What is a pay less notice, and when must it be served?

The Construction Act imposes a fixed sequence on every construction contract in the UK. A pay less notice doesn’t mean much outside that sequence, so start with the order of events.

1. 01Due date. The contract must fix a date on which each payment becomes due. Section 110 requires an adequate mechanism for determining it.
2. 02Payment notice. Within five days of the due date, the payer (or a specified person, such as a contract administrator) must serve a notice under section 110A stating the sum considered due and the basis of calculation. It must be served even if the sum is zero.
3. 03Payee’s notice in default. If the payer serves nothing, the payee can serve its own notice under section 110B. Where the contract allows an application for payment before the due date, that application itself usually becomes the default notice.
4. 04The notified sum. Whichever of those notices stands becomes the notified sum.
5. 05Pay less notice. If the payer wants to pay less than the notified sum, it must serve a section 111 notice before the deadline.
6. 06Final date for payment. The date the money must actually be paid. The contract sets the period between the due date and the final date.

Section 111: the payer must pay the notified sum on or before the final date for payment unless a valid pay less notice has been served.

By the deadline in the contract, which must be a fixed period before the final date for payment. Where the contract doesn’t set one, or the term isn’t Act-compliant, the Scheme for Construction Contracts fills the gap: the notice must be given not later than seven days before the final date for payment.

The Scheme also supplies default dates for everything else if the contract is silent: a due date the later of seven days after the end of the relevant period or the making of the payee’s claim, and a final date for payment seventeen days after the due date. Most standard forms set their own dates, and those are the ones you’ll be diarising.

NoteThe deadline runs backwards from the final date for payment, not forwards from the application. Change the final date and you change the pay less deadline with it.

Two things, and they’re both mandatory: the sum the payer considers to be due at the date of the notice, and the basis on which that sum is calculated. A notice that gives a number without a basis is vulnerable. A notice that gives a basis without a number isn’t a notice at all.

• Identify the contract, the payment cycle and the application it responds to.
• State a specific figure as the sum considered due, including zero if that’s your case.
• Set out how you got there: valuation of the work, deductions for defects, contra-charges, liquidated damages, retention, previous payments.
• Serve it by a method the contract permits, to the person the contract names, and record the date and time it was sent.

The courts have been reasonably forgiving about form and reasonably unforgiving about substance and timing. A document doesn’t have to be headed "Pay Less Notice" to be one, provided it makes clear what it is. But it has to be in time. And it has to give both the figure and the basis.

A pay less notice must state a specific sum considered due and the basis of its calculation. An email saying "we dispute your application" isn’t a pay less notice.

The notified sum becomes payable in full on the final date for payment, whether or not the work is worth it. The payee can start an adjudication to enforce payment of the notified sum, the so-called smash-and-grab. The adjudicator isn’t asked to value the work. The only question is whether a valid notice was served in time.

The payer isn’t left without a remedy. Since the Court of Appeal’s decision in S&T v Grove, a payer who has had to pay a notified sum because it missed its notices can start a second, "true value" adjudication to establish what the work was actually worth and recover the overpayment. But it has to pay first. The cash flow hit lands immediately, and the correction comes months later.

The payee also gains a separate right: under section 112, non-payment of a notified sum by the final date entitles the payee to suspend performance of any or all of its obligations, on seven days’ written notice, and to recover the reasonable costs of suspending and remobilising along with an extension of time.

It applies to contracts for construction operations in the UK, whether written or oral since the 2009 amendments removed the requirement for writing. It isn’t optional, and it can’t be contracted out of. A non-compliant clause is simply replaced by the Scheme.

The main exclusions are:

• Residential occupiers. A contract with someone who occupies, or will occupy, the dwelling as their residence is excluded by section 106. Domestic extension work for a homeowner is outside the Act.
• Excluded operations. Drilling for oil or gas, mineral extraction, and the manufacture or delivery to site of components and materials, among others.
• Contracts of employment, and some finance and development agreements.

NoteBecause of the residential occupier exclusion, a domestic builder can’t adjudicate against a homeowner unless the contract gives that right expressly. The payment notice regime doesn’t apply either, so you rely on your own payment terms and, if it comes to that, the county court.

Payment applications in Estimark carry the Construction Act dates on the application itself: the due date, the final date for payment and the pay less deadline. The deadline then sits next to the document it applies to rather than in someone’s diary. Certified applications become invoices, and the VAT reverse charge treatment carries through, so you don’t re-key the VAT position.

It’s a record, not a lawyer. Estimark doesn’t serve notices for you, doesn’t assess whether a notice you received is valid, and doesn’t advise on contract terms. Read more about payment applications and retention in Estimark.