The Cabinet Office has issued Information Note 1/2011 "Making fair payment in construction a requirement in central government contracts - NEC Z Clause".
It is said that the Note reminds central government construction clients of a decision taken in September 2009 to make fair payment practices a contractual requirement in all their construction contracts. This would extend to central government departments, their agencies and Non-Departmental Public Bodies. In the wider public sector these requirements are said to be recommended as best practice. The fair payment provisions were previously outlined in the "Guide to best ‘Fair Payment’ practices" - Information Note 2/2010.
The Note provides for payments between the Employer and Main Contractor to be made within 14 calendar days of the due date for payment; Employer to Subcontractors (via Main Contractor) within 19 calendar days and Employer to Sub-subcontractors (through the contractual chain) within 23 calendar days. The guidance requires the Main Contractor to set up its Subcontracts to accord with this and to require that its Subcontractors do the same down the line. There is provision for reporting non-compliance through the Cabinet Office's Supplier Feedback Service, although there is no information about any action to be taken where this occurs.
A sample Z clause for use with the NEC3 forms of contract to implement this requirement is provided in the Note. It adds various obligations on the Contractor including:
- Z5.1 - The Contractor assesses the amount due to a Subcontractor without taking into account the amount certified by the Project Manager.
- Z5.2 - The Contractor includes in its contract with each Subcontractor (1) a period for payment of no more than 19 days after the due date in the Main Contract (2) a provision requiring the Subcontractor to include a period for payment in its Sub-subcontracts of no more than 23 days after the due date in the Main Contract and (3) a provision requiring the Subcontractor to assess the amount due to its Sub-subcontractors without taking into account the amount paid by the Main Contractor.
- Z5.3 - The Contractor notifies non-compliance with the timescales for payment through the Feedback Service, includes a similar notification provision in its Subcontracts and requires its Subcontractors to include a similar provision in their Sub-subcontracts.
Whilst this is a welcome aim, careful drafting will be required to ensure that any express links in the subcontracts and sub-subcontracts to the due date under the Main Contract will not fall foul of the "pay when certified" prohibition being brought in by the 2009 Act. More importantly, it is difficult to envisage how this Z clause could be enforced in practice, particularly where it requires contractual provisions to be included down the supply chain. Interestingly, clause 26 of NEC3, which requires the Contractor to submit any proposed non-NEC conditions of Subcontract for the Project Manager's approval, has not been amended by this Z clause. This means if an NEC subcontract is used, the Project Manager's approval is not required, even if that subcontract omits the fair payment wording.
In addition, there is no contractual penalty for breaching these requirements and no penalty stated for a report being made through the Feedback Service. Crucially, although assessment of the correct amount payable is a key part of any fair payment regime, the guidance also relies on the underlying assessment of the amount payable being adequate.
The Notes above are available at: