Payments Flashcards
What is Option A
Priced Contract with Activity Schedule
-Used when the client knows exactly what they want and is able to clearly define it through the scope
-Most commonly used option
-Each activity is given a cost
- The lump sum for each activity is the price to be paid by the client following completion of that activity
What is Option B
Priced Contract with Bill of Quantities
-BoQs prepared by client, with the contractor pricing each item
-Contractor is paid for the quantity completed to date at the rates and prices in the BoQs
-Not used as frequently anymore
-Used when the client clearly knows what it wants and can define it through the scope
-Used where the exact quantity of items is hard to forecast
What is Option C
Target Contract with Activity Schedule
-Payments are based on defined costs incurred not completion of activity
-Advantage is contractor has certainty over price, with the contractor being incentivised to make cost savings for the benefit of the client and itself
-Used where the client knows what it wants and can clearly define in scope
-Benefit of sharing risk and opportunity
-Pain Gain Contract
-The contractor tenders a price, and includes and activity schedule, this price is the target
What is Option D
Target Contract with Bill of Quantities
-Client provides BoQs
-Used where client knows what they want, but there are likely to be changes in the quantities
-The contractor tenders a price based on the BoQs, this price is the target
-On completion the contractor is paid (or pays) its share of the difference between the final total of the prices and the final payment for PWDD
What is Option E
Cost Reimbursable Contract
-Contractor reimbursed defined cost plus fee
-Used where the scope of the work is uncertain, or where flexibility is required, or for emergency work, or experimental work
-Allows development of the design as the works proceed
-Where the definition of work to be done is inadequate but an early start is required
-Contractor can’t be expected to take risks
-It gives contractor very little incentive to cut costs
-Still an obligation for the contractor to provide a regular forecast of the total of the prices
What is Option F
Management Contract
-Contractor focuses on managing the contract rather than physically building, and does not normally carry out any construction itself
-Rarely used now
-Involves provision of facilities, managing deliverables, management of cost, quality and defects, managing the design, tendering and subcontracting
-Contractor holds very little risk
-Contractor is reimbursed the subcontractor cost plus fee
-Used where there is a need to co-ordinate a number of works contractors and suppliers or where the client doesn’t have sufficient capability to manage the project
What are the advantages of option A
-There is no requirement for a BoQ to be prepared for tendering- saving time and money at the pre-tender stage
-The contractor holds the risk of inaccuracies or missing items of work
-assessment of PWDD is easier and quicker than with the other options
-Programme and activity schedule linked, often leading to a more comprehensive tender
-payments linked to completion of activity, so cash flow for both parties more visible
-In order to receive payment the contractor has to complete the activity by the assessment date, so it has to price and programme realistically and is motivated to keep to the programme
What are the advantages of option A
-There is no requirement for a BoQ to be prepared for tendering- saving time and money at the pre-tender stage
-The contractor holds the risk of inaccuracies or missing items of work
-assessment of PWDD is easier and quicker than with the other options
-Programme and activity schedule linked, often leading to a more comprehensive tender
-payments linked to completion of activity, so cash flow for both parties more visible
-In order to receive payment the contractor has to complete the activity by the assessment date, so it has to price and programme realistically and is motivated to keep to the programme
Disadvantages of Option A to the Client
-No specific document that all the contractors price to, therefore can be difficult to compare tenders
-The tendering contractors have to spend time and money to establish and populate the activity schedule
- The client holds the risk of clearly defining the scope so that the contractor can produce the activity schedule
When should the contractor submit an application for payment
- Contractor to submit application for payment no less than 7 days before the due date. In reality this is often done 14 days before when there are a number of sub-contractors. Sub-contractors have very little cashflow, therefore any delays to their payments can be very significant
Timeline of activities prior to payment assessment date
- Contractor submit application no less than 7 days before it’s due
- PM has 5 days to provide a payment certificate
- Client has a further 14 days to pay the contractor
When must the first payment assessment be
- The first assessment is decided by the PM, but must be no later than the assessment interval after the starting date- this is normally in the contract data as 4 weeks
What is a Project Bank Account
-Money held in trust for payments to contractors and sub-contractors
-For receiving payments from the client and contractors
-Established within 3 weeks of the contract date
-Maintained by the contractor, they have to pay fees but also entitled to the interest
Advantage of Project Bank Account
Means sun-contractors get paid on the same day as the contractors, rather than having to wait approximately 18 days
How much money is due at a payment assessment
The amount due is:
o Price for Work Done to Date (PWDD)
o Plus, other amounts to be paid by the contractor- such as statutory taxes
o Minus amounts to be paid by or retained from contractor- such as if they had advanced payments or defects
How does the amount of money paid depend on the contract option being used
- Option A/C- the lump sum prices for each of the activities on the activity schedule
- Option B/D- lump sums and amounts obtained by multiplying rates by quantities for each item in Bill of Quantities
- Option E/F- The defined cost plus the fee
How does the defined cost change depending on the contract option chosen
- Option A/B- The cost of the components in shorter schedule of cost components, excluding the cost of preparing quotations for compensation events
- Option C/D/E- Payments due to subcontractors for subcontracted work. The cost of components in the schedule of cost components for other work, minus disallowed costs
- Option F- Payments due to subcontractors for subcontracted work. The prices for work done by the contractor, minus and disallowed costs
How does the PWDD change with the contract option chosen
Option A- The total of the prices for each completed activities on the activity schedule
Option B- The total of the quantity of completed work for each item in the Bill of Quantities, multiplied by the rate and a proportion of each lump sum
Options C-F- The total defined cost forecast to have been paid by the contractor by the next assessment date plus fee
What are disallowed costs
Costs not justified by contractor, incurred only because of contractors own fault
what’s included in disallowed costs depending on the contract option chosen
Options C/D/E- costs for correcting defects, cost of plant and material not used and adjudication or tribunal
Option F- cost which is a payment to contractors management or to subcontractor for contractors own direct works
What does an interim valuation- value of work involve
- Usually carried out by quantity surveyors
- A revaluation of the whole work- right from the start, not just over a particular time period
- This provides advice to the PM on interim certificates and payment notices
- Value is derived from payment mechanism
What does interim valuation- measured work involve
- When priced BOQs are used, items of work which have been completed can be extracted from the BOQs
- Partially completed work can be measured and priced at bill rates
- An estimated percentage of the total value of work completed may be adopted
What are the different ways of apportioning preliminaries to payments
- Apportioning preliminaries using a combination of fixed, time-related and value-related costs
- Apportioning preliminaries in direct proportion to the contract period
- Apportioning preliminaries in direct proportion to the value of the contractor’s work
- Apportioning preliminaries in direct proportion to total expenditure on completed work
What it the benefit of a retention amount
Incentive for main contractor to carry out remedial works
What is the Pari Passu Rule
o Principle of insolvency law
o A company’s property on winding up should be used to satisfy the company’s liabilities
o All debts are to be treated equally
o By placing the retention monies in a trust fund, they no longer belong to the insolvent client
o Project bank account is an example of a trust fund
How is the retention amount calculated
o Retention percentage applied to the excess of the PWDD above the retention free amount (don’t want to retain money from contractors when they need it the most)
o Retention is retained until the earlier of Completion or Takeover by Client
o At completion/take over half the amount of retained is released and the other half is retained until after the defects certificate is issued
What does the price adjustment formula show
the total of the products of each of the proportions stated in the Contract Data multiplied by (L – B)/B for the index linked to it; where
L (Latest Index) is the latest available index before the date of assessment of an amount due and
B (Base Date Index) is the latest available index before the base date
When is the assessment of the final payment due
Assessment undertaken 4 weeks after the defects certificate or 13 weeks after termination
Any dispute over the final assessment to be referred within 4 weeks
