercial consequences. For businesses managing payment in construction contracts, responding to notices and deadlines as they arise is generally far less disruptive than trying to recover the position after a payment dispute has developed.

Common Pitfalls in Practice

Construction Act payment disputes often arise not because the parties do not understand the work undertaken, but because the contractual payment procedure has not been followed correctly. Small administrative errors can have disproportionate financial consequences.

Common problems include:

• Missing notice deadlines: A payment or pay less notice served late may not have the intended effect, even where there is a genuine disagreement over valuation.
• Using the wrong dates: Confusing the due date with the final date for payment, or calculating a notice deadline from the wrong date, can undermine the payment process.
• Issuing unclear notices: Notices need to identify the sum considered due and explain the basis on which it has been calculated.
• Relying on standard processes rather than the contract: Commercial teams may administer payments using familiar timescales without checking whether the particular contract, including any amendments, requires something different.
• Overlooking the effect of amendments: Bespoke changes to JCT, NEC or other standard forms can alter payment dates and notice requirements or result in provisions of the Scheme applying instead.

Responsibility can also become fragmented between project managers, quantity surveyors and commercial teams. If it is unclear who must issue a notice or monitor a deadline, an otherwise manageable valuation disagreement can quickly become a payment dispute.

The practical risk is therefore not confined to poor drafting. Even well-drafted Construction Act payment terms only provide protection if the people administering the contract understand the mechanism and follow it consistently.

Practical Tips for Getting Payment Provisions Right

The best way to reduce payment disputes is to make the contractual process clear from the outset and ensure that the people administering it understand their responsibilities. A compliant payment mechanism is only effective if it can be followed reliably throughout the project.

Before entering into a construction contract, consider:

• Setting out the payment timetable clearly. Due dates, final dates for payment and notice deadlines should work together and be easy to identify.
• Checking amendments carefully. Changes to standard-form contracts should be reviewed for their effect on the wider payment mechanism, rather than considered in isolation.
• Avoiding unintended reliance on the Scheme. If contractual provisions do not comply with the Construction Act, Scheme provisions may be incorporated and create a more complicated hybrid mechanism.
• Making responsibilities clear. The contract administration team should know who issues each notice, what it must contain and when it must be served.
• Using a payment calendar. Mapping the relevant dates at the start of a project can help quantity surveyors, project managers and commercial teams identify upcoming deadlines rather than calculating them retrospectively when a disagreement arises.

It is also worth reviewing the payment mechanism when a contract is amended or project procedures change. The key question is not simply whether the construction act payment terms appear compliant on paper, but whether they create a payment process that can be administered accurately in practice.

Clear drafting combined with disciplined contract administration can substantially reduce the risk of a valuation disagreement becoming a more serious payment dispute.

Key Takeaways

The Construction Act provides a structured framework for payment in construction, but its protections depend on the payment process being followed correctly. In particular:

• Construction contracts must provide an adequate mechanism for determining when payments become due and establish a final date for payment.
• Payment notices and pay less notices must meet specific requirements and be served within the relevant Construction Act payment timescales.
• The notified sum generally determines what must be paid by the final date for payment, even where there is a dispute about the underlying valuation.
• Where contractual payment provisions do not comply with the Act, the Scheme for Construction Contracts can fill the gaps or replace non-compliant terms, potentially creating a more complex hybrid mechanism.
• Failure to follow the correct process can have immediate consequences, including an obligation to pay the notified sum, suspension of performance or adjudication.

For both paying and receiving parties, effective payment management therefore requires more than agreeing suitable contract terms. Clear drafting, accurate contract administration and close attention to notice deadlines are all essential to reducing payment risk.

If you are unsure whether your payment provisions comply with the Construction Act, or you are dealing with a missed notice, unpaid sum or developing payment dispute, Witan Solicitors can help. Our construction law team can review your contractual position, advise on the options available and help you decide on the most commercially appropriate next step. Contact us on 0300 303 2071 or complete our online enquiry form to discuss how we can help.

Last reviewed: by Qarrar Somji, September 2026