Contract administration

Contract administration or more correctly, post-contract administration begins once the contract has been signed and the site operations phase of a project starts. Contract administration has many aspects some of which are outlined below and included in HD video tutorials on www.duncancartlidgeonline.com.

1. Interim valuations 

 

Most standard forms of contract have a provision to pay the contractor on a stage payment or quantum meruit basis, as the work proceeds. Without this provision the contractor would have to wait until the end of the contract before receiving payment and this would clearly be unworkable from a cash flow perspective.  The stage payments or interim accounts are prepared usually monthly by the contractor’s surveyor and the client’s quantity surveyor. Until recently it had been common practice in the construction industry for the contractor not to release money to domestic sub-contractors until the contractor received payment, a system referred to as ‘pay when paid.’ This practice caused many problems and disputes particularly between contractors and domestic sub-contractors, as domestic subcontractors are not informed when the contractor receives payment and the contractor could withhold payment for weeks or longer. In 1996 the Housing Grants, Construction and Regeneration Act (referred to as the Construction Act) made pay when paid clauses unenforceable. The Construction Act contained the following provisions for all construction contracts;

  • pay when paid clauses are unenforceable

  • payment by instalments for all contracts over 45 days duration

  • the contractor is to be informed when payment is due as well as the amount

  • the contractor to be informed in the event of the client is to withhold payment.

  • the contractor has the right to withdraw from the site if not paid within a specified period

 

In 2009 the New Construction Act was introduced with important new payment provisions for all contracts entered into after 1st October 2011 in England and Wales and November 2011 in Scotland. Generally, the Acts accomplished two things:

 

  • improves the payment process within the construction supply chain; and

  • provides a quick and straightforward method of dispute resolution called adjudication.

 

This new provision is referred to as The Scheme for Construction Contracts or ‘The Scheme’ for short and provides that;

 

  • if a particular construction contract does not comply with the Construction Act 2009 then ‘The Scheme’ kicks in as the default and

  • only the defective section of payment provisions is replaced with the relevant provision from the Scheme.

 

However, it should be noted that all published standard form contracts should be compliant.

 

The provisions of the Act are summarised as follows,

 

Key to the process is The Due Date which is to be inserted into the Contract Particulars JCT (11) - Cl 4.8). (It can be expressed as a particular date, or last day in month, or second Wednesday, etc.).

 

A payment notice under the Act is valid if it states;

 

  • the sum due,

  • how that sum is calculated and

  • is issued within the correct timescale.

 

The Act permits two payment procedural options;

 

  • the first (the default) requires the Payer to issue the first notice;

  • the second (the alternative) requires the Payee to issue the first notice

 

Payment provisions

 

  • Five days after the issue of interim cert, the employer must send a written notice stating the amount to be paid and how it is calculated with a copy to the architect / CA

 

  • No later than nine days after the issue of the interim cert and five days before the final date for payment, the employer must notify the contractor of any deductions he is making from the certificate.

 

  • If payment is not made within 14 days – contractor may suspend work although the chances that this will happen are remote. JCT makes provision for interest to be charged on late payments at 5% above base rate.

 

  • If Architect /CA fails to make an interim payment; contractor can apply directly to employer

 

 

 

Architect’s Interim Certificates

 

To be issued not later than 5 days after the Due Date and must state the sum due at the Due Date. The certificate must also state the basis on which the sum due is calculated although the Contract is silent on the form or extent of the detail to be provided to support that calculation – e.g. measurement, % complete, all as last and add, lump sum assessment? etc.

 

Pay-less notices

 

It is not unknown for a client to withhold money from a contractor / sub-contractor due under an interim payment for several reasons without fully explaining the reasons to the contractor. This sort of action by a client is obviously very frustrating for a contractor but now the Act requires a pay-less notice to be issued when it is intended to withhold monies. However, in a case where monies are to be withheld from a contract a pay-less notice should be issued informing the contractor and although laudable as this may sound enforcing this process in the courts has proved to be expensive and unpredictable.

            

Section 4 attempts to revise and simplify the payment structure used under the 2011 version, via the introduction of Interim Valuation Dates (as determined by reference to the Contract Particulars). If the Contract Particulars are not completed, then the first Interim Valuation Date is one month after the Works commencement date and thereafter at monthly intervals. The new payment provisions provide additional flexibility, where interim payments became due by reference to four-week intervals from the "Date for Commencement of the Works", as it was then known. As before, each valuation is then subject to any pre-agreed fluctuation provisions.  However, payment is then due in each case, seven days after the relevant Interim Valuation Date.  

Following practical completion (rather than the period stated in the Contract Particulars), the Contractor now issues a certificate for final payment.  The issuance of this final certificate is now expressly stated as having no effect on unpaid interim payments and requires the application of fluctuations and deductions

 

When preparing an interim valuation, the following items may be included, if appropriate;

 

  • preliminaries as included in the bills of quantities

  • measured works as included in the bills of quantities

  • value of variations and extra works

  • work carried out by nominated sub-contractors and suppliers

  • materials on site

  • materials off site

  • fluctuations

  • approved loss and expense claims

 

The Construction Supply Fair Payment Charter

 

JCT (16) has attempted to simplify the payment process and useful detail has been added in an attempt to meet the expectations of the government's Fair Payment Charter. The Fair Payment Charter was introduced in 2014 by the Construction Leadership. Rebadged in 2016 as The Construction Supply Chain Payment Charter it contains eleven commitments to prompter payment. Clients, contractors and sub-contractors in the public and private sector can sign up to the Charter. The ambition is that by 2025 the construction industry's standard payment terms will be 30 days and that retentions are no longer withheld. However, when it was launched, just nine companies had committed to adopting it.  In addition, concerns have been expressed about how the charter will be policed and enforced, and it has been suggested that with no accompanying legislation, it may have little effect. The contracts no longer distinguish between interim payments due before practical completion and after practical completion. Previously, the period between interim certificates during the Rectification Period was two months rather than one month. It is now clear that the Contractor has the right to issue an application stating the sum it considers to be due. Previously, the contract left payment notices under the remit of the Architect/Contract Administrator, which could lead to Contractors sweating over whether they would be paid in good time.

2. Variations

 

Dayworks

 

The bills of quantities can be used by the quantity surveyor in the post contract stage of a project as the basis for valuing variations in the contract. There are however some occasions when the nature of the variation is such that it is unfair or inappropriate to use the bills of quantities / pro rata pricing and in these circumstances dayworks are used. Clause 5.7 of the JCT (16) provides for pricing dayworks as a percentage addition on the Prime Cost. The use of daywork rates relieve the surveyor of having to calculate rates from basics every time daywork charges are used.

 

Dayworks are defined in the Definition of Prime Cost of Daywork Carried out under a Building Contract ; a publication produced by the Royal Institution of Chartered Surveyors and the Construction Confederation. In September 2007, a major revision of the definition was published, replacing the 1975 version, the significant differences being;

 

 Labour; that now offer two options for dealing with the prime cost of labour;

 

Option A – Percentage addition. This option is based on the traditional method of pricing labour in daywork and allows for;

 

  • guaranteed minimum weekly earnings, e.g., standard basic rate of wages, Joint Board Supplement and Guaranteed Minimum Bonus Payment

  • all other guaranteed minimum payment, unless included with incidental costs, overheads and profit.

  • differential or extra payments in respect of skill, responsibility, discomfort, inconvenience or risk, excluding those in respect of supervisory responsibility.

  • payment in respect of holidays

  • any amounts that may become payable by the contractor to or in respect of operatives arising from the operation of the rules referred to

  • employer’s contributions to annual holidays

  • employer’s contributions to benefit schemes

  • employer’s national insurance contributions

  • and contribution, levy or tax imposed by statute, payable by the contractor in his capacity as an employer

 

Option B – All-inclusive rates. This option includes not only the prime cost of labour but also includes an allowance for incidental costs, overheads and profit. The all-inclusive rates are deemed to be fixed for the period of the contract. However, where a fluctuating price contract is used, or where the rates in the contract are to be index linked, the all-inclusive rates shall be adjusted by a suitable index in accordance with the contract conditions

 

For both options materials and plant are dealt with as follows;

 

Materials

 

  • the prime cost of materials obtained for daywork is the invoice cost after discounts over 5 per cent.

  • the prime cost of materials supplied from stock for daywork is the current market price after discounts over 5 per cent.

 

Plant

 

  • where hired for the daywork it is the invoice cost after discount over 5 per cent

  • where not hired for the daywork it is calculated in accordance with the RICS Schedule of Basic Plant Charges

  • includes for transport, erection, dismantling and qualified operators

 

It is up to the quantity surveyor preparing the contract documents to decide which of the above methods is most appropriate in the circumstances. Consideration should be given to; the length of the contract, whether the contract is firm or fluctuation price. It should be noted that specialist trades may have their own different definitions.

 

Recording Dayworks

 

Assuming that a variation order is issued for additional works, that cannot be valued using bill rates or pro rata pricing, then daywork rates are used. As this method of pricing has distinct advantages for the contractor, the recording and monitoring of dayworks must be strictly controlled. It will often be the case that a contractor will use a daywork sheet to record hours worked and material used to carry out additional works, in the hope that it will eventually be valued on a daywork rate basis and the final account stage and surveyors should be alert to this. If there is a clerk of works on site, then it will normally be his / her responsibility to check daywork sheet submitted by the contractor. The signature of the clerk of works will simply verify that hours, materials, etc. are correct; it does not imply that the item should be valued at daywork rates.

3. Final account

 

The final account stage of a contract is the process during which the quantity surveyor determines the final cost of a project, based on the following documents;

 

  • the form of contract,

  • original priced bill of quantities,

  • variations,

  • drawings and

  • agreed contractor claims.

 

For public sector projects in particular the final account acts as the final part of the audit trail, allowing all financial transactions relating to the contract can be clearly traced with the contract bills of quantities being the starting point; it can be a lengthy and time-consuming process. For a private sector client, it may not always be necessary to produce a fully detailed final account as long as the client is convinced that the final project has delivered value for money. For some public sector clients, the final accounts documents are subjected to audit.

 

The final account should be prepared during the contract period, as some of the detail required will have been used during the preparation of variations and interim certificates and not left until the contract in complete. One reason for doing this is that it is better to measure and price variations during the currency of the contract while the facts are still fresh in people’s minds, before work becomes covered up and before changes of personnel make the accurate preparation of a final account more difficult and time consuming. Contracts will typically specify a fixed period following practical completion of the work within which the account must be prepared.

 

The final account is composed of the following;

 

  • Statement of Final Account

  • Final account summary

  • Adjustment of Provisional Sums

  • Adjustment of Provisional Items

  • Adjustment of variation account

  • Adjustment for fluctuations

  • Adjustment for contractors claims (if applicable)

 

and is prepared in accordance with the conditions of contract. For example, in the JCT (16) Standard Form the clause dealing the preparation of the final account or final adjustment is clause 4.5. After the architect has issued the Certificate of Practical Completion the contractor must supply the quantity surveyor with all the necessary documentation in order that the final account (adjustment) can be prepared. The quantity surveyor then has an additional three months to prepare the final account (adjustment), there is no stipulated penalty stated in the contract if these deadlines are not met. 

                       

For more detail on the preparation of final accounts see the member’s section on www.duncancartlidgeonline.com

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