By following the simple processes outlined below, you will avoid timely and costly disputes and maintain cash flow
The Construction Contracts Act 2002 provides you with a process for dealing with payments and disputes under a construction contract.
The purpose of this Act is to reform the law relating to construction contracts and, in particular:
- to facilitate regular and timely payments between the parties involved in the construction contract;
- to provide a quick resolution of disputes arising under a construction contract; and
- to provide solutions for the recovery of payments under a construction contract.
Contracts covered by the act
'Construction Work' is a very broad term and covers most work that might be carried out in building, altering or maintaining both residential and commercial buildings.
Construction Work includes work on:
- buildings and other structures that form part of land, including temporary structures
- fittings in the building, such as heating, lighting and fire protection
- infrastructure that forms part of land, such as roads, utilities and land drainage.
Construction Work includes constructing or installing, altering, maintaining and removing the building, fittings or infrastructure. It includes work essential to the construction work, such as excavation, scaffolding and prefabricating components. It also includes design, engineering and quantity surveying work.
The full description of the meaning of Construction Work can be found here,
When entering into a construction contract you can either negotiate the terms of payment as a part of the contract or rely on the default payment provisions in the Construction Contracts Act. If there are no terms for payment in the construction contract the default payment provisions in the Act will apply.
Therefore, to ensure you get paid and avoid disputes you will need to issue a valid Payment Claim under the Act.
A valid Payment Claim must meet ALL the following requirements:
- Be in writing
- Include sufficient details to identify the construction contract to which it relates
- Identify the construction work and relevant claim period to which it relates
- State the amount claimed and provide a due date for payment
- State how the amount was calculated and a description
- State that the payment claim is made under the Construction Contracts Act 2002
- Attach 'Section 20, Construction Contracts Act 2002' to all payment claims issued, outlining the process for responding tot he claim, an explanation of the consequences to not responding tot he claimed or scheduled amount and an explanation of of the consequences of not paying the claimed or scheduled amount.
Disputing Payment Claims and Issuing Payment Schedules
Once you have issued a valid payment claim to the Client (Payer) they have 20 working days to either pay the amount in full, or if they dispute the amount claimed, they will submit a payment schedule.
A payment schedule MUST include all of the following:
- be in writing
- identify the payment claim to which it relates, and
- state a scheduled amount.
If the scheduled amount is less than the claimed amount, the payment schedule MUST indicate:
- the manner in which the Payer calculated the scheduled amount; and
- the Payer’s reason or reasons for the difference between the scheduled amount and the claimed amount; and
- in a case where the difference is because the Payer is withholding payment on any basis, the Payer’s reason or reasons for withholding payment.
If there is a dispute between the parties in the construction contract you can refer the dispute to adjudication. An adjudicator can make a decision which is binding on all parties to the contract that is enforceable as a Court Judgment. Adjudication is a fast track resolution process. However, nothing in the Act stops a party from filing a claim in the Courts or for arbitration of their dispute.
Any party in the Construction Contract may initiate the adjudication process by serving a written notice on the other party.
Construction Contracts and associated work are usually complex and involve large sums of money. Therefore, it is often advisable to obtain legal advice. First, to ensure that payment claims and schedules comply with the Construction Contracts Act, and second, to ensure you avoid disputes and settle them as efficiently as possible.
When the Payer chooses to hold retention money on trust, the Payer becomes a trustee and the Payee becomes the beneficiary.
Retention Money is defined as: “an amount withheld by a party to a construction contract (Party A) from an amount payable to another party to the contract (Party B) as security for the performance of Party B’s obligation under the contract.”
The obligations of the payer holding retention money on trust end when:
- Retention money is paid;
- The payee to whom the money is payable agrees to give up their claim; or
- The money ceases to be payable by law, i.e. the money ceases to be payable under the construction contract.
- does not need to be held in a separate trust account
- may be mixed with other money, ie, it can be held in the same bank account as other
- money may be held in the form of cash or other liquid assets
- may be invested and interest earned can be kept provided the investment is in accordance with the Trustee Act 1956.