Payment Schedules for London Construction Contracts: Stage Payments, Valuations, and Retention Explained

Payment terms are one of the most commercially significant elements of a construction contract. Getting the payment structure right protects both the homeowner (against overpaying for incomplete work) and the contractor (against funding the client's project). Understanding the main payment structures used in London residential construction, and the legal framework that governs them, helps homeowners enter into contracts with confidence.

Stage payments: a payment schedule where defined lump sums become due when agreed milestones or stages are reached -- for example, 10% on mobilisation, 30% on completion of foundations, 20% on completion of superstructure, and so on. Stage payments are simple to administer and common in smaller London residential projects where the work does not need external certification.

Valuations (interim valuations): a payment mechanism based on periodic assessments of the value of work properly executed and materials on site, typically carried out by the QS or contract administrator on an agreed cycle (usually monthly). Valuations are more common on larger projects where the contractor's cash-flow needs are significant and a rough-and-ready stage payment structure would be inequitable.

For most London residential extensions and refurbishments, a stage payment structure is the most practical approach.

A well-structured stage payment schedule should:

• Identify each payment milestone clearly (not just "completion of works" but specific, observable events)
• Specify the amount or percentage due at each stage
• Include a final payment on completion of the defects liability period
• Specify the payment notice period (see below)
• Specify the mechanism for disputes about whether a milestone has been reached

Avoid stage payment schedules where a large proportion of the contract sum is payable before the majority of the work is complete. A structure that requires 50% of the contract sum before the roof is on creates significant financial risk for the homeowner.

Retention is a deduction from each payment made to the contractor, held back as a fund to address defective work. In UK residential construction, retention rates of 3--5% are common.

A typical retention structure on a London residential project:

• During construction: 5% of each interim payment is withheld as retention
• At practical completion: 50% of the accumulated retention is released, leaving a 2.5% balance
• At the end of the defects liability period (typically 6--12 months after practical completion): the remaining retention is released once any defects identified during the defects period have been remedied

Retention protects the homeowner by ensuring that the contractor retains a financial interest in completing outstanding work and remedying defects even after practical completion has been certified.

The HGCRA 1996 (as amended by the Local Democracy, Economic Development and Construction Act 2009) establishes the right to payment in construction contracts. The most relevant provisions for London homeowners are:

Payment notices: the payer (homeowner) or the payee (contractor) must issue payment notices within specified timeframes. The contractor's application for payment is a payment notice; the homeowner or contract administrator must respond with a pay less notice if they intend to pay less than the amount applied for.

Pay less notices: if the homeowner wishes to withhold or deduct an amount from a payment (for example, because the contractor has not reached a milestone, or because defective work has been identified), they must issue a pay less notice before the final date for payment. Without a valid pay less notice, the contractor is entitled to the full amount of the payment notice.

Right to suspend for non-payment: if the homeowner fails to pay the amount stated in a payment notice (without having issued a valid pay less notice), the contractor has the right to suspend the works until payment is made. This right is a powerful tool for contractors and highlights the importance of homeowners managing payment notices and pay less notices properly.

Adjudication: disputes about payment (and other disputes under the contract) can be referred to adjudication -- a fast-track, 28-day dispute resolution process under HGCRA. The adjudicator's decision is binding temporarily (until overturned by arbitration or litigation) but allows cash flow disputes to be resolved quickly.

Note: domestic residential projects where the client is a residential occupier (living in the property) are excluded from the HGCRA payment provisions. However, most reputable contracts still include equivalent provisions as a matter of good commercial practice.

Practical steps for London homeowners:

1. Never pay large sums in advance -- a deposit of 10--15% of the contract sum is standard for mobilisation; anything more is a risk
2. Tie each stage payment to a clearly observable milestone
3. Walk the site and verify progress before authorising each stage payment
4. Include retention in the contract and deduct it from each payment
5. Always have a written contract that specifies the payment notice and pay less notice procedures
6. Never make final payment until you are satisfied with the completed works and any snagging items have been addressed

rcbGroup proposes a structured stage payment schedule on every project, tied to observable milestones. We operate transparently on payment: we apply for payments when milestones are reached, we accept retention as a standard commercial practice, and we release retention at the end of the defects liability period once all outstanding items are addressed.

Contact our team to discuss the commercial structure for your London project.