[PPT] - Payment D39PZ: Procurement and Contracts 2 Lecture Plan 1. Payment PowerPoint Presentation

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D39PZ: Procurement and Contracts 1

...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.)

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Unit 8: Contract Administration: Payment

D39PZ: Procurement and Contracts

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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

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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:
The Contractor can charge interest on the outstanding amount at 5%

above the base rate (cl. 4.12.6; cl. 1.1);

The Contractor can suspend the Works (cl. 4.14); and
The Contractor can terminate its own employment if payment still
utstanding a further 14 days past the due date (i.e. 28 days after

interim payment due date (cl. 8.9.1.1)

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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.

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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-
ffs” as permitted by SBC/Q)

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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.

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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)

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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.

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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.

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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

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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

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“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
These were typically used by the Contractor with its

subcontractors and were considered unfair.

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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

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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)

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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)

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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

f 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

Additions caused by the fluctuation option

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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)

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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

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Interim Certificates: procedure

The QS conducts an interim valuation as required by the

CA to ascertain the “Gross Valuation” so that an amount payable by the Employer can be stated as due in an Interim Certificate (cl. 4.9.2).

The QS will attend the site to:
Confirm and value the work completed (cl. 4.16.1.1)
Confirm and value any materials or goods stored on site

and due to be incorporated in the Works (cl. 4.16.1.2)

Confirm presence of any Listed Items (this may require a

visit to the Contractor’s or supplier’s storage facility) (cl. 4.16.1.3)

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Interim Certificate

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Statement of Retention

cl. 4.18.2 requires a

Statement of Retention to be issued with every Interim Certificate

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Interim Certificates (cls. 4.9 to 4.12)

Issued regularly as the Works progress to:
document the progress of the Works;
Mark an event; and
ensure regular interim payments from Employer to Contractor
Issued in accordance with:
cl. 4.9.1 - timing of certificate issue
cl. 4.9.2 - ascertaining the amount to be certified
Interim Certificates overcome the absence of a common

law right to interim payments

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Interim Certificates

Interim Certificates are not conclusive.
They are intended to be reasonably accurate.
However, they have significant commercial consequence

(for Contractor and Employer), and QS and CA professional liability.

An Interim Certificate (and its appended Statement of

Retention) documents are the outcome of an interim valuation.

Financial reports, case flow projections, etc. may also be produced,

but they are not mandated by the SBC.

An interim valuation is a fair assessment of the value of

the Works satisfactorily completed by the Contractor to date

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Interim Certificates

Each Gross Valuation must “adjust” the Contract Sum to

incorporate additions or deductions caused by Variations, additions and deductions (cl. 4.16): here are some deductions…

Liquidated Damages (if Non-Completion Certificate issued) (cl. 2.32.2.2)
Errors in setting out that do not have to be amended (cl. 2.10)
Cost of employing an alternative contractor to rectify defects the

Contractor is reusing to fix (cl. 2.38)

Cost of employing an alternative contractor to implement

instructions the Contractor is refusing to do (cl. 3.11)

Value of Works not in accordance with the Contract which does

not require to be replaced (cl. 3.18.2)

The updated Contract Sum is the Gross Valuation (cl. 4.16).

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Interim Certificates: procedure

The Contractor can (and usually does) make an application

for payment under cl. 4.11.1 in advance of the interim valuation.

The Contractor’s application will typically include:
Works completed to date, charged at “bill rates.”
Works completed in response to CA Instructions requiring variations,

charged in accordance with the Valuation Rules (cls. 5.6 to 5.10).

Wherever possible, variations should be measured and suitable bill

rates applied (cl. 5.6 - “Measurable Work”).

If a variation “cannot properly be valued by measurement,” Daywork

may be used (cl. 5.7 - “Daywork”).

All Dayworks sheets must be signed by the Clerk of Works.

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Interim Certificates: procedure

“The daywork sheet is to the construction client what the Jolly Roger is to the high seas – a flag that strikes terror into the hearts of its intended victims. It is the bloody banner that chills the mind, that freezes the hand that writes the cheque.”

Bingham, T. (2004). “Blood and Treasure.” Building, 30 April

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A typical dayworks

sheet

The contractor requests

payment of the actual labour, materials, and plant costs incurred to comply with an instruction that requires work that “cannot properly be valued by measurement” (cl. 5.7).

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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

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Instructions vs. Variations

Reminder:
Instructions address how the Works are being completed

(Instructions are issued to change the way in which Contractor are working or correct parts of the Works that have been assembled incorrectly)

Variations change the definition of the Works themselves

(variations are issued when it is required the contents of the Contract Documents to be ‘varied’ – usually by issuing revised drawings, bills, specifications etc.)

CA can only issue instructions in accordance with their right

to do so under SBC/Q cls. 3.14 to 3.22.

instructions issued under cl. 3.14 are Variations

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Instructions

Instructions are usually issued when the CA or Clerk of

Works observes the Contractor to be acting contrary to the Contract Documents (e.g. work “not in accordance”)

The Contractor will not be paid to comply with an instruction
The instruction was required because the Contractor was not

doing what it should have been doing.

The Contractor would be paid for complying with an

instruction if the instruction was issued in error

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Variations

Variations change the content of the Contract

Documents

e.g. by issuing a new drawing, specification, etc.
Variations are usually required:
to correct a mistake or discrepancy in the Contract

Documents

cl. 2.14.3 states “errors and inadequacies” dealt with by a Variation

because the fix will likely change the Contract Sum.

cl. 2.15 states “discrepancies” in Contract Documents dealt with by

an instruction

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Variations

Variations may also be required to:
the Works as defined in the Contract Documents simply

can’t be built

It either won’t work or can’t be built
if the Employer’s changes its mind about what is required
If uncontrolled, many of this type of Variation become

problematic

Because the need for a Variation was not created by the

Contractor, the Contractor will be fully paid for complying with a Variation.

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Types of Variation

There are two types of Variation
Variations that change the content of the Contract

Documents (cl. 5.1.1)

Variations that oblige the Contractor to use certain working

methods (e.g. working at night) (cl. 5.1.2)

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Adjusting the Contract Sum

The Contract Sum can be increased or decreased if:
a Variation has been issued (cl. 4.3.1.1)
an Acceleration Quotation or a Variation Quotation has been

submitted by the Contractor and accepted by the Employer (cl. 4.3.1.2)

a change in premiums the Contractor must pay for any “all

risk” insurance of the Works they were obliged to take out (cl. 4.3.1.3).

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Valuing variations Measurable Work 5.6.1 To the extent that a Valuation relates to the execution of

additional or substituted work which can properly be valued by measurement or to the execution of work for which an Approximate Quantity is included in the Contract Bills and subject to clause 5.8 in the case of CDP Works, such work shall be measured and shall be valued in accordance with the following rules:

.1 where the additional or substituted work is of similar character to, is executed under similar conditions as, and does not significantly change the quantity of, work set out in the Contract Bills, the rates and prices for the work so set out shall determine the valuation;

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Measurable Work 5.6.1

.2 where the additional or substituted work is of similar character to work set

ut in the Contract Bills but is not executed under similar conditions

thereto and/or significantly changes its quantity, the rates and prices for the work so set out shall be the basis for determining the valuation and the Valuation shall include a fair allowance for such difference in conditions and/or quantity; .3 where the additional or substituted work is not of similar character to work set out in the Contract Bills, the work shall be valued at fair rates and prices; .4 where the Approximate Quantity is a reasonably accurate forecast of the quantity of work required the rate or price for the Approximate Quantity shall determine the valuation; and

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Measurable Work 5.6.1

.5 where the Approximate Quantity is not a reasonably accurate forecast of the quantity of work required, the rate or price for that Approximate Quantity shall be the basis for determining the valuation and the Valuation shall include a fair allowance for such difference in quantity. Provided that clauses 5.6.1.4 and 5.6.1.5 shall apply only to the extent that the work has not been altered or modified other than in quantity.

5.6.2 To the extent that a Valuation relates to the omission of work set out in the Contract Bills and subject to clause 5.8 in the case of CDP Works, the rates and prices for such work therein set out shall determine the valuation of the work omitted.

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Measurable Work 5.6.3 In any valuation of work under clauses 5.6.1 and 5.6.2:

.1 measurement shall be in accordance with the same principles as those governing the preparation of the Contract Bills, as referred to in clause 2.13; .2 allowance shall be made for any percentage or lump sum adjustments in the Contract Bills; and .3 allowance, where appropriate, shall be made for any addition to or reduction of preliminary items of the type referred to in the Standard Method of Measurement, provided that no such allowance shall be made in respect of compliance with an Architect/Contract Administrator’s instruction for the expenditure of a Provisional Sum for defined work.

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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

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The Rectification Period

The Final Certificate is the final outcome of the Contract.
It is issued after the Rectification Period has ended.
The Rectification Period commences after issue of the

Practical Completion Certificate (cl. 2.34).

The Rectification Period is a period of time in which the

Contractor must make good all defects (cl. 2.38).

Default duration is 6 months (Contract Particulars).

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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

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Events prior to Final Certificate

Interim Certificates will have been issued at regular intervals

to direct the Employer's payments (cl. 4.9.1)

The Practical Completion Certificate has been issued (cl.2.30)
Further Interim Certificates have been issued every two

months during the Rectification Period to permit further adjustment of the Contract Sum and any payments from Employer to Contractor (cl. 4.9.1)

The Certificate of Making Good has been issued (cl. 2.39)

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The Final Certificate (cls. 1.10 & 4.15)

Signifies the CA’s satisfaction with the Works.
Issued within two months (cl. 4.15.1) after either:
the end of the Rectification Period (cl. 4.15.1.1)
the issue of the Certificate of Making Good (cl. 4.15.1.2); or
settlement of the “final account” in accordance with cl. 4.5.2

(cl. 4.15.1.3)

States the finally adjusted Contract Sum (4.15.2.1)
States the sum previously certified (and paid) plus the amount
f any advance payment paid pursuant to cl. 4.8 and where

relevant any sums referred to in cl.4.9.2.4 (4.15.2.2)

States the final balance due

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Legal standing of the Final Certificate

cl. 1.9 defines the effect of the Final Certificate.

It provides conclusive evidence that:

the Works have been completed in accordance with the

Contract Documents and all Instructions (cl. 1.9.1.1);

all required adjustments of the Contract Sum have been

taken into account (cl. 1.9.1.2);

all extensions of time due under cl. 2.28 have been granted

(cl. 1.9.1.3);

all loss and expense due to the Contractor has been paid (cl.

1.9.1.4).

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The Final Certificate

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Putting it all together...

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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

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