...last week (or things you should now understand) • the difference between a certificate and an instruction • the difference between an instruction and a Variation • the role of certificates in controlling money and time • the responsibilities of the CA with regard to the issue of instructions and certificates • key certificates associated with key post-contract events (e.g. Interim Certificates, Practical Completion Certificate, etc.) D39PZ: Procurement and Contracts 1
Unit 8: Contract Administration: Payment D39PZ: Procurement and Contracts 2
Lecture Plan 1. Payment principles 2. Payment under the Construction Act 3. Gross Valuations 4. Interim Certificates 5. Quantifying instructions and Variations 6. The Rectification Period 7. The Final Certificate 8. Summary D39PZ: Procurement and Contracts 3
Payment under SBC • Reviews the principles upon which the Employer’s periodic payments to the Contractor under SBC/Q are based • SBC incorporates several obligations from the Construction Act regarding payment practice, including: The Employer has 14 days from the “ interim payment due date ” to pay the certified amount to the Contractor (cl. 4.12.1) If it does not, then: o The Contractor can charge interest on the outstanding amount at 5% above the base rate (cl. 4.12.6; cl. 1.1); o The Contractor can suspend the Works (cl. 4.14); and o The Contractor can terminate its own employment if payment still outstanding a further 14 days past the due date (i.e. 28 days after interim payment due date (cl. 8.9.1.1 ) D39PZ: Procurement and Contracts 4
The Contract Sum • The amount of money the Employer will pay the Contractor for building the Works (Article 2) • Was originally the winning tenderer’s tender price. When the tender offer was accepted, the tender price became the Contract Sum. • If the Employer makes no changes (i.e. no Variations), and there are no unforeseen circumstances, the initial Contract Sum will be the amount finally paid. This is unrealistic. SBC/Q needs provisions to continually update and document the agreed Contract Sum. D39PZ: Procurement and Contracts 5
Interim payments • The long time required to construct the Works and their large capital value requires the Employer to pay the Contractor as the Works are completed. • Interim valuations are performed at agreed regular intervals by the QS to ascertain the current value of the Works This is the Gross Valuation In principle, the difference between one Gross Valuation and the immediately preceding Gross Valuation is the amount to be paid by the Employer for that period’s work This amount is subject to Retention (and other Employer “set - offs” as permitted by SBC/Q) D39PZ: Procurement and Contracts 6
Retention • Retention is governed by cls. 4.9.2, 4.18 and 4.20. • An agreed Retention Percentage is withheld by the Employer from each payment due following a Gross Valuation. The Employer’s (monthly) payments to the Contractor will be less than suggested by the Gross Valuation. D39PZ: Procurement and Contracts 7
Retention • Retention is deducted at the full Retention Percentage stated in the Contract Particulars from Works not yet covered by a Practical Completion Certificate (cl. 4.20.2.1) • Retention is also deducted at the full Retention Percentage from materials on site and Listed Items (cl. 4.20.2.2) • Retention is deducted at half the Retention Percentage stated in the Contract Particulars from Works that are covered by a Practical Completion Certificate but are not yet covered by a Certificate of Making Good - i.e. during the Rectification Period (cl. 4.20.3) D39PZ: Procurement and Contracts 8
Terminology • Interim - Something that happens several times at regular intervals - SBC/Q defaults to valuations at monthly intervals. • Gross Valuations (cl. 4.16) The QS’s ascertainment of the total value of the partially completed Works on the date of each interim valuation. • Interim valuations (cl. 4.10) The QS’s monthly activity of ascertaining the amount due in an Interim Certificate. This requires a Gross Valuation. D39PZ: Procurement and Contracts 9
Terminology • Interim Certificates (cls. 4.9.2, 4.10.1, 4.12) The regular certificates denoting the interim payments that must be paid by the Employer to the Contractor. • Retention (cls. 4.9.2, 4.18, 4.20) A proportion of the sums otherwise due to Contractor withheld by the Employer until the end of the project to ensure the Contractor to complete the Works. • Retention Bond (cl. 4.19) As alternative of the Employer deducting Retention, the Contractor can obtain a Retention Bond which will pay out to the Employer if the Contractor defaults on its obligations. D39PZ: Procurement and Contracts 10
1. Payment principles 2. Payment under the Construction Act 3. Gross Valuations 4. Interim Certificates 5. Quantifying instructions and Variations 6. The Rectification Period 7. The Final Certificate 8. Summary D39PZ: Procurement and Contracts 11
Payment generally • Contract parties are free to agree: The sum to be paid for the Works Whether payment is to be in installments When installments are due and how they are to be paid • We have seen typical such agreements in the SBC D39PZ: Procurement and Contracts 12
“Paid when paid” clauses • Payment under The Housing Grants, Construction and Regeneration 1996 Act: Sections 109 and 110 establish the Contractor’s statutory right to periodic payment. Section 110(1) requires that a mechanism for ascertaining payments is provided by construction contracts. Section 113 prohibits “paid when paid” clauses o These were typically used by the Contractor with its subcontractors and were considered unfair. D39PZ: Procurement and Contracts 13
1. Payment principles 2. Payment under the Construction Act 3. Gross Valuations 4. Interim Certificates 5. Quantifying instructions and Variations 6. The Rectification Period 7. The Final Certificate 8. Summary D39PZ: Procurement and Contracts 14
Division of responsibility • Gross valuation is the process used to implement the period payments from the Employer to the Contractor • QS ascertains (quantifying) the amount of the Gross Valuation (cl.4.10.2) • This is done using their own calculations, or they can review an application from the Contractor received not less than 7 days before the due date (cl. 4.11.1) • Using figures provided by the QS, the CA certifies the amount that must be paid by the Employer to the Contractor for that period of work (cl 4.10.1) D39PZ: Procurement and Contracts 15
Content of a Gross Valuation • When ascertaining each Gross Valuation, the QS will include: those parts of the Works “properly executed” on the date of valuation (cl. 4.16.1.1) materials or goods stored on site and clearly identifiable as being destined for inclusion in the Works (cl. 4.16.1.2) materials or goods stored off site but identified in the Contract Documents as “Listed Items” and therefore clearly identified as being destined for inclusion in the Works, (cl. 4.16.1.3) D39PZ: Procurement and Contracts 16
Content of a Gross Valuation • The QS must will also include the following in a Gross Valuation (from which Retention is not deducted): any amounts to be included in Interim Certificates in accordance with clause 4.4 as a result of payments made or costs incurred by the Contractor under clause 2.6.2 (additional insurance premiums due to early use by employer), 2.21 (fees or charges legally demandable), 2.23 (patent rights – instructions), 3.17 (CA’s instructions requiring contractor to open up for inspection any work covered up or to arrange for or carryout any tests of material or goods or of any executed work), 6.5 (contractor’s insurance of liability of employer), 6.10.2 (Terrorism cover – policy extension and premiums) or 6.10.3 Terrorism cover – policy extension and premiums) or paragraph B.2.1.2 or C.3.1 of Schedule 3 (insurance); Any amount payable under cl 4.14.2 due to suspension of work Any sum due to the Contractor as a consequence of a claim for Loss and Expense (cl. 4.23) Any amounts in respect of any restoration, replacement or repair of loss or damage and removal and disposal of debris under paragraph B.3.5 or C.4.5.2 of Schedule 3 or clause 6.11.5.2; and D39PZ: Procurement and Contracts 17 Additions caused by the fluctuation option
Deductions from a Gross Valuation • The QS ascertains the value of the following so they can be deducted from each Gross Valuation: Errors arising from contractors’ wrong setting out (cls. 4.16.3.1 and 2.10). Employer’s costs in using an alternative contractor to fix defects (cls. 4.16.3.1 and 2.38) Employer’s costs in using an alternative contractor to undertake instructions that the original Contractor is refusing to implement (cls. 4.16.3.1 and 3.11) Works not in accordance with the Contract Documents but not justifying an instruction to correct (cls. 4.16.3.1 and 3.18.2). Deductions caused by insurance premium reductions occur at any renewal of Terrorism cover by contractor due to variation in rate on which the premium is based (cl. 6.10.2) Deductions caused by a fluctuations option, if present (cl. 4.16.3.2) D39PZ: Procurement and Contracts 18
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