Lecture 6 - Certificates, payment and retention PDF

Preview

Summary

Construction Contracts. Lecture 6 - Certificates, payment and retention. Achieved a 1st in this module. Lecturer Prof Wayne Lord....

Description

Certificates, payment and retention Payments   

Time cost quality and risk – commercial decisions are all about money Interim payment vital to the economics of the construction industry Without interim payments and you would get the money in one go o Cash flow issues o Contractor funding the project themselves o Clients shouldn’t get the supply chain to fund the project themselves o Contractors often have trade credit to fund their own works, then recycle the money they receive on the open market to make more.  Keep hold of money, delay payment as long as possible o Pay when paid clauses are illegal o Pay when certified and pay what certified clauses are illegal  Can put them in, but they are unenforceable o Housing grants construction and regeneration act 1996 (Construction act)  Payment provisions governed by this

Payments – Latham’s recommendation for a modern contract  

Provision for assessing interim payments by method other than monthly valuation i.e. milestones activity schedules or payment schedules. Aim to phase out the traditional system of monthly measurement but meanwhile provision should still be made for it. o Clients prefer fixed fees, they don’t like calculated amounts

Payments – Lathams recommendation for a modern contract  

Clearly set out period for interim payments Otherwise an automatic right to compensation, involving payment of interest to deter slow payment. o Statutory rate of interest 8% above base – if contract does not make provision o Additional fixed sum can be recovered for non-payment depending debt value o Can recover, compensation for the time/ legal fees/ debt collectors.

NEC4 Payment provisions  



Contractor submits application for payment Project manager assess amount due o If contractor does not submit an application for payment - project manager still has to value works o Incentive for the contractor to submit the valuation Assessment interval (Usually one month)

Value of work done to date Other amounts to be paid to the contractor  Loss + Expense, Compensation events o Less amounts to be paid by or retained from contractor  Retention, MCD, Defective works Price for work done to date under the various options o A – Based on activity schedules – Less descriptive  Contractor gets paid for completed activities  Activity – is a section of work (fitting out a room, if the projector was not in, the contractor would not get paid anything even though they have done the rest of the works) o B – Bill of quantities – More descriptive  Contractor gets paid whatever he puts in based on the BOQ  BOQ – The contractor would be paid everything in the room minus the cost of the projector o C to F – Defined costs forecast plus Fee  Cost reimbursement contracts. Contractor gets paid the costs plus overheads and profit Other points o Retention percentage  By default NEC does not have retention (Optional clause) Rights to suspend o If client has not paid by the final date for payment o Contractor entitled to EOT and costs in maintaining site security and re-mobilisation  Costs are added to the contract sum o Walk off site and it is a repudiatory breach which means the other party can kick you off site o If the employer fails to pay, statutory right to suspend performance upon 7 days notices – construction act o o







NEC Payment timescale

 

The project manager to issue notice on time - cannot just issue a pay less notice instead o Misconception in the industry The project managers certificate is the notice of payment

 

If employer wants to pay less than the notified sum - issue a pay less notice Final date for payment 14 days from certificate

JCT Payment Provisions 



  

  

Contractor submits application for interim payment o Alternative A - stage or Fixed sum o Alternative B – Gross valuation) Due date is o 7 days after the interim valuation date or o 7 days after date of receipt by employer of application Employer payment notice within 5 days of due date Final date for payment 14 days from due date Retention deducted o Held by employer  Held on behalf the contractor – The contractors money  Held in separate bank account (If contractor requests)  Money protected in case of insolvency o Retention held – To encourage the contractor to complete the works and/ or to rectify defects o Retention JCT – no obligation to invest retention. Holding it as a trustee. o Retention percentage - 3% standard o ½ released after practical completion Alternative is a retention bond No payment by employer o Contract entitled to simple interest Can suspend – 7 Days statute o NEC based on statue, JCT is a contractual right to suspend

JCT payment cycle:

Construction Act  

If the contract is defective these take precedence as a matter of law and cannot be changed Amount due as calculated as

A equal to the value of any work performed during the relevant period B an amount equal to the value of any materials manufactured on site or brought onto site for the purposes of the works o C any other amount or sum which the contract specifies shall be payable during the relevant period Adequate mechanism - For interim or stages payment Payment notices o Payee notices in default o Have to issue payment notices o o

 

Construction Act Notices 



Payment notice (Sum considered to be due at the payment due date and the basis of the calculation) o Payer to payee – Normal o Payee to payer - Not normal but there can be provisions in the contract. Similar to invoice  Payee may give notice any time after payer notice should have been given IF sum payee considers will be due at the payment due date and the basis of the calculation o Payee application

Construction Act - Notified sum   

Notified sum to be paid on or before the final date for payment Notice of intention to pay less than the notified sum – Pay less notice Clients try to extend the period for final date for payment

Construction Act 

Payment cycle o Payment due 7 days following the relevant period or when a claim is made by the payee o Payment notice within 5 days o Pay-less notice not later than 7 days before the final date for payment o Final date for payment, 17 days after due date – for interim payment o For final payment it is 30 days – why?

Statutory payment provisions – 1 – Normal

Statutory payment provisions – 2 – No notice

 

If no notice is issued, this extends the final date for payment – Someone has to issue the notice Then there will be no final date for payment

Statutory payment provisions 3 – Payee notice

  

Application for payment may become the notice, if there is no payer notice. This is if no notice has been issued but an application has been. If project manager, then issues payment notice late and halves the valuation – you would be entitled to the full application amount.

Remedies for non-payment 

Right to suspend works – if not paid in full o Even if the clause is deleted out the contract the statute law applies o 7 days notice required o Automatic EOT for suspension o Plus reasonable costs

Other      

Payment schedule Don’t miss the payment run – happens with larger clients Look at contractors payment cycle and subcontractors payment cycle to ensure cash flow works Cost benefit analysis of retention and retention bond Contractor cannot interfere/ influence the issue of the certificate, has to be independent Bonds

Wates Construction V Frantom – Retention in separate account     

Construct a hotel Contractor requested that retention be placed into a separate bank account Employer refused Employer should be a trustee not a beneficiary of the fund Had a duty to safeguard the fund for beneficiaries

Sutcliffe V Tackrah – Certifying Uncompleted works

   

Employed architects who issued interim certificates Contractor was kicked off site for poor works and went into liquidation Employer sued architects for certifying work not completed Even though the certificate was in error, client is bound to pay the contractor based on the architects certificate...