Pay-when-paid clauses in UK construction contracts: what section 113 actually does

İsa Göktaş · Founder, CONTRIX · 25 October 2026 · 6 min · Source check: UK-PAY-001

Subcontracts still arrive with wording such as "payment will be made within 7 days of the Contractor receiving payment from the Employer". It looks like a sensible way to share cash-flow risk down the chain. For most construction contracts in the UK it does not work, and both sides tend to misjudge it: the payer relies on it, the payee assumes it is binding.

What the Act says

Section 113 of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) makes a provision in a construction contract ineffective if it makes payment conditional on the payer receiving payment from a third person. Where the clause falls away, the parties are free to agree other payment terms; if they have not, the payment provisions of the Scheme for Construction Contracts fill the gap.

The 2009 amendments (Local Democracy, Economic Development and Construction Act 2009, Part 8) went a step further. Under section 110(1A), making payment depend on obligations under another contract, or on a decision about whether those obligations have been performed, is not an adequate payment mechanism. In practice that closed the "pay-when-certified" route, where a subcontractor's payment waited for a certificate under the main contract.

The insolvency exception

There is one exception. A conditional payment provision remains effective where the third person whose payment it depends on is insolvent, including where that person's own payment depends on someone further up the chain who is insolvent. Two points matter in practice:

• It is a drafting point, not an automatic right. The exception only helps a payer whose contract actually contains a clause that relies on it. The insolvency events are defined by the Act. In William Hare Ltd v Shepherd Construction Ltd the Court of Appeal held that a clause whose wording did not track the statutory definition did not protect the main contractor.
• It does not cover slow payment. An employer who is simply late, disputes a valuation or is in financial difficulty without a formal insolvency event does not trigger it.

What happens on a live project

Because the conditional wording is ineffective, the ordinary payment machinery applies. The payer must pay the notified sum by the final date for payment unless a valid pay less notice is served in time. A main contractor who withholds payment "because we haven't been paid" without a pay less notice is exposed to an adjudication claim for the full sum, plus interest.

The subcontractor's practical position is equally clear: the risk to manage is not the clause itself but the notices. Issue applications on time, keep a record of the due date and final date for payment, and treat the absence of a payment notice or pay less notice as a commercial fact you can rely on.

Checks before you sign

1. Search for conditional wording. Look for "when paid", "if paid", "upon receipt of payment from the Employer", and payment tied to a certificate under the main contract.
2. Check the insolvency carve-out. If the payer wants to rely on the exception, the clause should be drafted against the statutory insolvency events, not a home-made definition.
3. Read the notice regime. Who issues the payment notice, when, and what happens if it is not issued? Gaps here are filled by the Scheme.
4. Check whether the Act applies. Some contracts fall outside the HGCRA, for example certain process-plant operations and contracts with a residential occupier. The analysis changes if it does not apply.
5. Consider real alternatives. If upstream insolvency is the real concern, project bank accounts, parent company guarantees or bonds deal with it more reliably than conditional payment wording.

This article is general information, not legal advice. Sources: Housing Grants, Construction and Regeneration Act 1996, ss.110 and 113 (legislation.gov.uk); Local Democracy, Economic Development and Construction Act 2009, Part 8, explanatory notes; William Hare Ltd v Shepherd Construction Ltd [2010] EWCA Civ 283.