Construction debt recovery: getting paid as a subcontractor or supplier when the money stops

Construction debts are recovered differently from any other trade debt, because the law gives subcontractors and suppliers rights that no other creditor has, and most never use them. If the payer did not serve a valid pay less notice, the sum you applied for is due in full by the final date for payment, whatever they now say the work was worth. After seven days’ written notice you can lawfully suspend work for non-payment, with an extension of time and your costs. A genuine dispute about value goes to adjudication and is decided in 28 days; an undisputed debt does not need adjudication at all, and a debt collection agency on commission is usually the cheaper route. Retentions are debts with due dates, not goodwill, and they are the first thing lost in an insolvency. The sector has led the insolvency statistics in England and Wales for years, which is the strongest argument for acting on the dates the contract already gives you rather than the goodwill you hope is there.

Why construction is different

Two things set construction debt apart. The first is the Housing Grants, Construction and Regeneration Act 1996, universally called the Construction Act, which applies to almost every contract for construction operations in Great Britain, whether or not it is in writing, and imposes a payment regime that the parties cannot contract out of: staged payments on projects over 45 days, a notice for every payment, a notice for every deduction, a right to suspend for non-payment, a right to adjudicate any dispute at any time, and a ban on pay-when-paid. Where a contract is silent or non-compliant, the Scheme for Construction Contracts fills the gaps. The main exclusion is a contract with a residential occupier for work on their own home, so a builder chasing a homeowner is back in the ordinary world of letters before action and small claims, covered in our general guide to debt recovery routes.

The second is the shape of the money. Payment flows down a chain from employer to main contractor to subcontractors to suppliers, each tier funding the one below from money it has not yet received, with retentions held back at every level and released a year or more after the work is done. When any link in that chain fails, everyone beneath it is exposed at once. Construction has been the sector with the most company insolvencies in England and Wales for years, and a subcontractor’s largest debtor is very often a single main contractor whose failure would take the retention, the final account and the business with it. That concentration is why acting on time matters more here than anywhere.

The first check: was a pay less notice served?

Before you argue about anything, find out whether the payer complied with the notice regime, because if they did not, there is nothing to argue about.

On a compliant contract the sequence runs: you make an application or the contract fixes a due date; the payer serves a payment notice within five days of the due date stating what it intends to pay and how that figure was worked out; if it then wants to pay less, it serves a pay less notice by the deadline the contract sets, which under the Scheme is no later than seven days before the final date for payment. If the payer serves neither notice in time, your application stands as the payment notice, and the sum in it becomes the notified sum, payable in full by the final date for payment.

This is not a technicality. It is the mechanism Parliament chose to stop payers holding money back while they think of reasons, and the courts enforce it strictly. A payer who missed its pay less notice must pay the notified sum now and pursue any valuation argument afterwards, through a later payment cycle or its own adjudication. Defects, delay, set-off against another contract, the employer not having paid: none of these excuses non-payment of a notified sum. Adjudicators decide these cases in the referring party’s favour routinely, and so quickly that the industry calls them smash-and-grab.

So the first document to find is the contract’s payment schedule, and the second is the payer’s email inbox. If no pay less notice arrived by the deadline, your letter changes from “please pay our invoice” to “the notified sum of £X fell due on [date]; no pay less notice was served; interest accrues at 8% over base from that date.” Different letter, different response.

The routes, in the order that costs least

Two rows deserve emphasis. Suspension is the right almost nobody uses, and it is the one that concentrates a main contractor’s mind, because a subcontractor walking off site costs the programme far more than the invoice. And the statutory demand row is there mainly as a warning: construction sums are disputed more often than most, and a statutory demand on a disputed debt backfires expensively.

Suspension: the right most subcontractors never use

Section 112 of the Act says that where a sum due is not paid in full by the final date for payment and no effective pay less notice has been served, you may suspend performance of any or all of your obligations under the contract. The conditions are that you give at least seven days’ written notice of your intention, stating the ground or grounds, and that you resume once payment is made in full.

Used properly, suspension is powerful and safe. You are entitled to a reasonable extension of time covering the suspension and the period it takes to remobilise, and to the reasonable costs and expenses the suspension causes you. A liquidated damages clause cannot be turned against you for a period of lawful suspension. Used improperly, without the notice or on a sum that is genuinely not yet due, it is a repudiatory breach, and the payer will use it to terminate and counterclaim. So the notice has to be right: in writing, to the correct party, citing the unpaid sum and the section, and the seven days have to run in full.

In practice most payers pay within the notice period. The letter says, without raising a voice, that you know your rights and will use them, and a subcontractor who knows their rights is one a main contractor keeps paid.

Retentions

A retention is a percentage of each payment, commonly three to five percent, withheld against defects, with half released at practical completion and the balance after the defects period, typically twelve months. Across a year’s work it can add up to a sum larger than any single invoice, and it is routinely treated by both sides as something that may or may not turn up eventually.

Treat it as what it is: a debt with two due dates. Each release date is a payment due date under the contract, subject to the same notice regime, so a retention that is not released on time and not the subject of a pay less notice is a notified sum. Write for it the day it falls due, with interest. Diary the release dates when you sign the contract, not when you remember. And remember that limitation runs from the release date, so a retention left to drift can become irrecoverable even from a solvent payer, as our guide to how long you can chase a debt explains.

The insolvency risk is the real problem. Retention money is rarely held separately, so when a main contractor fails it is simply part of the general pot and unsecured creditors see little of it. On larger contracts, ask for a retention bond or a project bank account in place of a cash retention. Where you cannot get one, treat outstanding retentions as exposure to that payer and factor them into how much more credit you extend.

Adjudication in plain English

Adjudication is a fast, binding, interim decision by a construction specialist, and it exists because the industry cannot wait a year for a court to decide whether a payment was due. Either party can refer a dispute at any time. You serve a notice of adjudication, an adjudicator is appointed within seven days, usually through a nominating body, and you serve your referral. The adjudicator must decide within 28 days of the referral, extendable by 14 days with your consent or longer by agreement. The decision is binding until the dispute is finally determined by a court, arbitration or agreement, and in the great majority of cases it is never revisited.

What it costs is the point most subcontractors misjudge. Each party bears its own legal costs whatever the result, so a £15,000 dispute fought with solicitors on both sides can cost more than it recovers. The adjudicator’s fee, commonly a few thousand pounds for a straightforward payment dispute, is normally allocated to the losing party. For smaller sums, low-value dispute schemes cap the adjudicator’s fee on a sliding scale for claims under £50,000, which makes adjudication viable for disputes that would otherwise be uneconomic. And a decision that is not honoured is enforced by summary judgment in the Technology and Construction Court, usually within weeks, with a very narrow set of defences.

Adjudication is the right tool when there is a genuine dispute about value, defects, delay or set-off, or when the payer refuses to accept that a notified sum is due. It is the wrong tool for a payer who simply has not paid and is not disputing anything: there is no dispute to refer, and the cost of the process is wasted on a debt that a firm letter or a collection agency would have recovered.

When a debt collection agency is the right call

A great deal of construction debt is not disputed at all. Builders’ merchant accounts, plant and tool hire, labour-only subcontract invoices, small retentions, a schedule of applications that the payer has approved and not paid: these are ordinary trade debts owed by companies that are slow, disorganised or short of cash, and they respond to the same pressure as any other. For those, a debt collection agency working on commission is usually faster and cheaper than anything in the Act, because you pay only on recovery and the agency’s letters and calls reach the person who signs the payment run.

The choice between an agency and the legal routes is the choice our guide to an agency versus a solicitor sets out in general terms, with adjudication standing in for court on the legal side. Undisputed and solvent: agency first, with the Act’s rights preserved and a firm date for escalation. Disputed: adjudication, because an agency cannot resolve a valuation argument and will only harden it. Insolvent or heading there: neither, and what creditors can do when a debtor company fails covers the limited options that remain.

Two things to tell any agency you instruct. First, that the debt is a construction debt and whether a pay less notice was served, because “the notified sum fell due on this date” is a stronger opening than “your invoice is overdue” and a good agency will use it. Second, whether you want to keep the relationship, since a subcontractor’s largest debtor is often also its largest customer. Our guide to choosing an agency by business type covers how process fit changes for a trade with staged payments and retentions, and what happens once you instruct covers the handover.

Personal guarantees and the chain above you

Two other levers are worth checking before you spend money on process. If the payer is a small contractor and you opened a trade account, look at whether a director signed a personal guarantee, which builders’ merchants routinely require and subcontractors rarely think to ask for. A guarantee turns a claim against a struggling company into a claim against a person with a house, and it changes the conversation immediately.

And look up the chain. Pay-when-paid is prohibited, so the main contractor cannot lawfully hold your money because the employer has not paid it, but knowing whether the employer has paid tells you whether you are chasing a cash-flow problem or a solvency problem, and the two need different responses. Companies House filings, the payment practices reports that larger contractors must publish, and a conversation with other subcontractors on the same job will usually tell you which you have.

Protecting the next job

Most construction bad debt is a paperwork failure before it is a payment failure. Make sure your contract’s payment terms comply with the Act, or the Scheme will apply and you should know its dates. Put every due date, final date and notice deadline in a diary the day you sign. Apply for payment on time, in the form the contract requires, to the named person, because a late or informal application weakens the notified-sum argument. Credit-check new payers and re-check existing ones when the value of work climbs. Ask for a retention bond or project bank account on anything large. Invoice statutory interest on every late payment as a matter of routine, so that paying you late is never free, and check your payer against the Fair Payment Code when you decide how much credit to extend. The late payment reforms working through Parliament will help at the margins; the Act already gives you most of what you need today.

Scotland and Northern Ireland

The Construction Act applies in Scotland with its own Scheme for Construction Contracts (Scotland) Regulations, so the notice, suspension and adjudication rights are the same in substance, with enforcement of an adjudicator’s decision through the Scottish courts and diligence carried out by sheriff officers. Prescription in Scotland generally extinguishes a debt after five years, which makes drifting retentions more dangerous, not less. Northern Ireland has its own Construction Contracts Order with equivalent rights and its own Scheme, with judgments enforced through the Enforcement of Judgments Office.

The short version

Find out whether a pay less notice was served. If it was not, you are owed the notified sum and interest, and your letter should say so. If it is still unpaid, give seven days’ notice of suspension, which resolves most cases on its own. Then choose the route by dispute rather than by size: an agency on commission for the undisputed, adjudication for the disputed, a proof of debt for the insolvent. Treat retentions as debts with due dates, and never let one drift towards limitation or an administration.

If you would rather hand the undisputed accounts to a professional, comparing costs nothing. On Collect Compare you can compare vetted UK debt recovery agencies blind, with names hidden until you choose, including litigation partners for the disputes that need more than a letter, or let us match you to the right one. It is free for creditors: the agency you choose pays for the introduction, and no agency can pay to rank.

This is general information, not legal advice. Construction payment law turns on the precise terms of your contract and the dates on your notices, and getting a suspension or adjudication wrong carries real costs risk, so take advice on your specific contract before acting.