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6 Dec 2023 • Tom Haley

Contra charges: the scourge of cash flow in the construction industry?

I get that contractors need to make deductions when a subcontractor causes them to incur cost (commonly known as a ‘contra charge’), but it seems to me that this part of the account has become a free-for-all and tends to include anything and everything the contractor can dream up to keep the subcontractor’s payment down (and, in my experience, avoid paying more than the liability stated in its accounts).

Granted I work in disputes so the sample of payment notices I see might be worse case, but most payment notices I see follow this trend:

  • Measured works paid, give or take, in line with the application for payment.
  • Add variations slashed in value or nilled due to alleged lack of information or justification.
  • Omit variations taken in full sometimes with no, or little, contractual basis.
  • An endless list of assorted contra charges deducting amounts without any contractual basis for the deduction and / or without providing any substantiation of the amount deducted.

The irony of the valuation amuses me and frustrates me at the same time: on the one hand variations must be justified to within an inch of their life before payment will be made whereas, on the other hand, large contra charge amounts can be swiped with a few words of description and healthy round negative figures.

It doesn’t seem fair that one rule applies to making payment and another applies to making a deduction. Some might say that’s just contracting and it is how it has always been but surely, we can do better than that? The payment notice should be a fair valuation of the works prepared in accordance with the subcontract, not an assessment which starts from the amount a contractor is willing to pay and works backwards.

The government introduced payment legislation in the construction industry to improve cash flow and I have been wondering recently why more isn’t being done to govern contra charge practices. At the very least, the bar to making a contra charge deduction should be equal to the bar to being paid a variation. Maybe there is more that standard form contracts could do in their standard subcontracts?

Am I the only one seeing this, or are others noticing a worsening in the practice of deducting contra charges? Maybe it has always been this bad and I am only just opening my eyes to the full extent of it?

This must be crippling subcontractors financially.

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