Payment Terms For Construction: What To Include So You Get Paid On Time
Late payment in construction often starts long before an invoice goes overdue. Applications, valuations, variations, retentions and final accounts all depend on terms that were agreed, or never agreed, at the start of the job. Clear payment terms won't guarantee that anyone pays on time, but they give you something concrete to point to when payment slips.
In short: good construction payment terms set out how and when you apply for payment, when payment falls due, how retentions work, what happens if payment is late, and how disputes are raised. If no payment date is agreed, the Late Payment Act sets a default of 30 days, but it's far better to agree your own in writing before work starts.
Construction Has Its Own Payment Rules
Construction contracts in Great Britain are covered by the Housing Grants, Construction and Regeneration Act 1996, known as the Construction Act, which includes entitlement to stage payments, payment notices and the right to suspend work for non-payment. Northern Ireland has an equivalent regime, and Ireland has its own under the Construction Contracts Act 2013. Standard forms such as JCT and NEC come with their own payment provisions, so check what applies to your contract before adding anything to it.
What Happens If You Haven't Agreed Any Terms
If a business-to-business contract doesn't set a payment date, the Late Payment of Commercial Debts (Interest) Act 1998 provides a default period of 30 days, generally running from the later of delivery of the work and the customer having notice of the amount owed. Where parties agree a longer period, it generally shouldn't exceed 60 days unless it's expressly agreed and isn't grossly unfair to the supplier.
The default is a safety net, not a plan. It says nothing about applications, retentions or disputes, and on a long project, that's where most of the delays arise.
What Good Construction Payment Terms Include
How and when you apply. Set out the application dates, what supporting information is needed, and who it goes to.
When payment falls due. State the payment period and exactly when it starts, rather than leaving it to 'promptly' or 'in due course'.
How variations are handled. Say how changes are instructed, priced and paid for, because unpriced variations are a common source of disputes.
Retention terms. State the percentage held, when it is released, and who releases it.
A late payment clause. State that statutory interest and compensation apply to overdue sums.
A dispute route. Explain how a query is raised, in writing and within a set time, and how undisputed amounts are paid in the meantime.
Your right to pause work. Where the contract and the law allow it, make clear what happens if payment isn't made.
Be wary of pay-when-paid clauses. These tie your payment to whether the main contractor has been paid, and they are generally ineffective in construction contracts, with limited exceptions such as the insolvency of the paying party.
Be Specific About Retentions
Retentions are typically 3% to 5% of contract value and are often held until the end of a defects period, which is commonly around 12 months. Because they're released so long after the work is finished, they are easy to forget and easy to dispute. Define the percentage, the release dates and who is responsible for releasing them, and diarise the dates.
The Commercial Payments Bill, if passed, would ban the withholding of construction retentions in Great Britain, with transitional arrangements. It isn't law yet, so retentions agreed today still matter.
Late Payment Interest And Compensation
Under the Late Payment Act, a business paid late by another business can generally claim statutory interest at 8% above the Bank of England base rate, fixed compensation of £40, £70 or £100 per invoice depending on its size, and reasonable recovery costs above that. Parties generally can't contract out of these rights unless the contract provides its own substantial remedy for late payment.
It's sensible to refer to this in your terms and on your invoices, and to tell a customer in writing if you intend to claim.
Keep Records And Get Written Agreement
Terms only help if the other side has accepted them. Send them with the quote or tender, ask for written acceptance before work starts, and keep a copy. During the job, keep applications, valuations, certificates and correspondence in order, so you can show exactly what was due and when if a dispute arises.
What's Changing
The Commercial Payments Bill, also known as the Late Payments Bill, would introduce a 60-day cap on business-to-business payment terms, with a shorter limit for public authorities, mandatory statutory interest, and earlier notification of disputes. It has passed the House of Lords and is awaiting its Commons stages. If it's approved, it's expected to come into force in 2027.
When Terms Aren't Enough
Even clear terms don't guarantee payment. Before you agree terms with a new client or main contractor, it's worth checking who you're dealing with, and you can run a credit check on Glenwood's credit checking platform. If an invoice or retention has already gone overdue, acting early gives you the most options. Specialist construction debt recovery can help you recover what you're owed.
FAQs
What should construction payment terms include? The application process, when payment falls due, retention terms, how variations are handled, a late payment clause and a route for raising disputes.
What if I haven't agreed any payment terms? If no payment date is agreed in a business-to-business contract, the Late Payment Act provides a default period of 30 days.
Are pay-when-paid clauses enforceable in construction? They are generally ineffective in construction contracts, with limited exceptions such as the insolvency of the paying party.
How long can payment terms be? Under current rules, a payment period longer than 60 days generally has to be expressly agreed and not grossly unfair. The Commercial Payments Bill would introduce a 60-day cap if it passes.
Should retention terms be in writing? Yes. State the percentage, the release dates and who releases it, so there is no doubt about when it falls due.
