Key Issue 1 - Payment for non-listed materials off-site

Question 1

What is an offsite materials bond?

Answer 1

Provided by the contractor in order to protect the employer against the loss / damage of offsite materials they have paid for

Question 2

What is an advance payment bond?

Answer 2

Provided by the contractor in order to protect the Employer against the loss of any monies he has advanced to the contractor

Question 3

What is the contract conditions for listed materials?

Answer 3

Provided that the conditions in the contract are followed:

Listed items are in accordance with the contract

The contractors has provided proof that the items are:

1. Vested in the contractor
2. Insured against loss or damage

Materials are stored in a secure location, set apart from other materials, clearly and visibly marked. Identifying:

1. The Employer as the person whose order is held
2. Destination of the works

Question 4

What are listed items?

Answer 4

Materials offsite that can be included in valuations provided the contract conditions are met

Question 5

What is the concern If the Contractor goes bust and you have already paid for offsite materials which have not been delivered to site?

Answer 5

Potential issues with materials being delivered to site.

Supplier may dispute who owns the materials (retention of title)

Question 6

What is included in a Vesting Certificate?

Answer 6

Parties: Information about the two parties

Location: Project Address and Material storage address

Insurance: Insurance certificate against loss or damage

Cost & Quant: Schedule of quantity applied, cost of materials

Question 7

Who are materials vested to when using a Vesting Certificate?

Answer 7

Materials are vested in the contractor

Question 8

What are some mechanisms available to protect the client from offsite material payments?

Answer 8

Check the financial status of the contractor and assess likelihood of insolvency

Check materials are vested, properly identified, stored and insured.

Materials are set aside and clearly marked with the clients details

Ensure the materials are ready for incorporation

Offsite materials bond

Client could purchase the items directly

Question 9

What does a vesting certificate do?

Answer 9

Certifies that the property has passed to the contractor

Proves that the materials are vested in the contractor and will become the employers property on payment

Question 10

Under a JCT contract do listed items require a bond?

Answer 10

The contract particulars specify if a bond is required (can be deleted if not required)

Question 11

What is the difference between uniquely listed and non-uniquely listed items?

Answer 11

Uniquely - project specific items

Non uniquely - not project specific (ie concrete, rebar)

Typically, the uniquely listed items are specific for the project and would not need a materials off-site bond unless stated. Examples of this could be steelwork that is used directly on the frame.

Non-uniquely listed items are not specific for the project and do require a bond in place. Examples of
this are concrete and rebar.

Question 12

Was the stone specified uniquely or non uniquely listed?

Answer 12

Stone was listed in the contract

Stone for the bar counters was unique (could only be used for this project)

Stone floor tiles were non unique (ie potentially could be used on other projects)

Question 13

What was the procedure in place if the contractor could not procure the stone specified in the ER’s, how would they go about procuring another material and getting it signed off and approved?

Answer 13

If an alternative product to that specified is proposed, the contractor must obtain approval first.

They must also submit the reason for the proposed substitution and submit all relevant information for the alternative materials, including:
•	Manufacturer and product reference 
•	Cost 
•	Availability 
•	Performance 
•	Manufacturers guarantees etc

Question 14

You mention the advance payment requested from the supplier put the contractor under significant financial pressure, was any checks carried out on the contractor prior to entering into contract?

Answer 14

Yes we carried out a credit check on the contractor which showed they were ‘low risk’

Question 15

If there was a risk of insolvency why would you recommend materials offsite payments, does this not put the client at risk?

Answer 15

Although the contractor was stating finance issues the risk of insolvency was low but the impact to the client was high.

In order to safeguard the contractors cashflow and develop the relationship I recommended to assist the contractor

Question 16

How did you know there was a risk of contractor insolvency? If this was stated why would you recommend to make offsite materials payment if the could go insolvent

Answer 16

The contractor didnt state they may be insolvent but they said the were having financial difficulties which indicates a risk

Financial checks were carried out pre-contract indicating a low risk. By recommending the offsite materials payment this mitigated the risk of contractor financial difficulties and the consequential risks to the client

Question 17

During the PQQ phase if you looked at the contractor’s accounts, what was you looking for and what did you advised the client?

Answer 17

A credit check was carried out which indicated a low risk and the clients financial team reviewed the contractors accounts

Question 18

What did you mean when you mention the client may be forced to source alternatives?

Answer 18

There was a risk if the contractor didnt procure the stone due to cashflow issues that alternatives may have to be sourced to meet programme

Question 19

You mention the risk of likelihood of the negative impact on the contractors cash flow and contractor insolvency was relatively low, what is the issue here then?

Answer 19

The likelihood was low but the impact was high

Question 20

What would you expect the cost of the bond to be in comparison to the money they needed is for?

Answer 20

Typical 5 – 10% of the value

Question 21

Whats the difference between and conditional and a on demand bond?

Answer 21

Conditional – needs to be proven and Client needs to evidence that the contractor has not performed their obligations and they have suffered a loss as a consequence.

On Demand – bonds paid immediately on demand when requested and do not need to satisfy any conditions. The demand cannot be fraudulent!

Question 22

Would there have been additional costs for the client for time etc associated with vesting the materials? Or was this included in your scope of services?

Answer 22

Vesting materials offsite was covered in our scope of services

Question 23

Why did you recommend Option C / offsite materials payment?

Answer 23

It mitigated the risks of programme delays and associated cost implications if the contractor was unable to procure the stone in the timescales or became insolvent due to cashflow problems.
It was also a way of the client ensuring the stone was secured and developed a positive relationship with the contractor

Question 24

What actually happened after the client chose option A, was the contractor really in financial difficulties?

Answer 24

The Contractor had to make the advance payment and sustain the damage to their cashflow until materials were on site.

The contractor wasn’t happy and felt aggrieved and took a less collaborative approach to the project.

Question 25

How does an advance payment bond work?

Answer 25

Prior to money being exchanged between employer and contractor the surety provided issues the APB in favour of the employer for the advanced amount.

When APB received the employer releases funds

Question 26

Whats the difference between and advance payment bond and a performance bond?

Answer 26

An APB will protect the Employer against goods or services yet to be supplied while a PB will provide compensation in the event of the Contractors failure to perform and complete his obligations under the Contract.

Question 27

If you advanced payment to the contractor or paid for materials off site, how would this be dealt with in valuations?

Answer 27

CHECK