Disputes between contractors and developers are relatively common. Most disputes typically centre on payments, and the legality of them being withheld. Contractors often accept contracts drafted by developers, without giving sufficient thought to their position if things go wrong. Spending time at the outset negotiating some of the provisions in the contract and understanding your statutory rights in the event of a dispute, can lead to a quick resolution to a dispute and ensure that disruptions to cashflow are minimised. Below are some of the main things to be aware of when negotiating contracts with developers:
Ensure payment periods are kept as short as possible
The contract must specify a due date and a final date for payment. Payment due dates usually occur one month after the date on which works commenced and at monthly intervals thereafter. Whilst parties are free to agree the length of the period in between the due and the final date developers often seek to impose a much longer gap between these two dates which can exacerbate cashflow problems for the contractor, particularly if managing multiple contracts. Contractors have a strong argument to negotiate a period of 17 days between the due and final date as enshrined in the Scheme for Construction Contracts (England and Wales) Regulations 1998 (as amended).
Beware of cross-contract set-off clauses
These are where a developer can withhold payment on one contract on the basis of what the developer claims has happened under another contract. Typically, this would be triggered by defective work. As a contractor, this type of clause can be especially onerous and have a knock-on effect right across the business. It is important to recognise this clause for what it is, and how potentially damaging it can be.
Retentions
This is when a percentage of the sum certified as due for payment under a construction contract (typically 3-5%) is held by the developer until the contractor performs all its obligations under the contract. Half of the amount is released on practical completion and the remainder is released upon the certification of making good defects. Contractors should insist that the retention amount is as low as possible and that money is ring-fenced and held in a trust. In light of the Carillion collapse, and with insolvencies in the construction sector on the rise since 2015, this is doubly important.
Suspension of work
Under the Housing Grants, Construction and Regeneration Act (as amended) a contractor can suspend work if payment is not made on the final date and the appropriate pay less notice has not been served . The contractor must give seven days written notice and specify the grounds of suspension. A valid suspension will entitle the contractor to an extension of time for completion of the work and a reasonable amount in respect of costs and expenses
Extensions of time
An extension of time is generally permitted where the delay is not the fault of the contractor, such as exceptionally adverse weather or variations under the contract . In other circumstances, failure to meet the completion date can result in liquidated and ascertained damages being levied against the contractor.
For more information or advice, please contact our Commercial Property Team on 0345 646 0406 or fill in our online enquiry form and a member of our Team will be very happy to assist.