Process and procedure for payment – is it necessary for contractor to apply for certificate of payment – can payment be made without certificate – deduction/set-off – Process and procedure for payment Payment Payment is a sum of money paid to someone or in the construction industry payment means the amount of money paid by an employer for the estimated value of work properly executed and materials and goods delivered to site by the contractor which it is the sum of money paid to Contractors after their works or certain projects has been successfully complete. In an engineering and construction contract, the Contractor has to fulfill his obligations to carry out all the works stated under the Contract. On the other hand, the Employer must keep his promise of giving necessary consideration which in most cases comes in monetary form. Types of Payment In practice, the payment to the Contractor for works done under the building contract has a variety of forms but in Malaysia however, the types of reimbursing the contractor are as follow: 1
Interim Payment
During contract period, interim payment is the most common method used or it is so called cost progress payments. In Standard Forms, the interim or cost progress payments are affected by the issuance of ‘Interim Certificate’. Interim Certificate is a certificate issued by the supervising officer binding the client to pay the fitting-out contractor an agreed amount for work that has been completed. The failure of the certifier to issue the relevant ‘interim’ certificates in line with the stipulation of the contract can expose his employer to a possible claim of breach of contract by the contractor. The frequency of periodic payment could be varied from fortnightly to monthly because the actual duration would be as agreed in the contract conditions signed.
B Brief Description of Relevant Contract Clauses
PAM 2006
JKR 203A
Contract Clauses IEM CIDB 1989 2000
The Contractor shall submit a 30.1 47 (a) payment application at The Interim Claim Interval stated in the Appendix. The Architect / Engineer / 30.2 14 days after Superintending Officer within Valuation shall within the stipulated period 21 after the Contractor days submitted Interim Payment Claims issues the Interim Certificate. The Employer has to make the 30.2 47 (d) payment to the Contractor within stipulated period after the Architect / Engineer / Superintending Officer issued The Interim Payment Certificate. Interest imposed on Employer for 30.17 late payment. Table 1: Contract Clauses
FIDIC 4th Edition
42.1
50.2
42.2(a) within 21 days
50.3 (a) 14 days after application
42.9 (a)
50.3 (c)
42.9 (b)
-
Description of Relevant Contract Cla 2
Stage Payment
It is defined as the payment of an agreed amount when an agreed stage of the project has been completed. The term stage payment is used when the payments are made at specific stages of work. This mode of payment is often used in small lump sum contract without quantities where a proportion of the total sum is agreed to be paid over in a number of stages. These proportions are fixed and do not depend upon any re-measurement of work. Nevertheless, the application of this mode of payments is more common in Turnkey, Design & Build as well as contracts involving repetitive works. 3
Payment Before Commencement
This is the sum of money paid to the Contractor by the Employer well before the work involved is executed. This practice is usually done in public work contracts. Some construction industry consultants focused on the residential projects suggest collecting a 50 percent payment before work even starts. The main purpose of implementing this type of payment is to help the Contractor to start up and finance the Contract without resorting unnecessary external borrowings. 4
Payment After Completion
This is the method of payment to Contractor triggered by the achievement of the Contract milestone of practical of substantial completion and or the so called handing over of the Works to the Employer. Hence, unless such stage is reached and certified by the contract administrator, the contractor is not entitled to any payment whatsoever. In using this method, the Contractor is basically financing the works to a large degree, which costs would eventually build into the contract sum. The Employer must also be prepared to shoulder this burden as well as be in a position to source and effect payment ultimately of a sizeable lump sum amount upon the taking over of the works.
Figure 1 : Construction Payment Flow Chart
Interpretation of Express Payment Provisions in PAM Contract 2006 (With Quantities) In PAM Contract 2006 (With Quantities) contain specially drafted clauses which govern all aspects of the subject of payment under the contract. The schedule of payment is usually agreed at initial phase of contracting. Unlike public works contract, the most common payment is progress payments. A regular disbursement of payment should be paid by the Employer to the Contractor based on work done on site. The express contractual provisions in PAM Contract 2006 (With Quantities) are discussed: Procedures for Payment Clause 30 of the PAM Contract 2006 (With Quantities) deals with all certificates and payment. In the same time regulates the entire subject of payment under the contract. There are three main types of certificates in relation to payment which are Interim Certificates, Penultimate Certificate and Final Certificate. Before practical completion, the Contractor is entitled to Interim Certificates at intervals of one month unless otherwise stated in the Appendix. The Interim Certificates state the amount due to the Contractor from the Employer. Final Certificate is a statement as to the amount of money finally due between the Employer and Contractor. In general, an interim valuation is carried out by submission of claim by the Contractor for the agreed period, usually end of the month. The amount will comprise value of work properly executed on site to be certified by the Architect after received the payment valuation from the Quantity Surveyor. Payment will be made by Employer on the issuance of Interim Certificate until Practical Completion, the following certificate may be issued is to release one-half of the retentions held by the Employer.
Thereafter the Contractor will submit a Final Account to the Architect and a reconciliation of the contract sum will be made. Penultimate Certificate is issued for release of Retention Sum and outstanding payment to Nominated Sub Contractor and Nominated Supplier within fourteen days of Certificate of Making Good Defects. Final payment of outstanding monies will be released after Defect Liability Period and a Final Certificate will be issued. The Employer is required to pay the sum stated in the certificate as being due to the Contractor so he fulfils his contractual obligations. Clause 30.1 requires the Contractor to submit his claim with details and particulars for payment for the Architect to certify interim payments. However, the condition of this clause is most often being amended, therefore the legal effect of the application of payment always become an issue of dispute. Decisions made shall based on the precise wording employed the circumstances and the intention of both parties. Under PAM Contract 2006 (With Quantities), non-compliance to clause 30.1 is not fatal to the Contractor’s entitlement, since the Employer is obliged to pay the Contractor for discharging his obligations. Timing of Payment In the construction industry, it is common practice for the payment of the contract sum to be made by installments. Under PAM Contract 2006 (With Quantities), Contractor is reimbursed for work done at regular intervals, usually monthly during the currency of the Contract. Interim payments are affected by the issuance of ‘Interim Certificates’, a term referring to the periodic certification of money due to the Contractor. Once the Contractor commences with the works and executes sufficient work in the interval leading up to the agreed period for certification, the Quantity Surveyor is obliged to undertake the necessary valuation. Failure of Quantity Surveyor in undertaking valuation and causes the Architect unable to issue Interim Certificate within twenty-one days upon receipt of Contractor’s claim, is a breach of contract for which the Employer is liable. The issue of Interim Certificates is a condition precedent to payment. Clause 30.1 stated that the Architect will issue all certificates to the Contractor with a copy to the
Employer. After that, the Employer has to pay the payment due to the Contractor within the Period of Honoring Certificates. Failure to pay within the set period is a breach of contract. The Contractor has become ‘entitled to payment thereafter within the Period of Honoring Certificates stated in the Appendix’, which will be 21 days from the issue unless a different period is specified in Contract. The English Court of Appeal held that “The Contractor shall be entitled to payment of the sum stated in the Interim Certificate to be due to the Contractor from the Employer.” Therefore the Employer has to act on the copy sent to him by the Architect and make payment promptly on or before the due date. When the Quantity Surveyor carry out valuation and what is the period taken by the Quantity Surveyor to carry out valuation does not stated clearly in the conditions. Therefore, in practice, it is common for the Contractor to follow up closely with the Quantity Surveyor to ensure that the claim is being valued as soon as possible. The Period of Honoring Certificate shall commence upon the receipt of the Interim Certificate by the Employer, not the issuance of Interim Certificate by the Architect. In practice, the Contractor gets the Interim Certificate from the Architect and sends to Employer by hand to ensure the payment is released as soon as possible.
Quantum of Payment In terms of progress payments, the amount to be paid by Contractors are usually based on the certified Interim Certificate but there are certain clauses provide for situations where the Employer is entitled to deduct amounts from that certified in interim payment certificates. The process of computing the quantum or amount due to the Contractor at the periodic payment involves a process so called ‘valuation’ Clause 30.2 lays down the components that are to be covered by an Interim Certificate which are:
Total value of work properly executed. This includes, of course, work executed by
Sub-Contractors. Total value of materials and goods delivered to site and off site. The materials and goods must be adequately protected against the weather or other casualties such as theft and various insurance risks. Besides that, the materials and goods must have
been reasonably, properly and not prematurely bought to the site. The total value of work properly executed is reflected in the amount due in the Interim Certificate. However, an Interim Certificate is an approximate indication of the value of work executed and the corresponding amount due to the Contractor. Clause 30.3 states that if there is any over certifications or under certifications, there can be a commensurate revision in the subsequent certificate.
Interim Certificate is allowed to be corrected by the Architect but limited to genuine errors and discrepancies in preparing the certificates. The Architect is entitled to take a fresh view of the state of the works each time he issues an Interim Certificate. This means the Contractor is entitled to payment of the sum actually stated in the Architect’s Interim Certificate even if the certificate contains a latent or patent error. It is clear that Architect’s Certificate may be challenged but its immediate effect is equivalent to that of a binding certificate. The certificates may be challenged only through proper contractual channels, usually by arbitrations. In certifying payments, the Architect is placed in position of impartiality and is required to act in a professional manner while exercising independent judgments. The determination of the amount due to the Contractor has to be undertaken professionally and with due skill and case as any default, omission and deficiency may render the Employer in breach of his contractual obligations. Although corrections can be made, but the Architect must be wary not to breach his duty of care to the Employer in the certification process he can be liable for breach of contract or in tort of negligence since he does not enjoy any immunity in discharging that role.
Deductions of Payment/Set-off Under PAM Contract 2006 (With Quantities), the Employer is entitled to set-off the amounts previously stated as due in Interim Certificates and retention sum from the total value of work done up-to-date. It is clear that the Employer has no right to set-off the amount stated as payment due to the contractor under Architect’s Certificate unless otherwise expressly stated in the contract. The Employer is allowed to make deductions in the following situations: Clause 2.4 - Where the Employer employs and pays others to carry out work after failure by the Contractor to comply with an instruction of the Architect. Clause 4.4 – Where the Employer suffers losses on Contractor’s non compliance of statutory obligations, notices, fees and charges. Clause 5.1 - Where the Employer suffers on Contractor’s wrong setting out. Clause 6.5(e) - Where the Employer pays for the lower valued, non-defective works with Architect’s issuance of Variation Order for reduction in value and payment to Contractor. Clause 6.7 - Where the Employer employs and pays others to carry out work after failure by the Contractor to comply with an instruction of the Architect. Clause 14.4 - Where the Employer suffer losses on Contractor’s false warranty on the materials. Clause 15.3(b) - Where the Employer employs and pays others to rectify minor defects when the Contractor does not comply own undertaking to rectify. Clause 15.3(c) - Where the Employer leave the minor defects unrectified and cost deducted from Contractor. Clause 15.4 - Where the Employer employs and pays others to carry out rectification work after failure of Contractor to attend the defects in schedule of defects.
Clause 15.5 - Where the Employer employs and pays others to carry out rectification work after failure by the Contractor to rectify during Defects Liability Period. Clause 19.5 - Where the Employer takes out third party insurance after default by the Contractor to take out such insurance. Clause 20.a.3 - Where the Employer takes out insurance of the Works after default by the Contractor to take out such insurance. These deductions are not reflected by the Architect or Superintending Officer (S.O) in the interim certificates themselves, but are instead deducted by the Employer from the amount stated as due in the interim certificates when making payment. Compare with PAM Contract 1998 (With Quantities), PAM Contract 2006 (With Quantities) provide more conditions for the Employer to set-off Contractor. This increases the Contractor’s liabilities while ensuring the Contractor is responsible and careful while executing the Works.
The certificate of payment is necessary to ensure that the interest between contractor and employer is guaranteed. Certificate of payment can be a proof in payment process and all the payment is follow the process that have been told or stated in Contract Document. It is also make sure that the contractor has been paid in an appropriate ways. This certificate also contains all information about the payment process. Payments cannot be made without a certificate because if there is no certificates of payments, then there is no proof that the contractor already be paid by the employers and another problem can be arise.
