The NEC4 Engineering and Construction Contract (ECC) was published in June 2017. This article looks in more detail at the new payment clauses and how both parties need to understand their rights under the Construction Act to avoid potential pitfalls.
Contractor’s applications for payment
The first standout change is that the contractor now has an obligation to submit an application for payment to the project manager. If the contractor fails to do so it is penalised. Under NEC3 the contractor had the option of submitting a payment application but there was no sanction if he chose not to do so.
This change makes a lot of practical sense. It follows market practice by putting the onus on the contractor (as the receiving party) to set out its position to the client in a timely fashion if it wishes to receive a substantial payment in relation to any assessment period and aligns with payment regimes under other standard forms of contract (e.g. FIDIC Yellow Book, JCT D&B 2016).
- The client (“employer” under NEC3) is happy because the risk is now with the contractor to get its payment applications in on time if it wishes to receive a substantial payment.
- The contractor is content because it establishes the starting point for any assessment of the amount due and is able to rely upon such assessment as a “default payment notice” under the Construction Act if the project manager fails to issue a certificate within the relevant period.
A word of warning though for contractors. The NEC4 only requires the contractor to include the sum it considers due in its application for payment. For a payment application to be considered a “default payment notice” under the Construction Act it needs to set out the basis on which the sum is calculated. It follows that if the contractor merely follows the letter of the NEC4 payment mechanism it may forfeit the advantages of the application later being construed as a default payment notice.
Contractor’s failure to submit an application for payment
The contractor is penalised if it fails to submit its payment application on time. In that case the project manager is obliged to assess the amount due to the contactor as the lesser of:
- the amount assessed by the project manager
- the amount due at the previous assessment date.
Put another way, the best that the contractor could hope for in that payment cycle is to receive nothing because the contractor will get no credit for the work done since the previous assessment date (second bullet point). On the other hand, if the project manager assesses that money is due from the contractor to the client (because, for example, the contractor has become liable for delay damages) then the contractor will be liable to pay the client (first bullet point).
This provision provides a very strong incentive on the contractor to get its payment applications in on time and discourages the contractor from deliberately missing payment applications when it knows that it has a net liability to the client.
A word of warning though for project managers. A project manager may take the view that if it assesses the amount due to the contractor as zero then it doesn’t need to bother providing a payment certificate. That would be a mistake as it would reopen the door for the contractor to serve a default payment notice.
Project manager’s failure to certify payment
The contract does not specify what happens if the contractor correctly submits its application for payment but the project manager fails to issue a certificate within the required period. The answer, in the UK at least, is that the provisions of the Construction Act will apply to fill the gap. That will mean that the contractor’s original application for payment will stand as a “default payment notice” and the contractor will be entitled to payment of that amount (subject to any pay less notice the client may issue). For the reasons given above, it is important that the contractor makes sure its payment application sets out the basis upon which the sum due has been calculated, not just the sum due, if it wants the application to stand as a “default payment notice”.
What happens if the contractor fails to make its payment application and the project manager fails to certify payment? The contract is also silent on this point.
In that case the contractor will have an opportunity to submit a default payment notice (pursuant to its statutory rights under the Construction Act). As long as the contractor makes sure that its notice satisfies the requirements of the Act it will then be entitled to payment of that sum (subject to any pay less notice the client may issue).
Conclusion
It would benefit both parties (and the project manager) to amend the standard NEC4 payment terms to ensure they comply with the letter of the Construction Act. This would aid clarity and avoid the need to refer back to the Act to deal with ambiguities.
This article was written by Norris Riley