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ImprovIng payment practIces In the constructIon Industry

Analysis of the 2nd Consultation on proposals to amend Part 2 of the Housing Grants, Construction and Regeneration Act 1996 and the Scheme for Construction Contracts (England and Wales) Regulations 1998

July 2008

Explanation of the wider context for the consultation


The Review of Part 2 of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) and the Scheme for Construction Contracts (England and Wales) Regulations 1998 was announced in the 2004 Budget: Following concerns expressed by the construction industry on unreasonable delays in payment, the Government will review the operation of the adjudication and payment provisions in the Construction Act 1996 to identify what improvement can be made.1 Following the Budget announcement, Nigel Griffiths asked Sir Michael Latham to review the operation of the Construction Act. An industry review group was set up under his chairmanship, along with specific groups to look at the payment framework and adjudication respectively. Sir Michael reported in September 2004. His report can be found at (http://www.berr.gov.uk/sectors/construction/constructionact/page13956.html). DTI considered the report produced under Sir Michaels chairmanship and in March 2005 issued, jointly with the Welsh Assembly Government, a first consultation document, Improving Payment Practices in the Construction Industry (http://www. berr.gov.uk/sectors/construction/constructionact/page13956.html). This looked at a number of the issues where amendments to the existing Act may be needed and covered both the payment framework and adjudication. There were over 350 responses emphasising the importance the industry attaches to the effective operation of the Construction Act. In January 2006 DTI published its analysis of those responses and set out those proposals it considered should be taken forward (http://www.berr.gov.uk/sectors/ construction/constructionact/page13956.html). At that point it was hoped that amendments could be introduced through a Legislative Reform Order. To help refine and develop the proposals, a sounding board was set up. Sounding board members were selected not to represent specific sectors within the industry, but were chosen because of their knowledge, experience and access to industry networks. It became clear that the nature of the possible amendments to the Construction Act were not suitable for introduction through a Reform Order. DTI therefore issued a second consultation paper in June 2007, also called Improving Payment Practices in the Construction Industry (http://www.berr.gov.uk/sectors/construction/ constructionact/page13956.html) which set out a series of detailed proposals which it would seek to introduce through primary legislation. That consultation closed on 17 September 2007. In total 71 responses were submitted. This publication provides an analysis of those responses.

1 Text taken from paragraph 3.59 of the Economic and Fiscal Strategy Report Budget 2004

In parallel with the publication of this analysis BERR is publishing draft Bill clauses and an explanatory note. These can be found at (http://www.berr.gov.uk/sectors/construction/ constructionact/page13956.html). The Cabinet Offices current consultation on the Governments draft legislative programme for 2008 / 2009 Preparing Britain for the Future indicates the Governments intention to introduce these clauses as part of the Community empowerment, housing and economic regeneration Bill.

enquiries to:
Michael McDermott Construction Sector Unit, Department for Business, Enterprise and Regulatory Reform Bay UG/86 1 Victoria Street London SW1H 0ET Tel: 020 7215 3722 Fax: 020 7215 0896 Email: michael.mcdermott@berr.gsi.gov.uk Questions about the involvement of the Welsh Assembly Government in the consultation process, consideration of responses and future implementation should be addressed to: Phillip Gardiner Construction and Domestic Energy Division Welsh Assembly Government Office Rhydcar Merthyr Tydfil CRH8 1UZ Tel: 01685 729 229 Fax: 01685 729547 Email: phillip.gardiner@wales.gsi.gov.uk

additional copies
You may make copies of this document without seeking permission. Further printed copies of this analysis or the consultation document can be obtained quoting ref: URN 08/1094 from: BERR Publications Order Line ADMAIL Publications London SW1W 8YT Tel: 0845 015 0010 Fax: 0845 015 0020 Minicom: 0845 015 0030 www.berr.gov.uk/publications

The Department will be able to arrange for this consultation to be made available in other languages or in Braille if required.

confidentiality
Responses to the consultation have all been made public by BERR and the Welsh Assembly Government unless respondents specifically asked that their response or identity remained confidential. The responses are available at: (http://www.berr.gov. uk/sectors/construction/constructionact/page13956.html) We have handled any personal data provided by respondents as is appropriate in line with the Data Protection Act 1998.

Contents
Executive summary ..................................................................................................................8 Chapter I Adjudication framework ........................................................................... 10
removing the requirement that the construction act should only apply to contracts in writing ... 10 prohibiting agreements that interim or stage payment decisions will be conclusive .................... 11 Introduction of a statutory framework for the costs of adjudication ............................................. 11

Chapter 2 Payment framework ................................................................................. 12


prevention of unnecessary duplication of payment notices ........................................................... 12 clarification of the requirement that a section 110 (2) payment notice should be served ............. 12 clarity of the content of payment and withholding notices ........................................................... 1 clarity of the sum due .................................................................................................................... 1 prohibiting the use of pay-when-certified clauses.......................................................................... 1

Chapter 3 Improving the right to suspend performance ........................... 1 Chapter 4 Other issues which are being considered as part of the consultation ........................................................................... 1
devolution ...................................................................................................................................... 1 correction of errors ........................................................................................................................ 1 the judgement of the house of Lords in melville dundas-v-george Wimpey ................................ 1

Way forward/Next steps .................................................................................................... 1 Annex 1 Breakdown of responses by type of respondent ...................... 18 Annex 2 Statistical breakdown of responses to the consultation response form ..................................................................... 19 Annex 3 Cabinet Office Code of Practice on Consultations ................... 1

Executive summary
Developing amendments to the Construction Act was always a challenge. The 1996 Act was introduced on the basis of support from across the industry. In conducting the review we have sought to work on the basis of consensus and not to intervene unduly into the parties freedom of contract, while ensuring clarity about what will be paid and when, and increasing the effectiveness of adjudication as an effective way of resolving disputes. The 2007 consultation paper, Improving payment practices in the construction industry: 2nd Consultation, put forward the following proposals:

Adjudication
K Removing the requirement for contracts to be in writing for the Construction Act to apply K Prohibiting agreements that interim or stage payment decisions will be conclusive K Introducing a statutory framework for the costs of adjudication

Payment Framework
K Preventing the unnecessary duplication of payment notices K Clarifying when a payment notice should be served K Clarifying the content of payment and withholding notices K Clarifying what constitutes the sum due K Prohibiting pay-when-certified clauses K Improving the right of suspension The consultation also put forward questions on devolution, the introduction of a slip rule and the implications of the House of Lords judgement in Melville Dundas vs George Wimpey

the responses
There was broad support for the proposals set out in the consultation paper though, given their technical nature, respondents were understandably concerned with the precise wording of any proposed amendments.

Adjudication
The support for the proposed amendments on adjudication was particularly strong. K Respondents almost universally supported the proposal to remove the requirement that contracts should be in writing for the provisions of the Construction Act to apply. K The proposal on conclusive decisions was welcomed though some felt it might be better to deal with the issue with a different legislative solution. K The introduction of a statutory framework for costs was broadly welcomed though some respondents felt it would be better to introduce an outright ban.

Payment
There was understandably a little more difficulty with the proposed amendments to the payment framework. K The removal of the requirement to issue a payment notice for contracts subject to a third party certification process was generally welcomed though some questioned the extent to which it was an issue. K Respondents broadly welcomed the increased clarity and transparency our proposals were seeking to introduce to the existing statutory payment framework. K However, some saw no need to intervene at all while others sought to make the case for a much greater intervention into freedom of contract and for wholesale reform of the existing statutory payment framework. K Responses on the abolition of pay-when-certified clauses were mixed although no clear alternative proposal emerged which would provide greater clarity about when a payment would be made.

Suspension
The proposal to improve the right of suspension received almost unanimous support.

Other issues
Respondents agreed that we should continue to work with the devolved administrations to keep differences across England, Wales and Scotland to a minimum. It was clear the recent House of Lords decision in Melville Dundas vs George Wimpey had given rise to some confusion and respondents were keen to see some clarification in statute.

Chapter 1 Adjudication framework


Reducing disincentives to referring disputes to adjudication where it is appropriate.

Consultation proposals
1. Removing the requirement that the Construction Act should only apply to contracts in writing 2. Prohibiting agreements that interim or stage payment decisions will be conclusive 3. Introducing a statutory framework for the costs of adjudication

Responses 1. removing the requirement that the construction act should only apply to contracts in writing
There was overwhelming support for this proposal 90% of respondents. It was felt that widening the scope of the Construction Act to include oral as well as written agreements was a vital step in improving the effectiveness of adjudication. ...I consider this change vital to the continuing effectiveness of adjudication. If any one change were to be made it is suggested that this is the one which is the most important. I consider that without this proposed change there is an increasing likelihood that adjudication will be frustrated........ .....this is essential to improve both adjudication and payment practices in the industry. Respondents indicated that the incidence of jurisdictional challenge on the basis of all the key contract terms being in writing was high the highest reported figure was in 36% of contracts. The average from all consultation responses was 30%. Such concerns as were expressed tended to focus on whether a 28 day quick and dirty dispute resolution process was suitable where the contract terms were unclear and whether an unintended consequence of this proposal might be to increase adjudication costs. If oral disputes referred to adjudication were inherently more complex than disputes under contracts wholly in writing, then this would have the effect of increasing the average cost of an adjudication. We are concerned lest our proposal encouraged parties to agree oral contracts. Over two thirds of consultation responses agreed that placing contracts on a clearly recorded basis had wider business benefits. We suggested that some important contractual provisions specifically any provisions relating to a contractual adjudication scheme will continue to need to be in writing. 84% of respondents supported this safeguard.
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2. prohibiting agreements that interim or stage payment decisions will be conclusive


There was strong support for amending the Construction Act to prohibit agreements that decisions as to the amounts of payments whether by instalment, stage or other periodic payments were conclusive. 78% of responses supported this proposal. ..Making interim payments final and binding is contrary to the intention of having interim payments. A number of responses suggested decisions should be open for scrutiny by an adjudicator (albeit within a specified time frame). Many respondents identified the importance of there being a period of time, a minimum of, say, 28 days, during which decisions could be challenged. It was also suggested that the term agreements should be taken to mean contract terms. Although, there was strong general support for this proposal, a small number of responses expressed concern that it would limit the parties freedom to contract. It was suggested that the parties must be free to agree between themselves that specific valuations/payments were conclusive since, in certain contracts, the parties ability to agree between them the conclusive nature of certain payments/valuations is an effective project management tool.

. Introduction of a statutory framework for the costs of adjudication


There was strong support for our proposal to prohibit agreements on the allocation of the costs of the adjudication until after the adjudicator was appointed. 79% of responses agreed with this proposal. There was broad support for the adjudicator to be statutorily entitled to claim for their fees and expenses. Many responses called for the Construction Act to be aligned with the 1996 Arbitration Act. Making both parties jointly and severally liable for the adjudicators fees and expenses was also welcomed. There was strong opposition from a number of key sectors to the proposal that parties could agree, after the appointment of an adjudicator, that one of them will pay the whole or part of the costs of the adjudication. Respondents falling into this bracket tended to want a more significant statutory intervention. There was also some support for the principle that the costs should lie where they fall.

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Chapter 2 Payment framework


Improving the transparency and clarity in the exchange of information relating to payments to enable the parties to construction contracts to better manage cash flow.

Consultation proposals
1. Prevention of unnecessary duplication of payment notices 2. Clarification of the requirement that a section 110 (2) payment notice should be served 3. Clarity of the content of payment and withholding notices 4. Clarity of the sum due 5. Prohibiting the use of pay-when-certified clauses

Responses 1. prevention of unnecessary duplication of payment notices


There was strong support for the proposal to allow a notice or certificate from a third party to act as a section 110(2) payment notice. Over two thirds (69%) of responses supported it. There was a widely held concern that we should reflect language used in the industry rather than introducing amendments which were overly legalistic. Detailed comments included making clear in the draft wording that: K The third party actually should have the right to issue a certificate K That the certificate from the third party should be issued or copied directly to the payee not an intermediary Some questioned the need for this proposal, feeling the practice was already permissible. On this basis they challenged the saving attributed to this measure in the Impact Assessment.

2. clarification of the requirement that a section 110(2) payment notice should be served
There was general support from 56% of respondents for this proposal but some felt this issue should be addressed by guidance rather than by legislation. All responses supporting this proposal spoke of the importance of using appropriate terminology in the amended wording. It was pointed out that phrases such as set-off and abatement were not widely used in the industry and were confusing. Some respondents felt our proposal was overly complicated and indicated that they would like the section 110(2) payment notice simply to state what was to be paid and the grounds for paying that sum.

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Some felt that a single notice system would be preferable while others noted that this could be problematic with a third party certifier. There was also a concern that any proposal should not be seen as encouraging cross-contract set-off.

. clarity of the content of payment and withholding notices


There was wide support from 71% of respondents for this proposal for providing a clearer link between the content of section 110(2) and section 111 notices. It is fundamental to the successful development and sustainability of the construction industry that each business knows how much it will be paid and when? The review and the proposed changes to the HGCR Act should ensure that through the Payment /Withholding Notice regime this becomes a reality. However, why not combine both notices, you dont need two and please make sure a Payment Notice has teeth and is mandatory.... However, some questioned the extent to which we were attempting to deal with a real, rather than a perceived, problem and considered that guidance was a better solution. Others decided not to engage with the proposal preferring to set out alternatives. More generally there were concerns that any emerging proposals were not unduly complex.

. clarity of the sum due


The principle behind this proposal was broadly welcomed, though some were wholly opposed to it. An express remedy in the event of a failure to certify or issue a notice of payment might provide greater comfort to payees Opponents of the proposal felt it introduced red tape to address a non-existent issue. if it is intended to introduce a default position whereby a payer must, without appropriate notice, pay any sum that is invoiced by the payee, this would be manifestly unfair Others wanted to see the proposal clarified to include claims issued before the due date (e.g. applications for payment issued under the contract). Some suggested that the fallback proposed in the consultation be the single statutory mechanism. It was also pointed out that a similar (albeit voluntary) approach had been tried before through the 1998 JCT Design and Build Form but that it had been rejected by the industry and subsequently removed from the standard form.

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. prohibiting the use of pay-when-certified clauses


There was strong support, 76% of respondents, in favour of this proposal. We strongly support this proposal subject to the detailed mechanisms being made sufficiently robust Some called for the prohibition to extend to all conditional payment provisions. Strong contrary views were expressed and there was concern that this proposal, if implemented, would interfere with the parties freedom of contract and stifle innovation in the future. One respondent felt that the judgement in the Midland Expressway Ltd vs Carillion Construction Ltd case on whether such clauses represented an adequate mechanism under the Act already provided a robust test.

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Chapter 3 Improving the right to suspend performance


Those replying to this question made the point that parties very rarely exercised their right to suspend performance. That said, there was almost universal support for what was proposed in the consultation document. Further comments, such as they were, tended to focus on ensuring the suspending party had not wrongfully suspended.

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Chapter 4 Other issues which are being considered as part of the consultation
Responses were also received to a number of the supplementary issues included in the consultation. These are summarised in the following paragraphs.

devolution
There was strong support, over 98% of the respondents, for the suggestion of cross border uniformity with the devolved administrations.

correction of errors
There was also strong support, over 90% of respondents, for the introduction of a provision allowing the adjudicator to correct errors and omissions in his decision even though this was not strictly necessary in England and Wales.

the judgement of the house of Lords in melville dundas-v-george Wimpey


Just under two thirds of respondents i.e. 65%, supported the proposal put forward in the consultation document and illustrated a desire from many in the industry to amend the Construction Act to make it clear that, other than in cases of a subsequent insolvency, the requirement for the payer to issue a section 111 Withholding Notice should apply.

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Way forward/Next steps


The responses to the consultation exercise which are summarised in this analysis have informed the development of draft Bill clauses. Those clauses have been published in conjunction with this analysis. The Government has published its draft legislative programme for 2008/2009 Preparing Britain for the Future. This set out our intention to introduce these clauses as part of the Community empowerment, housing and regeneration Bill during that Parliamentary Session.

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Annex 1 Breakdown of responses by type of respondent


Breakdown of responses
category Adjudicators Solicitors Sub-contractors Main-contractors/Clients Other (e.g. CE, RICS, RIBA,CIC,CUBATG) total number 14 17 24 7 9 1

country of origin:
England 68 Scotland 2 Northern Ireland 1

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Annex 2 Statistical breakdown of responses to the consultation response form


chapter 1 1. Removing the requirement that the Construction Act should only apply to contracts in writing.
Q1d: What proportion of contracts as a whole do you consider contain non-trivial terms which have been subject to oral agreement or variation? Answers are illustrated in the graph below.
Proportion of contracts subject to oral agreement or variation
35 30 25 % 20 15 10 5 0 0% - 10%
Based on 37 responses

10% - 25%

25% - 50%

50% - 75%

75% - 90%

90% - 100%

% of contracts

Mean 35.5% Median 29.4% Mode 17.5% It seems reasonable to conclude that approximately 30% of contracts have non-trivial terms subject to oral agreement or variation, although clearly some respondents experience much higher levels.

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3. Introduction of a statutory framework for the costs of adjudication


Qe: What proportion of contracts do you think contain an agreement that the referring party (or a specified party) should pay all or part of the costs of the adjudication? Answers are illustrated in the graph below.
Proportion of contracts containing agreement that a specified party should pay all or part of adjudication costs
40 35 30 25 % 20 15 10 5 0 Less than 0.1%
Based on 34 responses

0.1% - 0.5%

0.5% - 1%

1% - 5%

5% - 10%

More than 10%

% of contracts

Mean 7.0% Median 6.3% Mode 7.5%

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Qf: What proportion of adjudications do you think are conducted under contracts containing an agreement that the referring party (or a specified party) should pay all or part of the costs of the adjudication? Answers are illustrated in the graph below.
Proportion of adjudications under contracts containing agreement that a specified party should pay all or part of adjudication costs
30 25 20 % 15 10 5 0 Less than 0.1%
Based on 33 responses

0.1% - 0.5%

0.5% - 1%

1% - 5%

5% - 10%

More than 10%

% of contracts

Mean 4.1% Median 2.6% Mode 3.0% Comparing the responses to Q3e and Q3f, we can see that while approximately 7% of contracts contain agreements about who should pay adjudication costs, only 3% of adjudications are conducted on such contracts. This suggests that contracts containing such agreements are less likely to go to adjudication.

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chapter 2 2. Clarification of the requirement that a section 110(2) payment notice should be served
Q2b: Responses to Improving payment practices in the construction industry in 2005 suggested that a section 110(2) payment notice is only issued for 40% of payments. What proportion of payments where the notice is not issued do you think can be explained by the current deficiencies in the requirements in section 110(2) of the Act? Answers are illustrated in the graph below.
Proportion of cases where section 110(2) payment notice is not issued due to deficiencies in the current legislation
45 40 35 30 % 25 20 15 10 5 0 Less than 10%
Based on 35 responses

10% - 33%

33% - 66% % of contracts

66% - 90%

More than 90%

Mean 44% Median 43% Mode 5% It is clear from the graph above that there are a range of views on this question. More than 60% of respondents believe that deficiencies in the legislation lead to a failure to issue a section 110(2) payment notice in at least 10% of cases. There were not sufficient responses to carry out further analysis.

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3. Clarity of the content of payment and withholding notices


Qc: Responses to Improving payment practices in the construction industry in 2005 suggested that a section 110(2) payment notice is only issued for 40% of payments. In what proportion of cases where the notice is issued do you believe it is later supplemented by a separate section 111 withholding notice because the payer is unclear about how the section 110(2) notice should act as a section 111 withholding notice? i) Less than 10% of cases where the notice is issued (less than 4% of payments as a whole) ii) Between 10% and 30% of cases where the notice is issued (between 4% and 12% of payments as a whole) iii) Between 30% and 70% of cases where the notice is issued (between 12% and 28% of payments as a whole) iv) Between 70% and 90% of cases where the notice is issued (between 28% and 36% of payments as a whole) v) More than 90% of cases where the notice is issued (more than 36% of payments as a whole) Answers are illustrated in the graph below.
Proportion of cases where section 110(2) payment notice is later supplemented by a section 111 withholding notice
60 50 40 % 30 20 10 0 Less than 10%
Based on 36 responses

10% - 30%

30% - 70% % of contracts

70% - 90%

More than 90%

Mean 31.7% Median 9.5% Mode 5.0% It seems reasonable to conclude that a section 110(2) payment notice is later supplemented by a section 111 withholding notice in less than 10% of cases, although clearly some respondents experiences differed from this.

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4. Clarity of sum due


Qc: For the purposes of this consultation, we have assumed that on average across the industry, one in 30 payments that are (or should have been) notified under section 110(2) are later abated. Do you consider that this proportion: i) Is about right. ii) Should be less than half of this (i.e. less than one in 60 payments) iii) Should be more than twice this (i.e. more than one in 15 payments) Answers are illustrated in the graph below.
For the purposes of this consultation, we have assumed that on average one in 30 payments notified under section 110(2) are later abated. Do you consider that this proportion?
60 50 40 % 30 20 10 0 is about right
Based on 27 responses

should be less than half this % of contracts

should be more than twice this

Mean is about right Median is about right Mode is about right This confirms that the estimate of one in 30 payments being later abated was a reasonable one.

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Qe: Notwithstanding your answer to question (d) what percentage of the amount of each payment finally due under a construction contract do you consider is lost on account of the cost and delay involved in obtaining proper payment? i) Less than 1% of each payment ii) Between 1% and 2.5% of each payment iii) Between 5% and 10% of each payment iv) Between 10% and 15% of each payment v) Between 15% and 25% of each payment vi) More than 25% of each payment Answers are illustrated in the graph below.
Proportion of each payment finally due is lost because of cost and delay in obtaining proper payment
50 45 40 35 30 % 25 20 15 10 5 0 Less than 1%
Based on 27 responses

1% - 2.5%

5% - 10%

10% - 15%

15% - 25%

More than 25%

% of contracts

Mean 7.0% Median 1.9% Mode 1.8% Around 2% of each payment finally due is lost because of the cost and delay in obtaining proper payment.

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Qf: If changes to the payment framework were introduced as proposed in this chapter, what percentage of the amount of each payment finally due under a construction contract do you consider would be lost on account of the cost and delay involved in obtaining proper payment? i) Less than 1% of each payment ii) Between 1% and 2.5% of each payment iii) Between 5% and 10% of each payment iv) Between 10% and 15% of each payment v) Between 15% and 25% of each payment vi) More than 25% of each payment Answers are illustrated in the graph below.
Following proposed changes to the payment framework, proportion of each payment finally due is lost because of cost and delay in obtaining proper payment
60 50 40 30 20 10 0 Less than 1%
Based on 28 responses

1% - 2.5%

5% - 10%

10% - 15%

15% - 25%

More than 25%

% of contracts

Mean 3.5% Median 0.9% Mode 0.5% It seems reasonable to estimate that about 1% of each payment finally due would be lost because of the cost and delay in obtaining proper payment, following the proposed changes. This is an improvement on the existing situation as measured in question 4e.

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Qg: If, as proposed, the sum due under a construction contract were to be viewed in law as the amount paid or proposed to be paid as specified in a Section 110(2) payment notice, (with the amount in a claim for payment becoming due if no notice were issued), what effect do you think this would have on the cost of resolving payment disputes at adjudication? i) The cost would not be subject to a significant reduction (i.e. less than 5%) ii) The cost would be reduced by 5% to 15% iii) The cost would be reduced by 15% to 35% iv) The cost would be reduced by 35% to 65% v) The cost would be reduced by more than 65% vi) The cost would be increased Answers are illustrated in the graph below.
If sum due under a contract were to be viewed in law as the amount specified in a section 110(2) notice, what effect would this have on the cost of resolving payment disputes at adjudication
30 25 20 % 15 10 5 0 Reduced by less than 5%
Based on 32 responses

Reduced by 5% 15%

Reduced by 15% - Reduced by 35% - Reduced by more 35% 65% than 65% % of contracts

Increased

Mean reduced by 20.5% Median reduced by 25% Mode reduced by 25% Nearly 90% of respondents believed that this proposal would reduce the cost of resolving payments disputes at adjudication, although there was considerable variation in estimates of the size of this reduction. It seems reasonable to assume that a reduction of at least 25% is likely.

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chapter  Improving the right to suspension


Qd: What would you estimate to be the reasonable one-off costs of suspending performance on a typical construction project? i) Less than 5% of an average monthly interim payment. ii) 5% to 15% of an average monthly interim payment. iii) 15% to 50% of an average monthly interim payment. iv) 50% to 100% of an average monthly interim payment. v) 100% to 200% of an average monthly interim payment. vi) More than double an average monthly interim payment. Answers are illustrated in the graph below.
Estimated one-off costs of suspending performance on a typical construction contract - % of average monthly interim payment
45 40 35 30 % 25 20 15 10 5 0 Less than 5%
Based on 21 responses

5% - 15%

15% - 50%

50% - 100%

100% to 200%

More than 200%

% of average monthly interim payment

Mean 25.2% Median 14.4% Mode 32.5% It seems reasonable to conclude that the estimated one-off cost of suspending performance on a typical contract is 25% of the average monthly interim payment.

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Qe: What would you estimate to be the reasonable monthly ongoing costs while in suspension on a typical construction project? i) Less than 5% of an average monthly interim payment. ii) 5% to 25% of an average monthly interim payment. iii) 25% to 50% of an average monthly interim payment. iv) 50% to 100% of an average monthly interim payment. Answers are illustrated in the graph below.
Estimated monthly ongoing costs while in suspension on a typical construction contract - % of average monthly interim payment
90 80 70 60 % 50 40 30 20 10 0 Less than 5%
Based on 22 responses

5% - 25%

25% - 50%

50% - 100%

% of average monthly interim payment

Mean 16.8% Median 14.4% Mode 15.0% It seems reasonable to conclude that the estimated ongoing monthly cost while in suspension on a typical contract is 15% of the average monthly interim payment.

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Qf: What would you estimate to be the reasonable costs of remobilising performance on a typical construction project? i) Less than 5% of an average monthly interim payment. ii) 5% to 25% of an average monthly interim payment. iii) 25% to 50% of an average monthly interim payment. iv) 50% to 100% of an average monthly interim payment. v) 100% to 200% of an average monthly interim payment. vi) More than double an average monthly interim payment. Answers are illustrated in the graph below.
Estimated cost of remobilising performance on a typical construction contract - % of average monthly interim payment
60 50 40 30 20 10 0 Less than 5%
Based on 21 responses

5% to 15%%

15% to 50%%

50% to 100%

100% to 200%

More than 200%

% of average monthly interim payment

Mean 18.0% Median 10.0% Mode 10.0% We have concluded that it is reasonable to assume that the cost of remobilising performance on a typical contract is 10% of the average monthly interim payment. Respondents were asked to reconsider their answers to question 3d, 3e and 3f if the suspending party was not required to be ready to remobilise immediately, as at present, when the defaulted payment was eventually made, but was allowed an additional extension of time for any delay caused by the exercise of the right of suspension.

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Qg: In the light of BERRs proposed amendment, what would you estimate to be the reasonable one-off costs of suspending performance on a typical construction project? i) Less than 5% of an average monthly interim payment. ii) 5% to 15% of an average monthly interim payment. iii) 15% to 50% of an average monthly interim payment. iv) 50% to 100% of an average monthly interim payment. v) 100% to 200% of an average monthly interim payment. vi) More than double an average monthly interim payment. Answers are illustrated in the graph below.
Estimated one-off costs of suspending performance on a typical construction contract - % of average monthly interim payment
60 50 40 % 30 20 10 0 Less than 5%
Based on 16 responses

5% - 15%

15% - 50%

50% - 100%

100% to 200%

More than 200%

% of average monthly interim payment

Mean 10.5% Median 8.3% Mode 10.0% We consider it reasonable to conclude that the estimated one-off cost of suspending performance on a typical contract would be 10% of the average interim monthly payment. This is lower than the 25% of the average payment estimated without the proposed BERR amendment.

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Qh: In the light of BERRs proposed amendment, what would you estimate to be the reasonable monthly ongoing costs while in suspension on a typical construction project? i) Less than 5% of an average monthly interim payment. ii) 5% to 25% of an average monthly interim payment. iii) 25% to 50% of an average monthly interim payment. iv) 50% to 100% of an average monthly interim payment. Answers are illustrated in the graph below.
Estimated monthly ongoing costs while in suspension on a typical construction contract - % of average monthly interim payment
50 45 40 35 30 % 25 20 15 10 5 0 Less than 5%
Based on 22 responses

5% - 25%

25% - 50%

50% - 100%

% of average monthly interim payment

Mean 11.9% Median 8.8% Mode 15% It seems reasonable to conclude that the estimated monthly on-going cost while in suspension on a typical contract is 10% of the average monthly interim payment. This is lower than the 15% of the average payment estimated without the proposed BERR amendment.

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Qi: In the light of BERRs proposed amendment, what would you estimate to be the reasonable costs of remobilising performance on a typical construction project? i) Less than 5% of an average monthly interim payment. ii) 5% to 25% of an average monthly interim payment. iii) 25% to 50% of an average monthly interim payment. iv) 50% to 100% of an average monthly interim payment. v) 100% to 200% of an average monthly interim payment. vi) More than double an average monthly interim payment. Answers are illustrated in the graph below.
Estimated cost of remobilising performance on a typical construction contract - % of average monthly interim payment
60 50 40 30 20 10 0 Less than 5%
Based on 17 responses

5% - 15%

15% - 50%

50% - 100%

100% to 200%

More than 200%

% of average monthly interim payment

Mean 12.5% Median 7.8% Mode 10% We have concluded that it is reasonable to assume that the cost of remobilising performance on a typical contract is 10% of the average monthly interim payment. This is the same as the proportion of the average payment estimated without the proposed BERR amendment.



Qj: As well as covering the regulatory impact of the proposals described in Chapter 3 on the costs of suspension, the following questions also covered the impacts of the proposal in Chapter 2 on the transparency of the sum due and its effect on right to suspend. In reading the responses to questions (j) to (l) you should bear in mind the finding of Improving payment practices in the construction industry 2005 that the right to suspend performance is exercised in fewer than one in a 100 cases of defaulted payment at present. Following the introduction of both: K our proposals to reduce the costs of suspending performance in cases of nonpayment; and, K our proposals to improve the transparency of the sum due... ...how frequently do you believe the right to suspend performance would be exercised? i) In more than one in five cases of defaulted payment? ii) In between one in five and one in 20 cases of defaulted payment? iii) In between one in 20 and one in 100 cases of defaulted payment? iv) In fewer than one in 100 cases of defaulted payment? (i.e. no significant change) Answers are illustrated in the graph below.
Frequency with which right to suspend performance would be exercised following introduction of proposals on reducing costs of suspending performance and improving transparency of the sum due
45 40 35 30 % 25 20 15 10 5 0 More than 1 in 5 cases
Based on 31 responses

Between 1 in 5 and 1 in 20 cases

Between 1 in 20 and 1 in 100 cases

Fewer than 1 in 100 cases

Frequency in cases of defaulted payment

Mean one in 17 cases Median one in 33 cases Mode one in 33 cases It seems reasonable to conclude that, following the introduction of the outlined proposals, the right to suspend performance would be exercised in around one in 20 cases, more frequently than at present.



Qk: Following the introduction of only our proposal to reduce the costs of suspending performance in cases of non-payment how frequently do you believe the right to suspend performance would be exercised? i) In more than one in five cases of defaulted payment? ii) In between one in five and one in 20 cases of defaulted payment? iii) In between one in 20 and one in 100 cases of defaulted payment? iv) In fewer than one in 100 cases of defaulted payment? (i.e. no significant change) Answers are illustrated in the graph below.

Frequency with which right to suspend performance would be exercised following introduction of proposal to reduce costs of suspending performance
45 40 35 30 25 20 15 10 5 0 More than 1 in 5 cases
Based on 31 responses

Between 1 in 5 and 1 in 20 cases

Between 1 in 20 and 1 in 100 cases

Fewer than 1 in 100 cases

Frequency in cases of defaulted payment

Mean one in 20 cases Median one in 25 cases Mode one in 33 cases We have concluded that it is reasonable to assume that, given the introduction of only the cost reduction proposal, the right to suspend performance would be exercised in around one in 25 cases. This is more frequently than at present, but slightly less frequently than if both proposals were introduced.



Ql: Following the introduction of only our proposal to improve the transparency of the sum due in respect of the right to suspend performance, how frequently do you believe the right would be exercised? i) In more than one in five cases of defaulted payment? ii) In between one in five and one in 20 cases of defaulted payment? iii) In between one in 20 and one in 100 cases of defaulted payment? iv) In fewer than one in 100 cases of defaulted payment? (i.e. no significant change) Answers are illustrated in the graph below.
Frequency with which right to suspend performance would be exercised following introduction of proposal to improve transparency of the sum due
45 40 35 30 % 25 20 15 10 5 0 More than 1 in 5 cases
Based on 31 responses

Between 1 in 5 and 1 in 20 cases

Between 1 in 20 and 1 in 100 cases

Fewer than 1 in 100 cases

Frequency in cases of defaulted payment

Mean one in 20 cases Median one in 25 cases Mode one in 33 cases We have concluded that it is reasonable to assume that, given the introduction of only the transparency of sum due proposal, the right to suspend performance would be exercised in around one in 25 cases. This is more frequently than at present, but slightly less frequently than if both proposals were introduced.



Qm: What do you consider is the incidence of non-payment of a sum due in the construction industry? i) Fewer than 10% of payments ii) 10% to 30% of payments iii) 30% to 50% of payments iv) 50% to 70% of payments v) 70% to 90% of payments vi) More than 90% of payments Answers are illustrated in the graph below.
Incidence of non-payment of a sum due
45 40 35 30 % 25 20 15 10 5 0 Fewer than 10%
Based on 30 responses

10% - 30%

30% - 50%

50% - 70%

70% - 90%

More than 90%

% of payments

Mean 31.9% Median 34.2% Mode 40% It seems reasonable to conclude that non-payment of a sum due occurs in approximately 35% of payments.



Qn: What do you consider would be the incidence of non-payment following the introduction of both: K our proposals to reduce the costs of suspending performance in cases of nonpayment; and K our proposals to improve the transparency of the sum due? i) Fewer than 10% of payments ii) 10% to 30% of payments iii) 30% to 50% of payments iv) 50% to 70% of payments v) 70% to 90% of payments vi) More than 90% of payments Answers are illustrated in the graph below.
Incidence of non-payment of a sum due following introduction of proposals on reducing costs of suspending performance and improving transparency of the sum due
70 60 50 40 % 30 20 10 0 Fewer than 10%
Based on 30 responses

10% - 30%

30% - 50%

50% - 70%

70% - 90%

More than 90%

% of payments

Mean 13.6% Median 8.6% Mode 5.0% It seems reasonable to conclude that, following the introduction of both the outlined proposals, non-payment of a sum due would occur in about 10% of payments, less frequently than at present and less frequently than if just one of these proposals were introduced.

8

Qo: What do you consider would be the incidence of non-payment following the introduction of only our proposals to reduce the costs of suspending performance? i) Fewer than 10% of payments ii) 10% to 30% of payments iii) 30% to 50% of payments iv) 50% to 70% of payments v) 70% to 90% of payments vi) More than 90% of payments Answers are illustrated in the graph below.
Incidence of non-payment of a sum due following introduction of proposal on reducing costs of suspending performance
45 40 35 30 % 25 20 15 10 5 0 Fewer than 10%
Based on 30 responses

10% - 30%

30% - 50%

50% - 70%

70% - 90%

More than 90%

% of payments

Mean 23.9% Median 17.8% Mode 5.0% It seems reasonable to conclude that, following the introduction of the outlined proposal on reducing the cost of suspending performance, non-payment of a sum due would occur in about 20% of payments, less frequently than at present but more frequently than if both proposals were introduced.

9

Qp: What do you consider would be the incidence of non-payment following the introduction of only our proposals to improve the transparency of the sum due in respect of the right to suspend performance? i) Fewer than 10% of payments ii) 10% to 30% of payments iii) 30% to 50% of payments iv) 50% to 70% of payments v) 70% to 90% of payments vi) More than 90% of payments Answers are illustrated in the graph below.
Incidence of non-payment of a sum due following introduction of proposal to improve transparency of the sum due
50 45 40 35 30 % 25 20 15 10 5 0 Fewer than 10%
Based on 30 responses

10% - 30%

30% - 50%

50% - 70%

70% - 90%

More than 90%

% of payments

Mean 17.9% Median 12.6% Mode 5.0% It seems reasonable to conclude that, following the introduction of the outlined proposal on improving transparency of the sum due, non-payment of a sum due would occur in about 15% of payments, less frequently than at present but more frequently than if both proposals were introduced.

0

Annex 3 Cabinet Office Consultation Code of Practice


the six consultation criteria
1. Consult widely throughout the process, allowing a minimum of 12 weeks for written consultation at least once during the development of the policy. 2. Be clear about what your proposals are, who may be affected, what questions are being asked and the timescale for responses. 3. Ensure that your consultation is clear, concise and widely accessible. 4. Give feedback regarding the responses received and how the consultation process influenced the policy. 5. Monitor your departments effectiveness at consultation, including through the use of a designated consultation co-ordinator. 6. Ensure your consultation follows better regulation best practice, including carrying out a Regulatory Impact Assessment if appropriate. the complete code is available on the cabinet office website at: www.cabinetoffice.gov.uk/regulation/consultation/index.asp

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Printed in the UK on recycled paper containing a minimum of 75% post consumer waste. Department for Business, Enterprise and Regulatory Reform. www.berr.gov.uk First published July 2008. Crown copyright. BERR/Pub/8744/0.5k/07/08/NP. URN 08/1094.