Summary

Getting paid is the end goal of every job, and UK construction law provides tradespeople with meaningful protections — but only if they know how to use them. The Construction Act 1996 applies to most commercial construction contracts and creates a statutory right to stage payments, payment notices, and a "pay now, argue later" adjudication process. Many sole traders and small contractors are unaware of these rights and simply accept late payment or disputes as a cost of doing business.

For domestic clients (homeowners), the Construction Act does not apply, but the Consumer Rights Act 2015, Late Payment legislation, and the County Court small claims process all offer routes to recover money owed. The key discipline throughout is documentation: every quote, variation order, stage payment application, and site visit note is potential evidence.

Retention — the practice of holding back a percentage of the contract sum until defects have been remedied — is widely used in commercial construction and increasingly challenged as unfair to subcontractors and smaller contractors. Understanding how retention works, when it should be released, and how to chase it is essential for maintaining healthy cash flow.

Key Facts

  • Construction Act 1996 — formal title: Housing Grants, Construction and Regeneration Act 1996; applies to most commercial construction contracts in England, Wales, and Scotland (excluding residential occupier contracts)
  • Commercial payment period — maximum 30 days from invoice or application for payment; parties cannot contract out of this for commercial contracts
  • Domestic client payment — no statutory period, but Late Payment Act applies to commercial invoices; always specify payment terms in writing
  • Payment notice — must be issued within 5 days of payment due date by the paying party; must state the notified sum
  • Pay-less notice — payer's only way to pay less than the notified sum; must be issued no later than 5 days before the final date for payment
  • Adjudication right — any party to a Construction Act contract can refer a dispute to adjudication at any time; decision within 28 days; pay first, argue later
  • Late Payment of Commercial Debts Act 1998 — statutory interest at 8% above Bank of England base rate on late commercial invoices; also entitles creditor to fixed sum compensation (£40–£100 depending on debt size)
  • Retention percentage — typically 2.5–5% of contract value; 50% released at practical completion, 50% after defects liability period (typically 6–12 months)
  • Stage payment structure (typical) — 25% mobilisation deposit, 25% first fix, 25% second fix, 25% on completion
  • Letter before action — required before issuing County Court claim; typically 14-day deadline
  • Small claims limit — £10,000 in England and Wales; £5,000 in Scotland; £3,000 in Northern Ireland
  • County Court judgment (CCJ) — remains on debtor's credit record for 6 years if unpaid; powerful leverage for payment
  • Statutory demand — for debts over £750 from a company or £5,000 from an individual; if unpaid within 21 days can lead to insolvency proceedings
  • RICS/CIOB adjudication — adjudicator panels available through RICS, CIOB, and other nominating bodies; costs typically £1,500–5,000 per party
  • Final account — a complete financial statement of all contract sums, variations, daywork, loss and expense, and retention

Quick Reference Table

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Debt Type Recommended Route Timescale Cost
Domestic client, <£10,000 County Court small claims 2–6 months £35–455 court fee + time
Domestic client, >£10,000 County Court fast track or solicitor 6–18 months Solicitor fees apply
Commercial, any sum Adjudication (Construction Act) 28 days £1,500–5,000 per party
Commercial, <£10,000 Small claims or adjudication Both viable Adjudication faster
Undisputed debt (commercial) Statutory demand / winding up 21 days + Low cost, high impact
Large contractor insolvency HMRC preferential creditor status Variable Retain security where possible

Detailed Guidance

Stage Payments: Structure and Application

Stage payments protect cash flow and limit exposure if a client stops paying. A typical breakdown for a residential extension:

Stage % of Contract Value Trigger
Mobilisation deposit 25% Before work starts
First fix 25% Structural frame, first-fix MEP
Second fix 25% Plasterboard, second-fix MEP
Completion 25% Practical completion, snagging done

The exact stages should be defined in the original contract or quote. Each stage should have a clear, observable trigger so there is no dispute about whether it has been reached.

For commercial contracts under the Construction Act, each stage payment application must comply with the statutory payment mechanism (application for payment, payment notice, pay-less notice).

Issuing an Application for Payment (AFP): An AFP is a formal request for payment on a commercial contract. It should include:

  • The application number and date
  • The assessment date (usually the date of the application)
  • The amount claimed (gross valuation less previous payments)
  • A breakdown showing contract sum, variations to date, retention deducted, and net payment claimed

The employer (or their QS) must issue a payment notice within 5 days of the payment due date. If they do not, the contractor's AFP becomes the default payment notice.

Payment Notices and Pay-Less Notices

Under the Construction Act (as amended by the Local Democracy, Economic Development and Construction Act 2009):

Payment notice: The paying party must issue a payment notice within 5 days of the payment due date (or the date of the AFP). The notice states the "notified sum" — what they intend to pay and how it is calculated.

Pay-less notice: If the payer intends to pay less than the notified sum, they must serve a pay-less notice at least 5 days before the final date for payment. The notice must state the sum they propose to pay and the grounds for withholding the balance.

If no payment notice is issued: The contractor's AFP stands as the default payment notice. The full amount claimed becomes payable on the final date for payment.

If no pay-less notice is issued: The paying party cannot withhold any amount — even if they have a legitimate counterclaim. They must pay the notified sum in full. They can pursue recovery through adjudication or court afterwards, but they must pay first.

This "pay now, argue later" principle is the core protection of the Construction Act.

Retention: Rules, Release, and Chase

Retention is a percentage of each payment withheld by the employer to provide a financial incentive for the contractor to return and remedy defects. Typical terms:

  • Rate: 2.5–5% of all payments
  • Release 1 (moiety): 50% of retention released at practical completion (when the works are substantially finished, even if snagging items remain)
  • Release 2 (balance): Remaining 50% released at expiry of the defects liability period (typically 6–12 months after practical completion), subject to all defects having been remedied

Chasing retention: Retention is a common source of non-payment, particularly from main contractors who have their own cash flow problems. Effective practices:

  1. Include retention release dates explicitly in your subcontract or quote
  2. Issue a written application for each retention release when it falls due
  3. If not paid within the contract terms, issue a formal notice of late payment
  4. For Construction Act contracts, consider adjudication if retention is withheld beyond the release date without a valid pay-less notice

Retention reform: [verify] — the UK government has consulted on retention reform and a deposit scheme for construction retention, but as of 2026 no mandatory scheme has been enacted in England. Scotland, Wales, and Northern Ireland may have different provisions — verify current status.

Final Account

The final account is a complete financial reconciliation of the contract:

  1. Contract sum (original tender price)
  2. Plus: all agreed variations (each with reference to the variation order)
  3. Plus: provisional sums spent (against any provisional allowances in the original contract)
  4. Plus: daywork (if applicable)
  5. Plus: loss and expense (if applicable — prolongation costs, disruption)
  6. Less: any omissions or deductions agreed
  7. Less: retention withheld (state separately: moiety one and moiety two)
  8. Less: previous payments received
  9. = Final balance due

Issue the final account as a formal document, not just a final invoice. This provides clarity and creates a clear basis for any dispute about the final sum.

Late Payment: Interest and Compensation

For commercial invoices, the Late Payment of Commercial Debts (Interest) Act 1998 entitles the creditor to:

  • Interest: 8% above the Bank of England base rate, running from the day after the payment fell due
  • Compensation: Fixed-sum compensation automatically added to the debt:
    • Debts under £1,000: £40
    • Debts £1,000–£9,999.99: £70
    • Debts £10,000 or more: £100

These amounts accrue automatically — you do not need to claim them separately. Include them in any letter before action or court claim.

For domestic clients, the Late Payment Act applies if the client is acting in a commercial capacity (e.g., a landlord having rental property renovated), but not for pure consumer contracts. In consumer cases, you can claim interest at the court rate (currently 8% per annum) from the date of judgment.

Letter Before Action

Before issuing a County Court claim, you must send a letter before action (LBA). The LBA should:

  1. State the amount owed and the basis for the claim
  2. Attach copies of the invoice(s) and any relevant correspondence
  3. Give a 14-day deadline for payment (standard for most debt claims)
  4. State that you will issue a County Court claim if payment is not received by the deadline
  5. Offer to resolve the dispute through mediation if appropriate

Keep a copy and send by recorded delivery or email with read receipt.

County Court Small Claims (England and Wales)

For debts up to £10,000, the small claims track in the County Court is relatively accessible and low-cost. Key points:

  • Claim form: online at moneyclaim.gov.uk (or form N1 for paper)
  • Court fee: scales from £35 (claims up to £300) to £455 (claims £5,000–£10,000)
  • Process: defendant has 14 days to respond; if they admit and pay, the process is over; if disputed, a hearing is listed (usually 1–4 months)
  • Recovery of costs: on the small claims track, only fixed costs are recoverable — generally the court fee and limited fixed costs; solicitor fees are not usually recoverable
  • County Court Judgment (CCJ): if you win and the defendant does not pay, a CCJ is entered on their credit record for 6 years — significant leverage for residential clients
  • Enforcement: enforcement of a CCJ may require further applications (warrant of control, attachment of earnings) if the debtor still does not pay

Adjudication (Commercial Contracts)

For Construction Act contracts, adjudication is faster and often more effective than court. Any party can refer a dispute at any time. The process:

  1. Issue a Notice of Adjudication identifying the dispute and the relief claimed
  2. The other party has 7 days to respond to the nominating body (RICS, CIOB, etc.) if needed
  3. An adjudicator is appointed within 7 days of notice
  4. The adjudicator issues a decision within 28 days (extendable to 42 days with referrer's consent)
  5. The decision is immediately binding and must be complied with
  6. Either party can have the dispute finally determined by arbitration or court afterwards

Adjudication is not cheap (adjudicator fees typically £1,500–5,000+ per party), but it is fast and powerful for disputes over £5,000+.

Frequently Asked Questions

Do I have to offer stage payments?

No — but it is strongly advisable for any job over £2,000. Without stage payments, you bear all the financial risk until completion. A deposit of 25% covers material costs and protects you if the client cancels. Always include stage payment terms in your written quote.

What if a main contractor withholds payment from my subcontract and claims the client hasn't paid them?

"Pay when paid" clauses (making subcontractor payment conditional on the main contractor receiving payment from the employer) are prohibited for Construction Act contracts by Section 113. A main contractor cannot delay paying you just because they haven't been paid — you have an independent right to payment.

Can I put a lien on the property if I'm not paid?

England and Wales do not have a statutory construction lien system comparable to some other jurisdictions. You cannot place a lien on a property to secure payment for construction work. Your remedies are through adjudication, the courts, or (for commercial) a statutory demand. If you have supplied materials that have not been paid for and have retained title (a retention of title clause in your supply contract), you may be able to recover those materials, but this is a separate issue.

How do I deal with a client who pays in instalments but misses a stage?

First, issue a formal written reminder referencing the contract terms. If payment is not received within 7 days of the payment due date, stop work and notify the client in writing that works are suspended pending payment. Under Section 112 of the Construction Act (commercial contracts), you have a statutory right to suspend performance for non-payment after issuing 7 days' notice. Suspension does not breach the contract and you are entitled to additional costs caused by the suspension.

Regulations & Standards

Using squote: squote keeps a complete history of every quote sent by email — including the PDF attachment and the date sent — which means you always have a documented paper trail if a payment dispute goes to the small claims court.