CONSTRUCTION PROJECT PAYMENTS | WHEN IS WITHHOLDING PAYMENT JUSTIFIED & HOW SHOULD FINANCIAL DISPUTES BE HANDLED?
Payment is one of the most important parts of successful construction project execution. Contractors, suppliers, subcontractors and clients all depend on agreed payment arrangements to keep materials, labour and project activities moving.
However, disagreements can arise over incomplete work, defects, variations, measurements, documentation, invoices, payment certificates or failure to meet contractual requirements. In such situations, a party may consider withholding payment.
The important question is whether the withholding is supported by the contract and the circumstances of the project, and how the dispute should be handled without unnecessarily disrupting project execution.
In Kenya, construction payment disputes can involve clients, contractors, subcontractors, manufacturers and suppliers, and may arise from issues including delays, cash-flow problems, cost overruns and quality concerns. (Oraro & Company Advocates)
When Can Payment Be Withheld on a Construction Project?
Payment should not generally be withheld simply because there is disagreement between the parties.
Whether withholding is justified depends primarily on the construction contract, agreed payment terms and the circumstances giving rise to the dispute.
Potential reasons may include:
- Work that has not been completed according to the agreed scope
- Defective or non-conforming work
- An invoice that does not comply with contractual requirements
- Disputed measurements or quantities
- Unapproved variations
- Failure to provide required documentation
- Contractual retention provisions
- Other circumstances expressly provided for in the agreement
The specific contract should always be reviewed before deciding to withhold payment.
For public procurement contracts in Kenya, the applicable regulations provide that a contractor must satisfactorily perform its contractual obligations before payment, while also requiring procuring entities to make prompt and timely payments to contractors who meet those obligations. (Kenya Law)
Should a Client Withhold the Entire Payment Because of One Disputed Issue?
Not necessarily.
A dispute may concern only part of an invoice, a particular item of work or a specific variation.
Where the contract and applicable circumstances allow it, the parties should identify the undisputed amount separately from the disputed amount.
This can help prevent a relatively small disagreement from unnecessarily affecting the entire project.
A clear payment assessment should identify:
- Amount claimed
- Amount approved
- Amount already paid
- Amount disputed
- Reason for the dispute
- Supporting documentation
- Applicable contractual provision
This approach creates a clearer financial record for everyone involved.
Can Poor Workmanship Justify Withholding Payment?
Potentially, depending on the contract and the nature of the issue.
If completed work does not comply with agreed specifications, drawings, approved materials or contractual requirements, the client may have contractual rights relating to correction, rectification, retention or payment.
However, the contractor should be informed of the specific issue rather than simply being told that payment will not be made.
The parties should establish:
- What work is alleged to be defective?
- What requirement was not met?
- What evidence supports the claim?
- What corrective action is required?
- Who is responsible for the correction?
- When should the issue be resolved?
Documenting the issue makes the dispute easier to evaluate.
What About Incomplete Construction Work?
Payment may be linked to completed milestones under the project’s payment schedule.
If a payment becomes due only after completion or certification of a particular stage, the parties should verify whether that milestone has actually been achieved.
This is especially important for projects involving:
Procurement → Fabrication → Delivery → Installation → Completion
Each stage may have different contractual requirements.
A disagreement should therefore be assessed against the agreed scope and payment schedule rather than assumptions about when payment should become due.
Can Unapproved Variations Affect Payment?
Yes.
Project variations can create significant financial disagreements.
A client may request additional work, change materials or alter the original design. If the change is not properly documented, disagreements can later arise regarding:
- Additional materials
- Labour
- Fabrication
- Installation
- Project duration
- Additional costs
- Payment responsibility
A variation should ideally be documented and approved according to the project’s contractual procedure before substantial additional work is undertaken.
Clear variation records can help prevent disputes over whether additional work was actually authorised.
What If the Client Has Not Paid the Contractor?
Delayed client payments can create serious cash-flow pressure during construction.
However, a contractor should not automatically assume that delayed payment gives it unrestricted freedom to stop work or withhold obligations to suppliers and subcontractors.
The contract should be reviewed to establish:
- When payment became due
- Whether the invoice was correctly submitted
- Whether certification was required
- Whether notice of non-payment is required
- Whether interest applies
- Whether suspension rights exist
- What dispute-resolution procedure applies
Recent Kenyan case law has also highlighted the importance of carefully interpreting payment clauses between contractors and subcontractors. In Patronics Services Limited v EPCO Builders Limited & another, the court considered a subcontract payment clause and held that the provision regulated timing of payment rather than extinguishing the contractor’s underlying payment obligation. (Kenya Law)
How Should a Payment Dispute Be Documented?
Good documentation is one of the most effective ways to manage a construction payment dispute.
Keep records of:
- Signed contracts
- Approved quotations
- Payment schedules
- Invoices
- Payment certificates
- Delivery notes
- Site reports
- Measurements
- Approved drawings
- Variation instructions
- Completion records
- Correspondence
- Payment receipts
Written records help establish what was agreed, what was completed and what remains disputed.
What Should a Payment Withholding Notice Contain?
Where a contract permits withholding, the affected party should receive a clear explanation rather than an unexplained refusal to pay.
The communication should identify, where applicable:
- The amount being withheld
- The reason for withholding
- The contractual provision relied upon
- The work or obligation in question
- Supporting evidence
- The corrective action required
- The process for resolving the issue
This creates transparency and gives the other party an opportunity to respond.
The exact notice requirements depend on the applicable contract and law.
How Should Financial Disputes Be Handled?
The first step should normally be to return to the signed contract.
The parties should establish what the contract says about:
- Payment
- Certification
- Retention
- Variations
- Defects
- Delays
- Notices
- Suspension
- Dispute resolution
The next step should be a documented discussion between the relevant parties.
Where appropriate, the parties can then use the dispute-resolution mechanism specified in their contract.
In Kenya, construction contracts may provide for mechanisms such as negotiation, mediation, arbitration or adjudication, depending on the agreement and applicable framework. Kenya’s constitutional framework recognises alternative dispute resolution, while the proposed construction-payment adjudication framework has specifically focused on faster resolution of payment disputes. (Oraro & Company Advocates)
Why Should Construction Payment Disputes Be Resolved Quickly?
A financial dispute can quickly become a project-management problem.
If payments remain unresolved, the consequences may include:
- Delayed material procurement
- Delayed fabrication
- Subcontractor payment problems
- Labour disruptions
- Supplier relationship difficulties
- Project delays
- Additional administrative costs
- Increased legal expenses
Resolving a dispute early can therefore protect both the financial position of the parties and the progress of the project.
How Can Contractors and Clients Prevent Payment Disputes?
Prevention is usually better than trying to resolve a major financial disagreement after it has developed.
Before project execution begins, parties should clearly establish:
1. Contract scope
Define exactly what is included.
2. Payment schedule
Identify when payments become due.
3. Documentation requirements
Clarify invoices, certificates and supporting documents.
4. Variation procedure
Establish how additional work must be approved.
5. Quality requirements
Define the expected standards and specifications.
6. Completion milestones
Clearly identify the stages linked to payment.
7. Dispute-resolution procedure
Agree how disagreements will be escalated and resolved.
Clear project documentation can significantly reduce misunderstandings later.
Frequently Asked Questions
When is withholding payment justified in construction?
Payment withholding may be justified where the contract permits it and there is a legitimate contractual basis, such as an unresolved defect, incomplete milestone, disputed amount or other failure to meet an agreed requirement.
Can a client withhold payment because of defective work?
Potentially, depending on the contract and the nature of the defect. The issue should be clearly documented, communicated and handled according to the applicable contractual procedure.
Can contractors stop work because of delayed payment?
Not automatically. The contractor should review the contract to determine whether delayed payment creates rights to suspend work, claim interest or pursue another remedy.
How should a construction payment dispute be resolved?
Start by reviewing the contract and supporting records. The parties can then use the agreed dispute-resolution procedure, which may include negotiation, mediation, arbitration or another contractual mechanism.
Why are payment schedules important?
A clear payment schedule helps the parties understand when payments become due and how project milestones, procurement and completed work relate to financial obligations.
Conclusion
Construction project payments should be managed according to the agreed contract, payment schedule and documented project requirements.
Withholding payment may be appropriate in certain circumstances, but it should not be used casually or without a clear contractual basis. Where there is a disagreement, the parties should identify the disputed issue, document the evidence, communicate clearly and follow the agreed dispute-resolution process.
For contractors, suppliers, subcontractors and clients, clear payment terms, accurate records and properly documented variations can significantly reduce financial disputes and help keep project execution on track.
For specific legal questions about whether payment may lawfully be withheld, parties should obtain advice from a qualified construction-law professional based on the actual contract and circumstances.
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