JCT contract finance: funding applications, valuations and retentions

JCT contracts, and the subcontracts that sit beneath them, follow the payment framework set by the Housing Grants, Construction and Regeneration Act 1996 as amended. In outline:

1. Application or valuation. Interim payments usually fall due at set intervals, often monthly. Depending on the form, the contractor applies or the contract administrator values the work, including materials on site and sometimes listed items off site.
2. Due date and payment notice. The payer must issue a payment notice stating the sum it considers due and how it was calculated. If it does not, the payee's application can stand as the notified sum.
3. Pay less notice. To pay less than the notified sum, the payer must serve a pay less notice under section 111 of the Act before the deadline, with its reasons. Contra charges and set-offs that are not properly notified are open to challenge.
4. Final date for payment. The contract sets the period between the due date and the final date. Payment conditional on the payer itself being paid is generally prohibited, except where an upstream party is insolvent.
5. Retention. A percentage is deducted from each interim payment. Under JCT forms, part is usually released at practical completion and the rest after the rectification period, once defects are made good.

JCT's own explainer on interim payments sets out how its forms apply these rules. The detail that matters for funding is in your contract particulars and any schedule of amendments, which main contractors frequently use to lengthen payment periods, raise retention or widen set-off rights.

• Mobilisation. Labour, welfare, plant and early materials are paid from day one, and the first payment arrives only after the first valuation period plus the payment period.
• Undervaluation. The certified sum is often lower than what you applied for, and the difference may only be recovered later or through dispute.
• Retentions. On a contract running a year or more, the retained sum can approach or exceed your profit margin on the job, and you will not see the final part until the rectification period ends.
• Variations. Instructed extra work is often agreed and paid well after it is carried out.
• Tax timing. CIS deductions reduce receipts for subcontractors without gross payment status, and the VAT domestic reverse charge changes when VAT is collected and paid.

A standard invoice finance facility lends against a debt that is due, fixed and free of argument. A construction application is none of these until it is certified, and even then the payer may have contractual set-off rights. Many standard forms and main contractors' own amendments also restrict assigning the benefit of the contract or its payments without consent, which complicates the lender's security. And if the main contractor fails, the debt may be absorbed in counterclaims for completing the work. Mainstream providers therefore exclude contracts with stage payments or retentions entirely. Specialist construction lenders accept these features, but price and structure for them.

Illustration, with hypothetical round figures and no rates: a subcontractor wins a £600,000 package valued monthly over ten months. In the first month it spends around £70,000 on labour and materials. Its first application is certified at less than applied for, the retention is deducted, and payment arrives several weeks after the valuation date. By then the second month's costs are already paid. A construction finance facility advancing against each certified valuation keeps the gap manageable, while a small term loan covers the mobilisation costs before the first certificate exists. When the job ends, retention remains outstanding until the rectification period closes, so the business plans its next contract without relying on that sum.

The largest risk is the payer's insolvency: funded applications can become unrecoverable, and the facility usually has recourse to you. Funding also does not fix an underpriced contract; borrowing to keep a loss-making job going only increases the loss. Before reaching for finance, use the Act's protections properly: issue clear applications, challenge invalid pay less notices, and use your right to suspend or adjudicate where it is justified. Our guide to chasing late payment covers the basics. Government has also consulted on late payment, including how retentions are handled; check the government's response for what is changing and when. For the plant and heavy-contract side, see our guide to civil engineering funding, and for trade-specific pages see electrical contractor finance and utility contractor finance.