Best Practice Guidance
Building work can be a significant investment. So it is important to make sure that payments for building work are made fairly and safely. There are some common misconceptions about how to pay for building work. But if you follow best practice guidance then you can avoid problems, and make the right payments to the builder.
Use a well written building contract to agree the work your builder will do, and the cost. The RIBA and JCT publish good building contracts that you can use. And for more info on how to choose the right contract for your project you can read Building Contracts For Extensions.
Building Contracts and Payment Methods
Your building contract will set out the way in which you will make payments for the building work. It is important that this is agreed clearly before starting the work. The most common Payment Methods for building work are agreed Payment Schedules, or regular Valuations of the work done.
For small projects payments for building work can be based on a payment schedule. These often follow milestones such as 20% foundations, 30% walls, 20% roof, 20% services, 10% completion. Although making staged payments based on an agreed schedule offers some protection from overpaying, the stages are open to interpretation. So this method is only suitable for simple work.
Payment Schedules are not recommended for building work over £100,000 – Valuations are a much fairer and safer way to make payments for building work.
Valuations are a much better way to make payments for building work on most projects. A valuation is an accurate assessment of the work that the builder has completed. Valuations should be carried out at regular intervals by a professional such as your architect.
Most building contracts set valuations every 4 weeks, but this can be changed to 2 weeks if needed. The valuation will be based on the architect’s inspections of the work. And they will then issue a Payment Certificate to show the payment due to the builder.
Valuations of Work Done
Only building work that has been properly completed should be included in the valuation. The architect will carry out careful inspections of the work the builder has done, and anything not up to standard will not be included. The architect will also instruct the builder to put right any work that is not correct, so that it can be inspected again before being included on the next valuation.
The normal procedure for making a valuation is that the builder will submit an application to the architect for payment of the work done. This should be in the same format / breakdown of items of work as the tender for the project. The architect will then inspect and adjust the builder’s application to form an accurate valuation of the work that has been done.
You should not pay a deposit or advance payment for your building work. It is important that the builder has a solid financial standing. Most builders will have good credit terms with their suppliers and will not ask for up front payments as standard. Building contracts such as the JCT Minor Works make no provision for advance payments because they create unnecessary risk.
Never pay an up front deposit for building work, it puts you at unnecessary risk. Up front payments are not standard (whatever your builder says) and should not be included in valuations.
Off Site Materials
Although valuations will only include work properly completed on site there are times when it is necessary to consider off site materials. For example if the builder is required to procure a bespoke item that is made off site and has a long lead time. If any payments are to be made for these items then a contract that makes provision for this such as the JCT Intermediate should be used. The items should also be clearly listed in the contract and procured in the client’s name so that there can be no argument over ownership. And the architect will need to be able to inspect the items off site, and check the paperwork before they can be included.
Once the valuation is complete the architect will write a Payment Certificate that will show the amount due to the builder. It is important that payment is made by the date shown on the certificate, normally 14 days.
The payment certificate will also show an amount of retention, usually 5%. This means that if the architect’s valuation of the work done is £100,000 the payment certificate will show payment due of £95,000. The retention of 5% is kept by the client until completion of the project.
Payments at Practical Completion
When the work is complete the architect will certify Practical Completion. At this point half of the retention amount (2.5%) is released to the builder. The remaining 2.5% is kept by the client until the architect issues their Final Certificate. This is usually after a rectification period of 12 months.
Assuming that any defects are put right then at the end of the rectification period a final payment is made to the builder. The architect will show the amount due, including the release of the remaining 2.5% retention, on a Final Certificate.