Module II Contract Management Payment of Works

Module II Contract Management
Payment of Works
Chapter 12
Payment of Works
Contents:
page
12.1
General
Payment Schedule
Minimum Amount of Interim Certificate
88
89
90
12.2
Measurement of Works
90
12.3
Interim Certificate
Payment Breakdown
92
93
12.4
Retention
94
12.5
Practical Completion
95
12.6
Final Completion
96
12.1 General
ny payment made to the contractor should be based on completed works
which have been measured and approved by the engineer and deemed
compliant to the quality standards defined by the contract. Under no
circumstances shall the contractor be paid for works which have not been completed
or have been carried out to sub-standard quality.
How and when payments are made are based on the conditions of a particular
contract. Civil works contracts are often based on a bill of quantities where each
category of works are specified with a unit price offered by the contractor and an
estimated volume of works or materials. Smaller works would normally be awarded
using lump-sum contracts where the payment procedures are simplified.
Payment of completed works is based on inspection and approval by the engineer.
The engineer is responsible for measuring the exact quantities of completed works
and verifying that the quality of materials and workmanship conforms to the
technical specifications. The approved volumes of work are documented in a
payment certificate which the engineer submits to the client, basically stating that a
certain amount of works have been completed, and is now due for payment.
This endorsement of the works acts as the sole justification for the client to pay the
contractor. There is no need for any additional verification before payments are
processed. This process needs to be swift and free from bureaucratic red tape in
order to avoid delays in paying the contractor. Processing of a payment certificate
should not take more than one to two weeks.
Small-scale Contracting
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International Labour Organisation
Payment of Works
Remember:
Timely and swift processing of payment for works carried out by small-scale
contractors is a crucial issue in terms of providing a conducive environment in which
local entrepreneurs can survive and prosper. If payments are delayed, these firms will
easily encounter cash-flow problems which may force them to slow down or stop
works. When contractors are applying labour-based work methods, this issue is even
more important. Without timely payments, the contractor will not be in a position
to pay the labour force on time, which in the next turn will lead to poor morale
among the workers, resulting in lowered production rates and lacking labour
attendance.
The detailed procedures adopted in terms of cash flow from central level to local
authorities and further on to the payments to the contractors, need to be closely
monitored for its efficiency. The timely payment of the contractors is crucial to
their success and ability to operate using labour-based methods. A vital
performance criteria of the payment procedures is that the contractors are payed
within a maximum of one to two weeks after they have submitted an invoice.
There are three different types of payment certificates issued during the course of a
contract. The Interim Payment Certificate is used for partial payments during the
course of works implementation. The number of interim payment certificates to be
issued depends on the duration of the contract and the payment schedule as agreed to
in the conditions of contract. When all works have been completed, the final
remaining payment will be processed with the Certificate of Practical Completion.
This will also be the start of the Defects Liability Period. At the end of the Defects
Liability Period and after the contractor has completed any remedial works, the
Final Certificate of Completion is issued.
Payment Schedule
The schedule of payments are important for the contractor, and the specific schedule
of a particular contract needs to be carefully studied by the contractor already during
the bidding stage. Some contracts will only accept payments upon satisfactory
completion of all works, while other contracts may be more lenient providing
intermittent payments during the course of the contract. However, it is clear that the
payment schedule will dictate how much of the works and materials the contractor
will need to advance from his/her own pocket during the construction period.
The payment schedule is normally found in the general conditions of the contract,
and most commonly in the appendix to the conditions (or contract data). For larger
works, it is common to establish monthly payments of works. This implies that the
contractor will request the engineer to visit the work site at the end of each month to
measure the amount of completed works since the previous month and prepare a
payment certificate on this basis.
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Payment of Works
For smaller contracts the client may decide to limit the number of payment
certificates. For example, a lump sum contract may prescribe that the first payment
will be made when 50 percent of the works are complete, and the second payment
only on completion of all works.
Minimum Amount of Interim Certificate
To avoid processing very small amounts in the interim certificates, the client may
decide to set a minimum limit to which it is willing to accept a certificate for
payment. This means that if a contractor has had very little progress during a period
since last time he/she was paid, the client will not process any payments. It is
important to note that when a contract includes a minimum amount for the interim
certificates, a contractor may not necessarily be paid every month although this is
stated in the contract.
12.2 Measurement of Works

t is a common misconception among contractors that the client will guarantee
payments to an amount equivalent to the prices indicated under each item in the
Bill of Quantities. During the course of works implementation, it is expected
that deviations will occur from the originally estimated quantities. Therefore,
payments to the contractor are based on the actual measured quantities - not the
amounts as listed in the Bill of Quantities. Variations to the estimated quantities is a
common feature in construction contracts and for this reason, the original quantities
should be treated merely as an estimate and a basis for the bidding competition.
Payments are to some extent also performance based when dealing
with lump-sum contracts. The basic principle of a lump-sum contract
is that it states that the contractor will complete a certain service,
normally producing a specific end product, for which the client
will pay a fixed amount no matter what inputs are required.
However, the conditions of contract will normally prescribe
a schedule of payments, indicating when the contractor
should be paid.
The timing of the payments are then based on the progress of works, i.e. first
payment to be made after 30 percent of works completed, second payment after 60
percent, etc. Alternatively, the payment schedule may prescribe, payments at
various stages of the construction, such as after foundations have been completed,
roofing completed, etc. At these milestones, the engineer needs to make a rough
estimation of how much work has been completed and pay the contractor on this
basis.
Once again, before the contractor carries out any works which deviates from the bill
of quantities and drawings, it is necessary to obtain written approval for such works
from the engineer. Payment should not be approved for any additional works which
have not received prior written approval from the supervising engineer.
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Payment of Works
Payment of works completed under a civil works contract is carried out according to
the following three basic steps:
Although the above figure describes the principle
method of preparing payment certificates, there are
several variations in practice. A very common
procedure is to omit the invoice where the contractor
claims payments. Instead, the contractor and the
engineer, jointly prepares the list of quantities of
completed works which forms the basis for the
payment certificate.
For lump-sum contracts, measurement are usually less
time-consuming, since there is no need to verify
quantities in detail. However, it is still important to check that the works are being
carried out to the technical standards as prescribed by the contract as well as
adhering to standard building practices and workmanship.
Measuring completed works is a common cause of disputes between the contractor
and the client. For this reason, the method of measurement is often described in the
works specifications. More important, is that the volumes of work due for payment
is recorded using the unit of
measurement stated in the bill of
quantities or activity schedule. If the
contract documents have been properly
prepared, the units of measurement in the
bill of quantities should correspond to the
ones mentioned in the works
specifications.
The units of measurement need to be
strictly adhered to, when the contract has
been agreed on the basis of unit rates.
When applying the established units of measurement, there is never any doubt as to
the rates at which payments are based on. If new units of measurement are
introduced, the client will need to negotiate new rates with the contractor.
Any introduction of new units or methods of measuring works during the course of
the contract could easily be construed as a major change to the contract. Unless the
client has explicitly agreed to this and negotiated new rates with the contractor, it
may compromise the transparency of the contracts management.
Also, with lump-sum contracts, it is important to adhere to the payment schedule
prescribed in the conditions of contract. Any changes to these conditions may lead
to complaints from other firms, with accusations that the contractor was given more
favourable conditions once the contract had been awarded - and that the selected
bidder was aware of this during the bid competition.
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Payment of Works
12.3 Interim Payment Certificate for Road Works

he interim payment certificate acts as a standardised statement from the
supervising engineer to the client that measured works which have been
completed since the previous payment have been satisfactory carried out
according to the drawings and work specifications and are now due for payments.
It is the responsibility of the supervising engineer to prepare this certificate. It
should only be prepared after the works for which the contractor claims have been
inspected on site and found in good order, conforms to prescribed quality, and have
actually been carried out.
Interim certificates are prepared on the request of the contractor, i.e. upon the
receipt of a claim. However, a certificate should only be prepared if it conforms to
the agreed payment schedule and the minimum amount mentioned in the condition of
contact.
A new payment certificate is prepared for each payment due to the contractor. The
certificate acts as the payment justification, and once it is issued, the client will need
to release payments as soon as possible. When managing local contractors, the
processing of payments should not take more than one to two weeks after the
certificate has been prepared by the engineer.
The sample payment certificate shows
the minimum information which is
required in terms of advising the client
to process payments to a contractor.
Basically, the new information provided
is the total value of the measured works
(1), amount of deductions (2), and the
exact amount to be paid to the contractor
(3). In addition, it is common practice
to provide the client with information
related to history of payments (4) and
balance of payments as related to the
total contract value (5 & 6).
Actual payments to the contractor should
be issued by cheque in favour of the
contracting firm or its authorised
representative or by direct bank transfer.
It is expected that most contractors will carry out their financial transactions through
the services of a bank. Only in cases where there is no access to banking services
should the contractor be paid in cash.
Payment certificates form part of the financial system for a project,
acting as supporting evidence for expenditures against specific
budget items. Therefore, they need to be filed according to
established accounting procedures and are subject to the regular
audits.
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Payment of Works
Payment Breakdown
The interim certificate would normally not contain details of which bill items the
contractor has completed and are due for payments. Its main purpose is to advise
the client that payments at a certain total amount is now due to the contractor. In
order to monitor the payments made against each of the items in a bill of quantity,
the engineer will need to keep track of more detailed information as regards to work
progress and towards which bill items works have been charged.
A Payment Breakdown contains the details for the calculation of interim payments
due to the contractor. When the contractor requests payments for completed works,
the supervising engineer visits the site and measures the works carried out since the
previous payment. The measured works is then entered into a form against each of
the work items in the bill of quantities. For comparison, the accumulated payments
of previously issued certificates are also recorded in this form, thereby enabling an
effective cost control during the course of the works.
Once works have been measured and found in good order, the completed quantities
of work under each bill item are entered into the Payment Breakdown. The total
amount from the Payment Breakdown is then transferred to the payment certificate.
The sample below shows a payment breakdown which forms the basis for the
sample payment certificate presented previously.
PAYMENT BREAKDOWN
Bill of Quantities
Item
1.1
1.2
1.3
1.4
Description
Setting out alignment
Clear site of grass and light bush
Grubbing and stump removal
Tree felling and removal
Unit
m
m2
m2
no.
Qty
Rate
Break and remove boulders

Excavate side drain to form camber
Excavate, haul and compact soils
Construct scour checks
Construct mitre and catch-water
drains
2.6 Shape and compact gravel
Amount
Qty
Amount
15,000 0.12
1,800.00
9,000
1,080.00
6,000
720.00
1,200.00
72,000
720.00
48,000
480.00
28,000 0.02
560.00
16,800
336.00
11,200
224.00
375 4.50
1,687.50
260
1,170.00
115
517.50
5,247.50
3,306.00
1,941.50
m3
m3
m3
no.
m
6,200 1.07
6,634.00
4,960
5,307.20
1,240
1,326.80
31,750 1.12
35,560.00
22,225
24,892.00
9,525
10,668.00
1,347
1,171.72
250 2.74
685.00
244
668.56
1,850 0.22
407.00
1,924 0.87
1,673.88
m3
11,700 0.85
9,991.80
m2
no.
30,000 0.09
2,700.00
1,228
1,200 0.09
108.00
138
54,951.68
Sub-Total
3.1 Turfing
3.2 Tree planting
Qty
Current Payment
120,000 0.01
Sub-Total
2.1
2.2
2.3
2.4
2.5
Previous Payments
Total
Amount
437
96.14
577
502.16
32,039.48
12,593.10
110.52
12.42
Sub-Total
2,808.00
0.00
122.94
GRAND TOTAL
63,007.18
35,345.48
14,657.54
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Payment of Works
12.4 Retention
etention money is an additional security which the client may wish to apply
to a particular contract. As opposed to bid and performance securities, the
retention money requires no action or financial outlays from the contractor.
It is merely a procedure in which the client retains a certain amount (normally a
percentage) of the interim payments due to the contractor until all works have been
satisfactory completed.
The main purpose of the retention money is to safeguard the client against any
default work which the contractor may not be willing to rectify. If substandard
works are discovered during the course of the contract (including the defects liability
period), and the contractor refuses carry out the required repairs, the client may
decide to use the retention money to correct the faulty works. The client is then free
to use a different contractor to carry out this remedial work.
If the contractor repairs all defaults identified by the engineer within the contract
period, then the client is obliged to release all the retention money at the end of the
contract.
Although the intention of retention money is to take care of remedial works, it also
acts as an additional performance security for the client. Since the retention money
is calculated on the basis of invoiced works, the amount of retention will increase as
work progresses. This obviously acts as an additional
motivation for the contractor to complete works on time
so the retention can be released. In other words,
retention may have the same effect as a performance
bond.
Retention money is deducted from the total amount due
to a contractor in the interim payment certificates. For
most contracts, it is recommended that 10 to 15 percent
retention is applied. If the client wish to apply retention,
the exact amount is stated in the conditions of contract.
This percentage is deducted from each of the interim
payment certificates (not the total contract value). By
subtracting the deducted retention from the invoiced amount, the final amount due
for payment is calculated. This net figure is then used to record the expenditure in
the project accounts. The retention money is at the same time recorded as a
financial commitment, i.e. as an expense which is expected to occur in the near
future.
Remember that retention monies are always deducted from the amount
due for payment to the contractor according to the amount of works
completed since the previous payment. Retention on interim payments
should not be calculated from the total contract value.
Finally, for monitoring purposes, the retention money together with
the actual payment is recorded in the contracts register, together with the total
contract value and the remaining contract balance.
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Payment of Works
12.5 Certificate of Practical Completion of Road Works

he certificate of practical completion is used for processing payment for the
last remaining works at the end of the contract. Since most of the works
would be completed by this stage, it is common practice to release some of
the retention money at this point. Several standardised contracts will allow for 50
percent of the retention to be returned to the contractor when issuing the practical
completion certificate. Once again, the exact conditions for returning retention
money is specified in the conditions of contract.
If the supervising engineer discovers during site inspection that all works have still
not been completed, he/she should withhold the certificate of practical completion
and instead issue an interim certificate.
CERTIFICATE OF PRACTICAL COMPLETION
1. Measured Works:
13,004.16
Deductions:
2. Less 15% Retention
(1) x 0.15
1,300.42
(1)-(2)-(3)
11,703.74
3. Other:
(specify)
4. Balance of Remaining Payment:

5. Details of previous payments:
Cert No
Date
% Compl.
15.7.01
14
9,015.36
1,352.30
15.8.01
20
12,853.25
1,927.99
16.9.01
21
13,476.87
2,021.53
14.10.01
23
14,657.54
2,198.63
50,003.02
7,500.45
Total Previous Payments
Measured Works Retention
6. Total Retention Monies

7. Return of Half of Accrued Retention
8. Total Amount Due:
(2)+(5)
8,800.87
(6) / 2
4,400.43
(4)+(7)
9. Total Contract Value

10. Balance Due after Defects Liability Period
16,104.18
63,007.18
4,400.43
The following table provides a sample of

the essential information contained in a
practical completion certificate. Once the
remaining works have been inspected and
found in good order, the contractor is
eligible for payment of (i) the remaining
works and (ii) half of the retention
monies. The amount of retention money
to be paid out at this stage is half of all
retention monies with-held so far,
including half of the retention calculated
for the final works due under this
payment. The other half of the retention
money is held back until the end of the
defects liability period.
Once again, only the actual payment
issued to the contractor is recorded in the
project accounts as an expenditure. The
remaining retention money is recorded as
an commitment.
Since this is the last payment directly related to completed works, there is no
minimum amount limit to this certificate.
The date of issuance of the Practical Completion Certificate is the starting date of
the defects liability period and should be the same as when the final works were
inspected and approved.
Remember that (i) it is the responsibility of the supervising engineer to ensure that
payments are made only for works which have been completed and (ii) that
completed works are inspected to verify that the works have been carried out to the
technical standards and quality prescribed in the contract. In other words, works
which are substandard or has not been fully completed should not be included in the
certificate.
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Payment of Works
12.6 Final Certificate of Completion

he final certificate of completion is issued after (i) the defects liability
period has expired, and (ii) any remedial works have been inspected and
found in good order.
Similar to all the other payment certificates, it is the responsibility of the supervising
engineer to prepare the final certificate. The purpose of this certificate is to advise
the client that works have been completed, all defects have been rectified - also
those discovered during the defects liability period, and recommend that the
remaining retention money is released to the contractor. Following the sample
certificate for practical completion shown in the previous section, the final certificate
may look like the sample shown in the table below.
FINAL CERTIFICATE OF COMPLETION
Road Name: Chouk - Prey Contract No: RR128-2001-3
Province: Kampot
Certificate No: 6
Contractor:
Sunny Construction Co. Ltd
Address:
P.O. Box 354 Kampot
This is to certify that works at the above mentioned

location(s) have been fully completed as specified in the
Contract and accepted to the satisfaction of the Supervising
Engineer after inspection following the Defects Liability Period
in accordance with the terms and conditions of the Contract.
Amount
1. Remaining Retention Monies Withheld:

2. Deductions:
0.00
none
3. Total Amount Due:
4,400.43
(1)-(2)
4,400.43
4. Date of Practical Completion:
15-Nov-01
5. Date of End of Defects Liability Period:
15-Feb-02
If all defects have still not been rectified at the end of the defects liability period, the
supervising engineer may allow additional time for the contractor to carry out this
remaining work. If the contractor refuses to rectify any remaining defaults, the
engineer may advise the client to find someone else to finalise the works, using the
remaining retention money.
Deductions are entered for any deficiencies which the engineer have detected and the
contractor have failed to correct after receiving reasonable notice. It is important to
note that the deductions entered in this certificate, are final and the contractor will
have no further possibility to take any remedial action, nor receive any later
payments.
Once payment of the remaining retention money has been made, all obligations from
both parties to the contract are regarded as fulfilled. This also constitutes the final
completion of the contract. Only at this stage should the final retention money be
recorded as an expenditure.
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