The Payment Regime

When the Construction Contracts Act 2002 (the Act) came into force on 1 April 2003, it significantly reformed the law relating to construction contracts and sought to dramatically change the way in which cashflow occurs in the industry by facilitating regular and timely payment between the parties to a construction contract and by prohibiting conditional payment provisions in construction contracts.

In particular, the Act rendered conditional payment provisions such as ‘pay-when-paid’ and ‘pay-if-paid’ clauses in a construction contract ineffective and established a new regime for making and responding to progress payments so that lump sum contracts devoid of the entitlement to progress payments became a thing of the past.

Previously, contractors could defer payment to subcontractors until the contractor was paid or exclude payment entirely in the event of the contractor not being paid. Unless the contract expressly provided for the right to progress payments, the contract was deemed ‘entire’ and the whole of the contract works were required to be completed prior to any entitlement to payment.

Under the Act, parties to construction contracts may agree to any terms and conditions regarding the number of payments, the interval between those payments, the amount of each of those payments, and the dates when each of those payments becomes due.

The Act established a statutory right to progress payments in respect of commercial construction contracts but not residential construction contracts. If the parties to a commercial construction contract failed to agree on a mechanism for determining the number of progress payments, the interval between those payments, the amount of each of those payments and/or the date when each of those payments becomes due, the Act provided a default mechanism for calculating the amount of a progress claim and the due date for payment.

However, under the Construction Contracts Amendment Act 2015, the statutory right to progress payments and the default payment provisions in sections 16-18 of the Act for calculating the amount of a progress claim and the due date for payment apply to all construction contracts entered into or renewed on or after 1 December 2015.

The default date for a progress payment or any other type of payment under a construction contract for construction work carried out under that contract is 20 working days after the payment claim is served on the payer.


Payments

Under section 14 of the Act, parties to construction contracts may agree to any terms and conditions regarding the number of payments, the interval between those payments, the amount of each of those payments and the dates when each of those payments become due. Parties may also expressly agree to a single payment on completion.

If the parties fail to agree on a mechanism for determining any of those matters, the Construction Contracts Amendment Act 2015 establishes a statutory right to progress payments and a mechanism for determining the number of payments under the contract, the interval between those payments, the amount of each of those payments and the date when each of those payments becomes due in respect of any construction contract entered into after 1 December 2015.

The default provisions are set out in sections 16-18 of the Act and include:

  • a party who has agreed to carry out construction work under the construction contract is entitled to claim for work performed each month;

  • the amount to be claimed is to be calculated having regard to the relevant period, the value of the work carried out during that period, the contract price, the rates or prices set out in the contract or the reasonable value of the work, the cost of any variations and the cost of rectifying any defective work, and provisions relating to retentions or liquidated damages; and

  • the default date for payment is 20 working days after the payment claim is served.

 

Most of the standard forms of contract such as NZS3910:2013, BuildRight® BCC:2016 and Registered Master Builders Contracts incorporate a mechanism for determining the timing and quantification of payments. In those cases, the express terms of the contract will supersede and replace the default provisions of the Act for payments.


Payment claims

Payment Claims are formal demands for payment made under the Act and include progress claims and final claims.

Under section 20 of the Act, a payee (the party to a construction contract who is entitled to a progress payment) is entitled to serve payment claims on the payer (the party to a construction contract who is liable for that payment) for payments, including any single or final payment under the contract. In order to benefit from the default payment entitlements under the Act, a payee must first serve a valid payment claim on the payer. A valid payment claim must comply with the following mandatory requirements:

  • be in writing;

  • contain sufficient details to identify the construction contract to which the payment relates;

  • identify the construction work and the relevant period to which the payment relates;

  • state a claimed amount and the due date for payment;

  • indicate the manner in which the payee calculated the claimed amount;

  • state that it is made under the Act; and
     
  • ​​​​​​​must be accompanied by a written notice (in the prescribed form) outlining the process for responding to the claim and explaining the consequences of not responding if payment of the claimed amount in full is not made by the due date for payment (see Form 1 in the Construction Contracts Regulations 2003).

Payment schedules

The service of a valid payment claim sets in motion the provisions of the Act which provide a statutory right for the payee to enforce payment of the whole of the claimed amount in the event that the payer does not respond within the mandatory period with a valid payment schedule or pay the whole of the claimed amount by the due date for payment.

If you receive a payment claim under the Act and you do not agree with the way in which the payee has calculated the payment claim, you must respond by providing a payment schedule. A payment schedule must be in writing, it must identify the payment claim to which it relates, and it must state a scheduled amount ie the amount the payer proposes to pay to the payee in response to the payment claim.

A payment schedule is intended to inform the payee as to the amount the payer proposes to pay on the due date for payment and the payer’s reasons for any difference between the scheduled amount and the claimed amount such that the payee can make an informed decision as to whether or not to pursue the unapproved amount in an adjudication.

Under section 21 of the Act, a valid payment schedule must:

  • be in writing;

  • identify the payment claim to which it relates; and

  • state a scheduled amount

If the scheduled amount is different from the claimed amount the payment schedule must also indicate:

  • the manner in which the payer has calculated the scheduled amount;

  • the reasons for any difference between the scheduled amount and the claimed amount; and

  • where the difference is because the payer is withholding payment on any basis, the payer’s reasons for withholding payment.
     

Consequence of not providing a valid Payment Schedule or not paying the claimed amount or the scheduled amount by the due date for payment
 
Statutory debt – default liability

The primary purpose of the Act is to encourage and promote cashflow in the industry.

As far as the payer is concerned the payment regime set up under the Act is ‘sudden death’. Should the payer not follow the correct procedure within the mandatory time, the payer becomes liable to pay in the interim the whole of the claimed amount, whatever the merits of the claim.

If a payer fails to provide an effective payment schedule, being one that satisfies the requirements of section 21 of the Act, within the time required by the relevant construction contract or if the contract does not provide for the matter, within 20 working days after the payment claim is served on the payer, the payer becomes liable to pay the whole of the claimed amount on the due date for payment to which the claim relates pursuant to section 22 of the Act.

To be an effective payment schedule to resist the harsh consequences of section 22 of the Act, the payer must state unequivocally an amount that the payer proposes to pay the payee in response to a payment claim and all areas of difference or dispute to enable the payee to properly assess its future options.
Failure to pay within the required time results in the amount claimed (or any unpaid scheduled amount) becoming a debt due on the due date
for payment for which the payee can immediately sue together with the payee’s actual and reasonable costs of recovery.

In such cases the payer is not entitled to any deduction by way of dispute, set-off, or abatement against the claimed amount.
 

Suspension of work

For commercial contracts entered into before 1 December 2015, if a payee serves a payment claim on a payer and:

  • the claimed amount is not paid in full by the due date for payment and no payment schedule has been provided by the payer; or

  • the payer provides a payment schedule in response to the payment claim and the payer fails to pay the whole of the scheduled amount by the due date for payment;

the payee is entitled to serve notice on the payer of the payee’s ntention to suspend work, and to suspend work after five working days from the date of that notice if, as the case may be, the claimed amount or scheduled amount is not paid in full.

A payee under a residential construction contract entered into before 1 December 2015 may suspend work for non-payment only if the contract expressly provides that right and only then, after complying with the notice procedures prescribed under the contract.

For a construction contract entered into or renewed after 1 December 2015, if a payee serves a payment claim on a payer and:

  • the claimed amount is not paid in full by the due date for payment and no payment schedule has been provided by the payer; or

  • the payer provides a payment schedule in response to the payment claim and the payer fails to pay the whole of the scheduled amount by the due date for payment;

the payee is entitled to serve notice on the payer of the payee’s  intention to suspend work, and to suspend work after five working days from the date of that notice if, as the case may be, the claimed amount or scheduled amount is not paid in full.
 

 

FORMS AND PRECEDENTS FOR PAYMENT CLAIMS AND PAYMENT SCHEDULES

Forms and Precedents
 

OTHER BRIEFINGS YOU MAY BE INTERESTED IN

Adjudication A Brief Introduction

Time Periods for Adjudication

What is changing and when

Enforcement

 

About Us

With 20 years experience in the avoidance, management, and resolution of building and construction disputes, the Building Disputes Tribunal is recognised and respected as the leading independent, nationwide provider of specialist dispute resolution services to the building and construction industry.

Find Out More