Construction Debt Recovery Study: Defect Allegations After an Unpaid Invoice

Construction debt recovery is rarely just about sending a payment reminder.

In many construction disputes, the unpaid sum is modest, but the arguments raised after payment is chased can become much wider. A contractor may suddenly rely on alleged defects, incomplete work, delay, remedial costs, contra-charges, or a supposed pay-less notice.

Defect Allegations After an Unpaid Invoice - If happens, the creditor needs to think carefully before treating the matter as a simple unpaid invoice.

This case study looks at a construction payment dispute involving Marcin and Tomasz, two CIS construction workers who were owed payment after their working relationship ended.

The contractor is not named because the payment issue was resolved without court or tribunal proceedings. This case study is used for educational purposes only, to show the practical issues that can arise in construction debt recovery where unpaid CIS payments are followed by defect allegations, pay-less notice arguments or disputed responsibility between companies.

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Defect Allegations After an Unpaid Invoice.

Background: unpaid CIS construction payments

Marcin and Tomasz carried out construction work connected with a contractor. After the relationship ended, there was an unpaid balance of £1,387 gross. This was made up of sums said to be due for work on different plots and weekend work instructed by the site manager.

The amount was to be split equally:

• Marcin: £693.50 gross

• Tomasz: £693.50 gross

The notice before claim made clear that if CIS deductions were to be applied, they had to be lawful, properly accounted for, and remitted to HMRC. The net payments then had to be paid to the correct bank accounts.

This was not approached as a basic “please pay the invoice” situation. The evidence included WhatsApp messages, CIS documentation, payment arrangements, the nature of the work, and how the relationship operated in practice.

That mattered because construction payment disputes often involve more than one possible route: contract/payment recovery, CIS treatment, worker-status arguments, and possible statutory claims.

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The contractor’s response: defects, incomplete work and future costs

The contractor did not simply say that the money was not owed.

Instead, the response raised workmanship issues, incomplete work, alleged site problems, future financial consequences, remedial costs, delays to other trades, sound testing costs, and out-of-tolerance work.

The contractor also suggested that once a final account had been agreed, a statement of costs could be issued.

This is a common pattern in construction unpaid invoice disputes. A worker or subcontractor asks to be paid. The paying party then reframes the issue as a defects dispute, final account issue, contra-charge or future-cost problem.

• Sometimes the defects are genuine.

• Sometimes they are exaggerated.

• Sometimes they are raised late because the project has not produced the expected margin, the final account is under pressure, or the contractor is looking for additional recovery at the end of the project.

The important point is this: a late list of alleged defects is not automatically a valid answer to an unpaid payment claim.

A construction creditor should not ignore defect allegations. But they should also not accept them at face value without checking the contractual and statutory basis being relied on.

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Pay-less notice pressure after work is completed

One of the key issues in this dispute was whether the contractor was really relying on a valid pay-less notice or simply raising a retrospective list of complaints after payment had already been chased.

The reply asked the contractor to identify:

1. the notice relied upon;

2. the date and time it was served;

3. the contractual payment mechanism relied upon;

4. the final date for payment;

5. the prescribed period before that final date; and

6. how the notice complied with section 111 of the Housing Grants, Construction and Regeneration Act 1996.

That was important.

In a pay-less notice dispute after work is completed, the payer should be able to explain what notice was served, when it was served, what payment mechanism applied, and how the amount was calculated.

A retrospective complaint list is not the same thing as a properly served pay-less notice.

This is why construction debt recovery often needs a more careful strategy than ordinary unpaid invoice recovery. If the paying party raises defects, delay or contra-charges, the creditor should check whether those points were raised at the correct time, in the correct form, and under the correct payment mechanism.

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Why worker status also mattered

This dispute also raised a separate pressure point: worker status.

The clients were treated through a CIS/payment arrangement, but that does not always decide the legal relationship.

The notice before claim explained that there was a proper basis to argue that Marcin and Tomasz were not genuinely operating independent businesses on their own account. The evidence suggested that they were personally providing work as part of the contractor’s business operation.

That may give rise to limb (b) worker status under section 230(3)(b) of the Employment Rights Act 1996.

This point matters because some construction businesses assume that CIS status, self-employed labels, invoices, or subcontractor wording automatically prevent employment-related claims.

That is not always correct.

Where the individual personally performs work and the other party is not truly a client or customer of an independent business carried on by that individual, worker-status arguments may arise.

In practical terms, this meant the dispute was not treated only as a small unpaid construction invoice. There was also possible exposure to claims such as unauthorised deductions from wages, holiday pay, failure to provide written particulars, and other sums arising from the working relationship.

That changed the commercial pressure.

If the unpaid amount is small, the paying party may think it is not worth paying. But if the dispute opens up worker-status issues, tribunal risk, holiday pay and statutory rights, the cost of defending the position can quickly become greater than the sum originally withheld.

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The result: payment was made

After the notice before claim and follow-up correspondence, payment was made through CIS payment statements.

Each statement recorded total income, a company margin, CIS deduction, and net payment to each client.

The principal payment dispute was therefore treated as resolved.

However, the final step was important. The position was not simply left at “thank you for paying”.

A final email recorded that the payments were made after the notice before claim and without supporting evidence being provided to maintain the alleged pay-less notice or deduction position.

The email also recorded that the clients did not accept that any pay-less notice, deduction, contra-charge, or similar argument remained live in respect of the paid sums.

Rights were reserved regarding the small gross shortfall, company margin, CIS treatment, holiday pay, worker-status issues, and any other statutory or contractual matters arising from the relationship.

That final step protected the clients from a common risk: a contractor paying the invoice but later trying to revive the same defect allegations as a small claim, contra-charge, or set-off argument.

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The commercial lesson: do not stop when payment arrives

This construction debt recovery study shows why it is important to lock the position even after payment is made.

If a debtor pays after pressure, that is usually a good result. But where the debtor has already raised defects, incomplete work, delay, remedial costs or pay-less arguments, there may still be future risk.

The debtor may later say that the payment was made under pressure, that the defects remained unresolved, or that a separate claim is still being considered.

A careful closing email can reduce that risk.

It should record what has been paid, what the payment relates to, whether the principal debt is treated as resolved, what allegations are rejected, and what rights are reserved.

This does not guarantee that no future claim will be made. But it creates a clear paper trail if the debtor later tries to change position.

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Practical checks before construction debt recovery action

Before taking action in a construction unpaid invoice dispute, check:

• who the correct legal debtor is;

• whether there is more than one company involved;

• whether CIS statements identify a different paying party;

• what work was completed;

• what evidence supports the unpaid sum;

• whether defects were raised before or only after payment was chased;

• whether any pay-less notice was served;

• what the contract or payment mechanism says;

• whether the final date for payment can be identified;

• whether the individuals may have worker-status arguments;

• whether the recovery route should be court, tribunal, negotiation, or both;

• whether payment, if made, needs to be followed by a position-locking email.

This is why a construction dispute should not be assessed only by the invoice value.

A £1,000 to £2,000 unpaid balance can create wider legal and commercial risk if the wrong route is chosen or if the debtor’s allegations are not properly dealt with.

For businesses dealing with overdue invoices, unpaid invoice recovery should start with checking the debt, the evidence, the debtor, the payment mechanism and the recovery prospects before more time and money are spent.

Where the dispute involves a business debtor, disputed invoices, debtor silence, late-payment arguments or enforcement risk, commercial debt recovery should be approached as a strategy, not just a demand letter.

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Conclusion

Construction debt recovery often involves more than unpaid labour or an unpaid invoice.

The paying party may raise defects, incomplete work, delay, contra-charges or pay-less notice arguments after the project ends. Those arguments may need to be challenged quickly and precisely.

This case study involving Marcin and Tomasz shows the importance of identifying the correct debtor, checking CIS and payment records, challenging unsupported pay-less notice arguments, considering worker-status pressure, and recording the position clearly after payment is made.

The strongest recovery strategy is not always the most aggressive one.

It is the one that gets payment, protects the evidence, limits future risk, and prevents the debtor from rewriting the dispute later.