The Construction Industry Payment Problem
The construction sector is one of the most challenging environments for cash flow management in the UK. Main contractors routinely delay payments to subcontractors, clients dispute variations and extras, and retention fees are frequently withheld beyond agreed periods — sometimes indefinitely. For small and medium-sized contractors and subcontractors, these unpaid sums can be business-critical.
At Tempest Financial, we understand the commercial dynamics of the construction industry. We work with contractors, subcontractors, specialist trades, and suppliers to recover overdue payments, challenge unlawful withholding, and pursue retention releases on your behalf.
The Housing Grants, Construction and Regeneration Act 1996 (often called the Construction Act) regulates construction contracts in the UK. It was notably updated by the Local Democracy, Economic Development and Construction Act 2009, with changes taking effect in October 2011 that fundamentally overhauled payment mechanisms, adjudication rules, and statutory protections for those operating within the construction supply chain.
Payment Notices & Pay Less Notices
Under the Act, a paying party is required to issue a Payment Notice no later than five days after the payment due date, specifying the sum considered due and the basis of calculation. If they intend to pay less than that sum, they must serve a Pay Less Notice before the final date for payment – setting out the sum they propose to pay and the grounds for the reduction. Failure to serve either notice correctly, or at all, has significant consequences: the sum applied for by the payee becomes the notified sum and is due in full on the final date for payment. There is no discretion. There is no right to raise a late dispute. The debt crystallises by operation of statute.
Smash and Grab Adjudication
Where a paying party has failed to issue a valid Pay Less Notice in time, the payee is entitled to refer the matter to adjudication and claim the full applied sum as a debt – irrespective of any underlying valuation dispute. This is what practitioners refer to as a “smash and grab” adjudication. The adjudicator has no jurisdiction to consider the merits of the underlying dispute; their sole function is to determine whether the notices were served correctly and on time. If they were not, the decision is straightforward and the sum becomes immediately enforceable. We are well versed in identifying these opportunities and acting on them swiftly.
Adjudication – A 28-Day Resolution Process
Adjudication is available at any time under a construction contract and is deliberately designed to be fast. A decision must be reached within 28 days of referral (extendable to 42 days with the referring party’s consent). The decision is temporarily binding – meaning it must be complied with immediately, even if the losing party intends to challenge it through arbitration or litigation. The courts take a robust approach to enforcement; it is exceptionally rare for an adjudicator’s decision not to be enforced by the Technology and Construction Court (TCC). A debtor who believes they can simply ignore or delay an adjudication award will find the courts take a very different view.
Retention – A Right, Not a Favour
Retention is one of the most widely abused payment mechanisms in construction. Employers routinely withhold retention beyond the agreed release date, citing incomplete snagging lists, unresolved defects, or simply hoping the sub-contractor will not pursue it. Under the Act and the underlying contract, the release of retention on practical completion – and again at the end of the defects liability period – is a contractual obligation, not a discretionary act. We pursue retention releases as a debt, not a negotiation, and we do so with a comprehensive understanding of the contractual and statutory framework that governs it.
The Right to Suspend
Section 112 of the Act gives any party owed a sum under a construction contract the right to suspend performance of their obligations where payment has not been made by the final date for payment and no Pay Less Notice has been served. The suspending party must give at least seven days’ written notice of their intention to suspend, specifying the ground or grounds. Once exercised, the right to suspend is a powerful commercial lever – and critically, the period of suspension is added to any contractual completion date, meaning the suspending party cannot be held liable for delay damages arising from the suspension. Many creditors are unaware they hold this right. We make sure our clients know exactly what tools are available to them and are not afraid to use them.
Pay When Paid – Largely Abolished
Prior to the Act, “pay when paid” clauses were commonplace in construction contracts, allowing a main contractor to withhold payment to a subcontractor until they themselves had been paid by the employer. The Act rendered such clauses largely ineffective. They are only enforceable in the specific circumstance where the upstream employer has become insolvent. In all other circumstances, a sub-contractor is entitled to be paid on the agreed contractual terms – regardless of whether the main contractor has received payment. If a paying party attempts to rely on a pay when paid clause to justify non-payment, we challenge it.
Common Issues We Encounter
Retention Withheld Beyond Release Date
Retention funds held beyond the agreed defects liability period with no valid reason given. This is one of the most common and damaging payment issues in construction.
No Pay Less Notice Served
Where a payer fails to serve a valid Pay Less Notice before the final date for payment, the full sum applied for becomes due — regardless of any underlying dispute.
Disputed Variations and Extras
Work instructed verbally or by conduct, then denied at payment stage. We help evidence and pursue legitimate variation claims.
Unlawful Pay When Paid Clauses
Subject to very limited exceptions, Pay When Paid clauses are prohibited under the Construction Act. We challenge unlawful attempts to delay your payment using such provisions.
Disputed Final Account
A common tactic at the end of a project — inflated cross-claims and counterclaims used to delay or reduce final account settlement.
Insolvency of Main Contractor
Where a main contractor enters insolvency, subcontractors are often left unpaid. We advise on the options available and pursue recovery where possible.
The Late Payment of Commercial Debts (Interest) Act 1998 (As Amended 2013), gives businesses a statutory right to claim interest and compensation on overdue commercial debts. The 2013 amendments, which implemented the EU Directive on combating late payment, significantly strengthened creditors’ rights and introduced more robust protections against grossly unfair contractual payment terms.
Statutory Interest
Where a commercial debt has been outstanding beyond the agreed payment terms – or beyond 30 days where no terms have been agreed – the Act entitles the creditor to claim statutory interest at 8% per annum above the Bank of England base rate. This rate applies from the date the debt became due and accrues daily. On a significant debt, the interest alone can represent a material sum – and one that continues to grow for every day payment is withheld.
Fixed Debt Recovery Costs
In addition to statutory interest, the Act entitles creditors to claim a fixed sum in compensation for the cost of recovering the debt. The fixed amounts are: £40 for debts under £1,000; £70 for debts between £1,000 and £9,999.99; and £100 for debts of £10,000 or more. These sums are claimable as of right – they do not need to be justified or evidenced.
Debt Recovery Costs
Beyond the fixed sums, the Act also permits creditors to claim the costs incurred in recovering the debt that exceed the fixed amount. This includes the costs of instructing a debt recovery agent. We include statutory interest, fixed compensation, and debt recovery costs as standard in all recovery correspondence – ensuring that the full statutory entitlement is pursued from the outset, not as an afterthought.
Backdated Claims – Up To 6 Years
Statutory interest under the Act can be claimed going back up to six years under the Limitation Act 1980. Where a debtor has been sitting on an unpaid invoice for an extended period, the interest element of the claim can be substantial. We assess this as part of every instruction we receive, ensuring that clients recover not just the principal debt but the full extent of what the law entitles them to.
The Retention Fee Problem
Retention — typically 3–5% of the contract value held by the client or main contractor — is one of the most contested areas of construction payment. It is estimated that over £6 billion in retention is held in the UK construction supply chain at any one time, with a significant proportion never returned to the subcontractor it belongs to.
How Retention Abuse Occurs
Main contractors and clients routinely hold retention beyond the agreed defects liability period, raise spurious defect claims at the last moment, or allow the entity holding the retention to become insolvent. The Construction Act and contractual provisions provide important protections — but only if they are actively enforced. That is where Tempest Financial steps in.
We pursue the release of retention funds by issuing formal demand correspondence that references your contractual entitlement, the statutory regime, and the consequences of continued non-payment — including the accrual of statutory interest and the referral of the matter to our panel solicitors for adjudication or court proceedings where necessary.
What We Can Achieve for You
- Recovery of overdue stage payments and final account sums
- Release of withheld retention fees beyond the defects liability period
- Statutory interest claimed at 8% above base rate under the Late Payment Act
- Fixed debt recovery costs added to your claim as standard
- Formal demand correspondence referencing your Construction Act rights
- Pursuit of disputed variation and extras claims
- Challenge of unlawful Pay When Paid provisions
- Referral to panel solicitors for adjudication or court action where required
- Settlement negotiation to achieve a swift commercial resolution
Our Approach
Our role is to pursue recovery through professional collections correspondence and negotiation, maximising your recovery before legal escalation becomes necessary. In many cases, a well-drafted formal demand referencing the Construction Act and the Late Payment Act is sufficient to prompt payment.