Set-off in construction
Produced in partnership with Dentons
Practice notesSet-off in construction
Produced in partnership with Dentons
Practice notes
Cash flow is essential to the construction industry—without it, projects would grind to a halt. However, where parties owe sums of Money to each other (for example, where an Employer owes the contractor for works undertaken but the contractor also owes the employer for damage caused to the property during the works) it makes commercial sense to have a mechanism whereby only one payment is made rather than two separate payments. Such a mechanism exists in the form of 'set-off'.
This Practice Note gives an overview of set-off (both generally and contextually within the construction industry), explains how it works in practice and offers some practical tips and considerations to bear in mind when dealing with set-off in the context of construction contracts.
What is set-off?
Commercially, set-off is a mechanism used by parties to manage cash flow. It effectively allows for the offset of opposing financial claims to produce a single amount owed by one party to another. In litigation, set-off functions as a defence to a claim for monies due.
For more information, see Practice Note: What is
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Jurisdiction(s):
United Kingdom
Related legal acts:
Key definition:
Cash flow definition
What does Cash flow mean?
Cash flow is regarded by many as the ultimate test of financial health. Seasoned analysts do not entirely trust the figure a company puts on its profits, since profits can be ‘massaged’, whereas cash is more difficult to manipulate. Profit, as they say, is a matter of opinion. Cash is a matter of fact. The best way to check the cash flow position of a company is to scrutinise the cash flow statement in its annual report and accounts. It provides fact on whether a company has generated or consumed cash in the year, and how. It can be used in conjunction with the P&L to assess the trading results, or it can be used in conjunction with the balance sheet to assess liquidity, solvency and financial flexibility.
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