Jacob Austin 00:00:00 Hi all! It's Jacob Austin here and welcome to episode 140 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode is all about a type of clause that should be dead, but it keeps coming back to life. We're talking about pay when paid and pay when certified provisions. Not the blunt and obvious versions that were banned nearly 30 years ago, but the type that contractors are regularly dressing up as something else and that are hard to spot, but still commonly appearing in bespoke subcontract amendments and still catching subcontractors out. So let's dig in. Now let's start with some commercial reality. Your subcontract payment schedule is what keeps your business alive. You're paying out labor materials. You're paying for hire of plant. Cash leaves your door as soon as you step onto site and before you're able to recover it. And the whole point of payment regimes under the Construction Act is to make sure you can get paid and to give you defined, predictable windows that you're able to do it in, not whenever the main contractor feels ready, not when the employer issues a certificate on a separate contract, on defined dates with defined amounts, and subject to defined challenge procedures.
Jacob Austin 00:01:49 Pay unpaid clauses break that system. They shift the risk of the employer not paying or not paying on time or not certifying, and they shift it away from the contractor and down onto you. That means you, the subcontractor who's done the work, took the risk on the materials, paid their lads to turn up and do a professional job, and actually has no contractual relationship with the employer whatsoever. You've got no sight of what's happening upstream, and you've barely got the ability to influence it. And yet under a pay one paid clause, someone else's problem becomes your cash flow issue. Your crisis. Parliament understood exactly what this problem was. Back in 1996. And yes, that means its 30th anniversary is due when it passed the Housing Grants, Construction and Regeneration Act. Section 113 of that act makes it clear payment provisions under a Construction Act that a conditional on the payor receiving payment from a third party are ineffective. They're void. They can't be enforced. The only exception to that, and this is critical, is when the third party is insolvent.
Jacob Austin 00:03:08 That means if the employer has gone bust, a properly drafted P1 paid on insolvency clause can be invoked. But that is a really narrow and specific issue. Everything else is prohibited, but it's still being spoken about in 2026 because the prohibition exists right there in the law. But the enforcement of it comes down to you. It's being allowed to creep in. Nobody audits main contractors, subcontractors. Nobody from the government is tasked with reviewing your bespoke terms. So if you sign up to a non-compliant clause and never challenge it, you can guarantee the main contractor is going to use it against you. And that's where the problem comes from. To understand how these clauses are surviving still. You need to know a little bit about the legal history of them. The 1996 act banned pay one page clauses through section 113, but it didn't initially capture a closely related variant which was page one certified. These were clauses that said, in effect, you'll be paid once the architect or contract administrator certifies the value under the main contract.
Jacob Austin 00:04:27 It has the same commercial outcome as pay when paid. Your payment depends on something happening in a contract that you're not a party to, but technically, because it wasn't using exactly the same wording, it was being snuck in. In a recent analysis of onerous subcontract clause types, it was noted that it's common to see clauses in subcontracts drafted only to release things such as retention to the subcontractor on completion of the main contract works or the issuing of the certificate and making good defects under the main contract. That is a hidden form of a pay one paid clause, and these clauses are not compliant with the Construction Act. Parliament caught that loophole in 2011 by introducing the Local Democracy, Economic Development and Construction Act 2009 that came into force on the 1st of October 2011. That act amended the original Construction Act by inserting section 110 one A. That amendment says that a clause will be invalid if it makes payment conditional on the performance of obligations under another contract, or by a decision by any person confirming whether actions or obligations under another contract have been performed.
Jacob Austin 00:05:52 The intention of that is really explicit to prevent a party up the line from relying on circumstances relating to its own contract to delay payment downstream to other contractors. That means that if an employer has failed to comply with its certification requirements to a main contractor, the main contractor can't use that as an excuse to deny a subcontractor their payment. So the legal framework now has two lines of attack on disguised conditional payment clauses. Section 113, which is a clear pay one paid prohibition. And section 110 one A, which outlaws pay one certified as well. Both of these are in force. Both apply to subcontracts and both of them have teeth, but only if you use them and where subcontractors are getting caught out with this is the problem has evolved somewhat. The problem isn't that main contractors are openly stating you won't be paid until we are. Nobody writes it like that anymore. So the problem is that the language has evolved and disguised itself, but the commercial effects of it, i.e. non-payment, haven't changed at all. So let's look at five different patterns of main contractors amendments and how they'll impact you as a subcontractor.
Jacob Austin 00:07:24 The first one is really common, and it's really obvious, and you should really easily be able to spot it. And it's relating to retention release. You might see language in your subcontract that says the second moiety of retention shall be released following the issue of the certificate of making goods under the main contract. It looks really harmless, but it makes your retention clause dependent on the certificate that the employer or the client is issuing to the contractor, which is nothing to do with you. That's clearly making your retention release dependent on a third parties contract. So it's non-compliant under section 110 one A that's a non-compliant amendment. It's not possible to make that link to somebody else's obligation under a different contract. Second, we have payment dates that are keyed into main contract valuation dates. Here you're watching for language that defines your payment due date as a specified number of days after the main contractor receives their valuation notice or payment notice, or ties your valuation back to the monthly valuation date under the main contract. Occasionally, this can be for good reason if the contractor is working on an actual cost basis and they need your valuation to be able to justify their own valuation, but they should always be able to describe your valuation date in their own words, in their own language, and in a proper schedule of dates that give you clear action points.
Jacob Austin 00:09:02 If your due date is floating around, depending on what's happening upstream, then that valuation procedure very likely fails to provide the adequate mechanism required by that same section of 110 one eight of the Construction Act. The TCC has been really clear that the intention of that section is to do away with uncertainty, to give you defined dates to work to, and a defined monthly recipe to follow. I submit my evaluation on this date. I get my notice by this date. I get paid on this date. It should all follow logically, and you should be able to see the logic in words in your contract. If it looks woolly, then you challenge it. The third issue is around variations and the valuation and then payment of them. I've seen amendments in contracts that will only permit subcontractors to be paid variations if the main contractor is able to recover them from their client as well. Sometimes the contractor tries to dress this up in a way that sounds friendly, saying things like, we're back to back with you, making it feel like we're in this together, but all they're really trying to do is say if they can't get paid for a change, then you're not being paid for it either.
Jacob Austin 00:10:18 And for that, the contractor is in dreamland. How many times do they actually 100% transfer the same scope from their contractor to your contract? They'd have to let you the complete job for that to be the case, which their contract probably prohibits them from doing anyway. And you've guessed it, this kind of arrangement is another example of a pay one paid clause that has been outlawed. Fourth, we have set of provisions that are drafted to survive adjudication as demonstrated in TCC case law. Some contractors attempt to include broad contractual set of rights that could be read to apply against sums that an adjudicator has already decided are due to be paid. The courts have been really firm on this. Clauses that permit set off as a matter of contract can only be enforced within the realms of the Construction Act. If they are deemed to overstep the mark, then then not in compliance with the policy of the act and therefore can be struck out. The fifth common kind of pay and pay clause is the genuine one pay when paid on insolvency.
Jacob Austin 00:11:34 It's the one conditional payment provision that's still lawful. And that means that if the employer becomes insolvent and the subcontractor contains a properly drafted Paye unpaid insolvency clause, the main contractor can, in principle, stop payment to you on the basis that they haven't been paid either. That pushes the risk of the employer's insolvency down the chain. Commercially, that matters because that's the exact moment when money is most at risk. Employer insolvency usually means your work is stopped. Your materials are on site and your final account is unresolved. The worst case scenario is that the contractor can point to a properly drafted clause telling you that they're in the same boat and doesn't have to pay you. There are limited things you can do about it, but you can still do two things. Both of them are pre insolvency because by the time the administrator is appointed, it's often too late. But first you need to understand is one of these clauses actually in your subcontract. That means reading the payment provisions before you sign. Awareness is everything when it comes to your contract.
Jacob Austin 00:12:50 If you don't know, you can't manage your position and you can't challenge it, so you always need to start by reading that subcontract. The second is the actual way to manage it, and that is to keep your valuations current. The insolvency exception only protects the main contractor against paying money that they haven't received themselves. It doesn't give them any right to clawback interim payments that they've already made. So if you've been running your applications properly, regularly keeping your certified sums as up to date as you can, and not allowing any kind of large gap to develop between the value of the work done and the money that you've received, then it means your exposure at the point of insolvency is smaller. Subcontractors who fall the furthest when an employer goes bust are the ones who let their valuations drift. Doing months worth of work with nothing certified, not challenging pay less notices or reductions in the valuation of your work or a growing unemployed balance because you haven't thoroughly valued your work. Tight commercial management. Here is your proper protection.
Jacob Austin 00:14:04 There are no legal technicalities after the fact that do a better job of managing your money than you getting your hands on it at the right time. Now let's think up a worked example to put some context around what we're talking about. Let's say you're an M&A contractor and you agree to subcontract with a main contractor on a commercial fitout project. The contract is based on a JCT, but as per the usual, there's quite a lengthy schedule of amendments at the back which you skimmed at the time of signing it. But you are focused on the price of the program and just glossed over those amendments five months later. Valuation for has been submitted. You've applied for £85,000, including £12,000 of retention that you're entitled to release against a section or completion of part of your package. The main contractor, SHS, comes back with £62,000 and no retention release. The reason given is that retention is held pending issue of the Practical Completion Cert under the main contract or Lass per the subcontract terms. Now you go back to that schedule and there it is, a clause that says retention will be released following practical completion as certified under the main contract.
Jacob Austin 00:15:31 You just encountered a non-compliant retention release mechanism under section 110 one eight of the Construction Act. That clause is ineffective. The retention release can't be conditional on the main contractor's release under their own contract. There are two separate contracts with separate mechanisms and separate triggers. This scheme for construction contract now steps in to replace that, and your retention release clause should now be governed by your own subcontract milestone, the completion of the section of works under your package, not whatever's happening on the main contract. So what do you do? You write to the main contractors, QTS. You identify the provision and you state that it doesn't comply with the law. With the Housing Grants, Construction and Regeneration Act, 1996, as amended. You state that the terms of the scheme for construction contracts now apply. You now issue a formal payment application for the full amount, including your attention. You follow the notice regime if a valid pay less notice isn't served in time, you have a notified sum and you also have adjudication which is available to you at any time.
Jacob Austin 00:16:51 Just the threat of adjudication to the main contractor may be enough to change their mind, particularly after you've pointed out that their contract doesn't comply with the law. Now let's think about how you protect yourself as a subcontractor. The first line of defense is pre-contract. It's reading the amendments to the sub contract at inquiry stage. If you can't do that, perhaps you get too many inquiries to spend all of your time reading through amendments and not pricing the work. If you can't read through it at a tender stage, you need to submit your quotation with a clear caveat that says, I'm submitting this quote on the basis of an unamended JCT subcontract. Obviously your tailor that to suit the situation. You're not going to tell them you're going to work on a JCT subcontract on an NEC project. But the key thing here is to say you aren't pricing the amendments. It buys you the time to review them when you get issued that subcontract later. What you absolutely can't do is sign up to a contract without reading it. If you don't feel qualified to read it, you need to pay somebody to read it for you on your behalf.
Jacob Austin 00:18:05 But if you listen to the show regularly, you should have a good idea of pointers you should be looking out for. The first line of defence as I say, pre-contract. Look for language that ties payment clauses that tie your entitlement, timing or amount back to the main contract. That could be certificates, variations, valuations, completion events, employer decisions. Any of these are a flag and they are potentially illegal. You can challenge this with a simple emailed response. Something like this clause appears to make payment conditional on performance under the main contract, which is not compliant with section 110 one A of the Construction Act. We require this to be removed or replaced with a subcontract specific trigger. That's a commercially legitimate position. You're not being difficult. You're requiring the subcontract to comply with the law. This same scrutiny needs to run through the whole of the contract. Look at your retention release provisions. Bespoke or amended contracts might have onerous retention mechanisms, for example, clauses in subcontracts that are drafted to only release retention when the main contract works are completed or their main contractor making Good Defects certificate has been issued.
Jacob Austin 00:19:28 These are the most common non-compliant pattern. If the retention release in your subcontract references the main contract in any way, that clause needs to be challenged and removed. Third, on the insolvency exception, understand what it says a payment paid on insolvency clause is the one conditional payment provision that can be acceptable under law, but for a main contractor to rely on it. The clause has got to accurately reference current statutory definitions. Outdated drafting here is your friend, but it's difficult to identify. The best mechanism is to make sure you're maximizing your valuations. You're submitting them early, and you're challenging every bit of payment that you're not receiving in the contractor's payment notice. Getting your cash in your bank account is the best way to protect yourself. Fourth is to know that the scheme is always behind you. So if your contract fails to comply with the Construction Act, the scheme for construction contracts applies. That's the safety net. If a payment provision is non-compliant, it doesn't mean you lose your entitlement. It means that the terms set out in your subcontract can be replaced by the scheme's terms, as in the scheme for construction contracts.
Jacob Austin 00:20:48 That means your due date, your final date for payment, your payment notice rights. All of these exist whether the subcontractor drafts them in properly or not. Fifth, and finally is to use adjudication. This is another area that is mandated into subcontracts by the Construction Act. A dispute can be referred to adjudication at any time. That could mean a non-compliant payment clause applied to withhold money that's properly due. If you challenge it, and the contractor either ignores you or refutes it, then you can take that to adjudication. You get a decision in 28 days. And case law is littered with cases and decisions that back that up the removal or strikeout of offending clauses and replacement with the construction scheme compliant clauses. So today's important messages. Pay when paid clauses have been prohibited under the Construction Act since 1996. The only valid exception is insolvency of an upstream party, and even then the clause must be correctly drafted to pass legal scrutiny. P1 certified clauses where your payment date or amount depends on certification under the main contract.
Jacob Austin 00:22:08 These have been specifically written out as well. Under the amendment to the Construction Act in 2009 that came into force two years later. The most common non compliances are around retention, making retention releases conditional on the main contracts, practical completion or the issue of making good defects under the main contract. If you see this, you can challenge it with confidence because it is void, it's illegal and you'll have the support of the law and any adjudicator you run it past. If a non-compliant provision has been applied and money is withheld, then the scheme for construction contracts fills the gap in your contract. That means you still have entitlement. Non-compliant mechanisms are simply replaced, meaning you can re-issue your application. You can follow the notice regime and adjudicate if the money doesn't come. Ultimately, these kind of clauses have survived this long because subcontractors don't challenge them and quite often don't even appreciate that they're sat there in their subcontracts because they haven't read them. You can change that. The law doesn't enforce itself, but you can enforce it.
Jacob Austin 00:23:22 You have leverage now because you know how to identify unlawful clauses, but you need to be prepared to identify them and then say so. Doing it pre-contract is far cheaper than waiting until you're missing the cash, until it's hurting your cash flow, and then you've got the cost of going to adjudication. Both of those routes are available to you, but by far and away the easiest is to do it at the start, get it right before you get to site, and just to close out with a note about the subcontractors blueprint. My mission with this podcast is to help the million SME subcontractors working in our industry, and I really need your help if you're listening to this. If you take some value away from today's episode, then please do share the show and pass that value on to somebody else who'd benefit from hearing it, so that I can help as many people as possible. And thanks for tuning in. You can find more information at www.SubcontractorsBlueprint.uk And we're also on all your favorite socials again at Subcontractors Blueprint.
Jacob Austin 00:24:31 And remember, miss the contract detail and the commercial risk falls on you. Thanks all. I've been Jacob Austin and you've been awesome.
