project controls and construction act

The Construction Act – What Is It? What Do You Need to Know in 2024?

Those of us in the world of contracts and the commercial side of construction can’t get enough of it. But to a lot of people, it’s something other people talk about and not something that affects our daily lives. So, what is the Construction Act? And why should we care?

First, we need to address it by its full name. Because no article on the subject would be complete without the “Housing Grants, Construction and Regeneration Act 1996”. A snappy title! Originating from the famous Latham Report of 1994, the aim was to improve payment culture and ultimately help to reduce construction insolvency.

The Act has been amended  since 1996, but the original Act introduced our favourite subject – the right to adjudication. The important thing to note with the Act is that it trumps contract in respect of adjudication and payment provisions. The Act  is law. Broadly, the Act introduces mandatory provisions required for every construction contract in relation to payment and dispute resolution. As an example, if a contractual payment mechanism does not meet the requirements of the Act, the Act steps in to make the contractual payment mechanism compliant.

Getting Paid

The most recent amendment has included a right to payment in instalments for contracts set to last more than 45 days.

It also made some changes to the mechanisms for payment and rights of suspension of works in the event of non-payment. These should be treated and used with care. However, the right to suspend work has the potential to be a very powerful tool in the armoury of a contractor or sub-contractor seeking payment for work completed.

One of the original key features of the Act was to remove ‘Pay When Paid’ clauses, making it illegal for employers / main contractors to impose a pay when paid regime on their subbies. This was all part of the aim of reducing the number of construction industry insolvencies which reached almost 5,500 in 1992. Sadly, it seems to have had limited effect, as the BCIS noted in this recent article.

It’s vital, as we’ve noted before, to check your contract and payment terms. Missing a deadline or part of the payment process can have serious ramifications. Be sure to make a note of and keep to the payment and notice regime in your contract – or if applicable, the regime under the Act.

Dispute Resolution

Arguably, the key benefit has been to reduce the cost and length of time spent in dispute resolution. Prior to the introduction of the Act, disputes were usually referred to arbitration or litigation in court. Both processes would be time-consuming and were likely to be very costly. They often involve lengthy periods engaged with solicitors, expert witnesses, barristers and others. One case of a PFI project in Leeds finished construction in 1994 and only received an arbitration decision in 2006. And as the old adage goes – justice delayed is justice denied.

With the advent of adjudication, disputes raised are settled in a matter of weeks. Not always perfectly, but they can later be challenged, and at least a degree of justice happens in a short space of time. The courts will usually ‘enforce’ a decision and therefore cash will continue to flow, and parties can move on.

Other Matters

There have been debates over what is or isn’t a construction contract for the purposes of the Act. One of the amendments to the Act expanded the scope of construction contracts to include oral contracts – i.e. those not in writing. But of course, if a contract is not in writing, the terms can be very hard to determine. If at all possible, avoid entering into a contract without the very bare essentials written down.

The Act has led to a lot of changes in the construction industry. Whether it’s had the effect of reducing insolvency as first envisaged is a moot point. With 4,500 insolvencies in 2023, some would argue not. But since 1997, adjudication has been popular as a route to obtaining quick justice. The Act will undoubtedly be with us for some time to come. Hopefully future amendments will lead to more certain law and a better quality of decisions at adjudication.

Should you need any help with any of the issues outlined above, get in touch with one of the team today.