Payment Flashcards
What is a contract sum?
The contract sum is the amount (or consideration) that the employer agrees to pay the contractor for carry out the works. Found in Article 2
What items are able to adjust a contract sum?
- Variations (To design / Specification of work, additions or reductions in scope)
- Acceleration Quotations
- Loss and Expenses incurred by the contractor
- Provisional Sums adjustments
- Approximate quantity adjustments
- Fluctuations (labour, materials, tax’s, levis, gov contributions)
When would you NOT make an adjustment to the Contract Sum?
- When there was an error in the Contractors Proposal then they bear the cost and there is no addition to the Contract Sum
- When opening up works they are NOT in accordance with the contract
What is provisional sum?
A Provisional Sum is an allowance for a specific element of works that has not been defined in the tender documents.
What are the 2 types of provisional sums?
2 types of Provisional Sum in the JCT contract:
- Defined Provisional Sum
a. Details about activity. Nature, location of the work, the method used and quantity to indicate scope and extent.
b. The works have been allowed for in the Contractors programme and Prelims - Undefined Provisional Sum
a. The works have been NOT been allowed for in the Contractors programme and Prelims
b. Lacks detail
What is VAT?
Value added tax, or VAT, is the tax you have to pay when you buy goods or services.
Is VAT included in the Contract Sum?
NO, the Contract Sum is VAT-exclusive. The Employer shall in additional to each monthly interim payment pay the amount of any VAT properly chargeable.
What is the Construction Industry Scheme (CIS)?
- The Construction Industry Scheme (CIS) sets out a series of rules for how contractors should make payments to subcontractors.
- If the Employer is down as a Contractor, instead of paying all the money to the Contractor direct, the Employer pay HMRC direct a portion of the Tax due.
- Purpose of the scheme was to ensure Contractors are paying the right amount of Tax.
- If not signed up to the scheme Contractors have to pay a higher rate of tax.
What is retention?
- Retention is a percentage of money deducted from each interim payment certificate to the contractor and retained by the employer
- It acts to safeguard the Employer against latent defects and Contractors possible failure to complete the works
- Also incentivize the Contractor to ensure works are completed on time and not defective.
- The amount of retention to be held is stated within the Contract Particulars (3% SBC/D&B; 5%)
When is retention released?
Half retention is released to the Contractor when practical completion or partial possession is achieved, and the other half is released when the certificate of making good defects is issued at the end of the rectification period.
What are the rules on treatment of retention?
Statement of the amount of retention to be deducted from each Gross Valuation is required to be sent to the contractor prior to issue of Interim Certificate.
What is a retention bond?
A retention bond is financial security provided by an insurer company / bank to secure the amount that would have been held as retention. The value of the bond will reduce by half after practical completion has been certified.
What is the typical value of a retention bond?
3 or 5 % of the contract sum
How are bonds paid for?
Bonds are paid for by the Contractor but the costs for doings so may be included within Contractors tenders
What is the purpose of retention?
To safeguard the Employer against latent defects and incentivize the Contractor to ensure works are completed on time and not defective.
What are Fluctuations?
Provisions in Construction Contracts to provide a mechanism for dealing with the effects of inflation – if large projects lasts a few years this is very crucial. They allow for: • Changes in taxation • Costs of labour • Materials • Admin Costs
Hoes does JCT deal with fluctuations?
Under Schedule 7 – Fluctuation Option A, B, C
• Option A: contribution, levy and tax fluctuations
• Option B: Labour and material cost and tax fluctuations
• Option C: formula adjustments
Chosen option is stated in the Contract Particulars
What are the Advance Payments?
- Advanced payment is an upfront sum of money paid by the Employer to the Contractor (‘down payment’) to cover the contractor’s setting up costs or costs for a particular part of the project.
- It shall be paid to the Contractor on the date stated in the Contract Particulars and reimbursed to the Employer on the terms stated in the Contract Particulars (stated dates and amounts).
- Advanced payment bonds can be used as an alternative.
When can payment on an advanced payment bond be made under JCT?
Payment shall only be made when the Contractor provides the Employer a bond in the terms set out in Schedule 6.
When may you use an advance payment notice?
- Contractor incurring large costs early in the project (plant, equipment, materials)
- Prefabrication works/costs.
- Specialist supplier works/costs.
Where are the details for advance payment stated?
Contract Particulars and Section 5 (JCT) or Contract Data and Option X14 (NEC)
What does the Construct Act say about payment provisions?
The Construction Act (HGCRA96) states that every contract must provide for interim payments if the contract period is greater than 45 days and, for every payment, a mechanism for calculating the sum due, the due and the final date for payment.
How can Interim Payment calculations be calculated?
The way interim payments are calculated will be stated within the Contract Particulars. (Contract Data NEC)
• Periodic (Interim) Payments
o Most used method of payment.
o Assessment of works to date, against the submitted pricing document (i.e. BQ/Schedule of Works/Contract Sum Analysis).
o 1st interim payment normally due 1 month after the date of possession.
o Aids client cash flow instead of lump payments for stages/milestones.
• Stage Payments
o Stages are typically related to the completion of significant elements of works (i.e. substructure).
o Typically used when no QS is involved.
• Milestone Payments
o A variant of Stage Payments, whereby the Contractor is paid for completion of milestones.
o this may be a particular element (substructure, frame, façade)
o will be set against a pre-agreed Programme dates.
• Activity Schedule
o commonly used in lump sum contracts and NEC Option A&C.
o works priced to be undertaken in completing the works.
o can only be certified once 100% of activity is complete.
What are preliminaries?
- Preliminaries provide a description of a project which allows the contractor to assess costs associated with administering the project.
- They do not sit under a specific package of works to be completed.
- These include things like storage of materials, site security, site welfare, hoarding. List of preliminaries provided as part of the tender pack.
When are materials included within a valuation?
• Materials On Site
o they must be included within in a payment application, the QS must inspect the amount certified on the payment request and visually inspect the quantity on site.
o Most contractors will prepare a list of materials on site and assign a figure next to each item. All materials on site must be properly protected (they are kept on site at the contractors risk).
• Materials Off Site
o Can be claimed but they must be supported by an invoice, vesting certificate (stating that the employer owns the materials), intended for use on site, correctly insured and safely stored (always try to visit the materials off site if possible to check they are stored correctly).
What is a vesting certificate?
A ‘vesting certificate’ or ‘certificate of vesting’ may be required from the contractor (sub-contractors / suppliers), certifying that ownership of goods, plant or materials listed in a schedule will transfer from one party to the other upon payment and confirming that they will be properly identified, separately stored, insured and are free from encumbrances (such as retention of title).
