Payment: Know the process
29/07/24
Newsletter #17:
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All companies need cash in the bank, but do you know the processes for getting paid under NEC ECC, and do you follow them?
This week we assess the payment process and identify the key activities needed for making (and taking) payment!
How to assess how much needs paying
How to apply the timescales of Y(UK)2
What if payment is late?
To get paid you need to have done some work…let’s begin…
1. How to assess how much needs paying
We’re going to assume here that Y(UK)2 applied to your contract. Afterall if you are undertaking construction works in the UK then it’s going to be applicable in most cases. This sets out the process for payment.
Full definition - Y(UK)2 The Housing Grants, Construction and Regeneration Act 1996 (HGCRA)
What does Y(UK)2 do?
Sets the dates for payment
Assigns responsibility between the Parties (Contractor and Client)
Assigns duties to the Project Manager
Recap: Doing work for which payment is due.
In order to get paid you must do work, NEC defines this as “the amount due” (See clause 50). The Project Manager assess the amount due at each assessment date.
The first assessment date is set by the Project Manager and subsequent assessments are at the intervals stated in the Contract Date (Clause 50.1). Generally every month on the same calendar day.
To calculate what is due you calculate:
the Price for Work Done to Date (see relevant Option clauses for specifics)
plus other amounts to be paid to the Contractor
less other amounts to be paid by or retained from the Contractor
Example:
Contractor has done £50,000 worth of work + an Advanced Payment of £25,000 (X14) - Retention of 5% (£2,500).
= £50,000 + £25,000 - £2,500 = £72,500 Payment Due
2. How to apply the timescales of Y(UK)2
As shown above the timescales for payment can be quite confusing, but taking it steps-by-step provides logic. Here is how each element breaks down:
Contractor provides an application before the assessment date to explain what they believe is due for payment (50.1)
Project Manager undertakes their own assessment and certifies the payment within one week of the assessment date (50.2)
Payment is made within 3 weeks (21 days) of the assessment date (51.2). Which is also the default timescale for Y(UK)2. Check this hasn’t been changed via contract amendments.
If either party (most likely Client) wishes to pay less than the certified amount, they notify the other Party no less than 7 days before the final date for payment.
That is the simplicity and complexity of the payment process. Here are a few issues which arise:
Clients change the dates in the contract to allow for payment much longer than the 21 days.
Clients have issues with internal finance and don’t pay by the final date
Contractors don’t provide an application before the assessment date
3. What if payment is late?
The contract provides clear direction to all Parties if payment is not made within the contractual timescales. The process is:
Clause 51.2 - If a payment is late, interest is paid on the late payment!
Interest is assessed from the date by which the payment should have been made until the date when the late payment is made. This interest payment is included in the first assessment after the late payment is made.
Contract Data sets the interest rate, lets assume 5% above a base rate of 2%, per annum.
Example:
£100,000 payment is late
73 days late
5% + 2% = 7% total
Calculation:
£100,000 x 7% = £7,000 interest charged per annum
£7,000 / 365 days = £19.18 per day
£19.18 x 73 days = £1,400 interest due
£100,000 + £1,400 = Total due £101,400
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Reading Recommendations
To understand more about how to prepare and manage an NEC contract, the following guidance documents are available.
NEC4 Preparing an Engineering and Construction Contract
NEC4 Managing an Engineering and Construction Contract
Understanding the NEC4 ECC Contract
