Contract Administration 341

opic 6

Payments

Topic 06 (Payments).doc

Table of Contents
TABLE OF CONTENTS ........................................................................................................................... 2
LECTURE OBJECTIVES ........................................................................................................................3
INTRODUCTION .......................................................................................................................................3
PAYMENTS (AS 4000 CLAUSES 37 & 38) .........................................................................................3
TYPES OF CONTRACT AND METHOD OF PAYMENT ................................................................................3
PRELIMINARIES BREAKDOWN .................................................................................................................7
CASH FLOWS ...........................................................................................................................................8
UNFIXED MATERIALS ..............................................................................................................................9
RETENTION ..............................................................................................................................................9
CONTRACT SUM ADJUSTMENTS............................................................................................................10
FINANCIAL CONTROL ...........................................................................................................................11
SELF ASSESSMENT QUESTIONS ...................................................................................................... 12
BIBLIOGRAPHY ....................................................................................................................................13

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Lecture Objectives

Understand payment procedures for standard forms of contract and assessment

of interim payments;

Describe three methods of administering prelims;

Understand specific obligations with regard to unfixed material;

Calculate contract sum adjustments for variations & Provisional Sums;

Calculate the final adjusted contract sum;

Discuss the objectives of a financial control system

Introduction
The form of contract being used and the applicable clause within it determines
payment procedures.

Payment is consideration for the works undertaken by the

Contractor in performance of work as set out in the contract. The Contract Sum may
only be varied by formal adjustment within the terms and conditions of the Contract.

Payments (AS 4000 Clauses 37 & 38)

Types of Contract and Method of Payment
There are two basic contracts but many variations to them. They are Lump Sum
Contracts or Schedule of Rates Contracts.

Lump Sum is a contract in which the price offered and accepted is one single lump
sum for the whole work but subject to change or adjustment as permitted within the
terms and conditions of the contract.

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Schedule of Rates is a contract in which the price is agreed to in advance in the form
of rates for units of work which rates are then applied to the final quantity of measured
work to arrive at the final Contract Sum.

Payment in both forms may be paid at predetermined stages, at quality hold points or
milestones. It is only the final certificate that is conclusive and all payments prior to
the final certificate are payments on account or interim payments. Accuracy of the
payment should be assured as recent cases have been cited in which Contractors have
taken legal action against the Superintendent for incorrect certification.

Payment Procedure
The normal procedure for assessing and certifying payment for work completed under
standard forms of contract and AS 4000 is:

1. The Contractor completes a quantity of work;

2. The Contractor submits a progress (interim) claim to the Superintendent

(usually monthly but they may be tied to specific milestones or achievements);

3. The Superintendent or Superintendents Representative examines the claim,

and assesses the work completed compared to the work claimed;

4. A progress certificate is issued in accordance with the contract documents;

5. The certificate is presented to the Principal for payment; and,

6. The Principal pays the Contractor in accordance with the contract document.

Remember the Final Certificate is the only conclusive certificate and therefore anything
included in an interim certificate may be subject to amendment in a later certificate.

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Assessing Payments
On large contracts where the Contract Sum exceeds a few thousand dollars it is usual
practice for the Contractor to be paid sums on account as work proceeds ie receive
interim payments. This process is identified in AS 4000 clause 37 which states:

The Contractor shall claim payment progressively in accordance with Item

28.

In effect this clause and item says that once each month on a date as stated in Item 28
the Contractor shall submit a progress claim.

These claims are widely known as progress claims or interim certificates. The interim
payment reduces the financial burden on the Contractor by reducing the expense of
borrowing large sums of money to pay for the work. All standard forms of contract
allow for progress claims.

The parties must agree when signing the Contract what day each month the progress
claim is to be made. The Contractor will attempt for a date so as to remain cashflow
positive. Certain accounts will fall due at a certain date within the month for which
the Contractor would prefer to have received the progress payment for them first.

The timing of subsequent events in the payment procedure following submission of

the progress claim may be found with reference to the applicable form of contract.
Under AS 4000, clause 37.2 the Superintendent has 14 days after receipt of the claim to
determine the amount due as a progress claim and to issue notice of the amount due in
the form of a payment certificate to the Principal. Failure to issue the certificate means
the payment amount default to the amount claimed. The Principal has 7 days (and no
more than 21 days from receipt of the claim by the Superintendent) to pay the amount
certified, less retention, by the Superintendent.

If the Contractor fails to make a claim the Superintendent may issue a certificate using
their assessment and process it the same way.

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In practice the Contractor and the Superintendent agree the value of work completed
together which reduces duplication of work, any disagreement on figures and speeds
up the process.

Stage Payments
Some forms of contract permit stage payments to be made. In this process payments
are made when certain defined stages in the construction work have been completed,
eg, ground slab, wall plate level, roof on, etc. This method is appropriate for housing
contracts but is also done on larger contracts by way of Milestone payments.

The Process
Whether there is a priced Bill or not, a tour of the site is required to determine the
extent of the work carried out during the period for which the claim is being made.
The amount of work carried out since the beginning of the contract should be recorded
ie. the gross figures and the amount recorded at the previous inspection deducted. By
following this process strictly any previous under or over certification is corrected and
any incorrect figures will not be compounded.

AS 4000 indicates that the following should be included in the progress claim;
the Contractors valuation of the works executed, including variations,
completed or partly completed;
the Contractors valuation of any unfixed material that can be claimed (this is not
available by default, only if listed at item 29 in the Appendix);
the retention amount;
the amount previously certified;
the total amount previously paid;
the amount being claimed this period by the Contractor;

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Topic 06 (Payments).doc

the amounts for Nominated sub-contractors, together with any variations;

evidence of payment to Domestic and Nominated sub-contractors previously
certified.

To adequately cover the contractual aspect the following items will also need to be
considered;
Preliminaries,
Main Contractors work,
Variations,
Unfixed materials and goods,
Nominated sub-contractors,
Fluctuations (Rise and Fall),
Retention
Preliminaries

Preliminaries Breakdown
It is a more straight forward exercise to value preliminaries with a priced Bill of
Quantities than without since the Bill will identify each item, and the price in the BQ
may be apportioned for inclusion in the progress claim.

Preliminary items may be defined under four headings; cost related, time related,
single payment or a combination of two or more.

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Topic 06 (Payments).doc

Cost related depends on the contract sum expended for their value.
Time related items depend on the contract duration expired for their value.
Single payment items (spot items) have no relationship to either duration or
value of the works and are selected at a particular point in the contract.

Scaffolding, for example, has erection costs, dismantling costs and a weekly hire charge
in between that may be related to either time or the cost value of the works.

For Cost items the total preliminaries are calculated as a percentage of the contract
sum after deducting the preliminaries and provisional sums. In each progress claim
the percentage is applied to the measured work.

For Time items the preliminaries value is divided by the number of weeks or months
the contract is to run and the sum of this is applied to the number of weeks or months
that have elapsed.

Cash Flows
There is a tendency for Contractors to load the earlier parts of the job to maintain
positive cashflows ie money is coming in before too much has to be paid out. Care
must be taken to ensure that overpayment does not take place (beware negligent
certification). If the Contractor should go into liquidation problems will arise. The
opposite circumstance will eventuate when rise and fall is appropriate. The calculation
normally produces a condition favourable to undervaluation of the work and later
reaping the benefit of additional rise and fall.

The establishment of an S curve chart based on historic data from previous jobs will
assist in determining that an appropriate value of work is either being claimed or paid
(see example). On larger projects where a Bill is used the cost of the items in the priced
Bill should be used as the basis for payment. Scrutiny of the rates to avoid loading in
one area or another should be established when the BQ is submitted for checking at the

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time of tender. On occasions when a schedule of rates is used as the basis of valuing
ongoing work care should be taken to check the actual work carried out.

Unfixed Materials
It is often requested by the Contractor that the principle pay for unfixed material, As
4000 accommodates this, as do most Standard Forms of Contract but it is not an
entitlement, it has to be noted in the Appendix. Even then certain conditions must be
complied with and these are set out in clause 37.3. Payment should only be made
when adequate insurances or guarantees are provided. Particularly care is advised if
the materials are to be stored off site. It must be established that clear ownership of the
materials is vested in the proprietor. The materials should be identified and stored in a
manner so that they cannot be confused with other goods of different ownership.

Often a Bank Security or Guarantee is requested by the proprietor as security against

the full value of the goods. Prior to payment the material should be inspected by the
architect to determine that all is in order. All additional costs in respect of security or
insurance arising from payment for materials on or off site are to be borne by the
Contractor.

Mutual advantages include; for the Contractor, an increase in cash flow and knock-on
effects of saving interest payments; for the Principal, a reduction in escalation (R&F)
payments on incomplete work.

Retention
Security or retention is held to ensure that the Contractor provides the service stated in
the contract and in accordance with the provisions of the general contract. This may be
established in two ways;
cash deduction, the withholding of a portion of the monies due to the Contractor,
often expressed as 10% to a maximum of 5% of the contract sum,
security, in the form of a bankers undertaking, a guarantee in lieu of cash
deductions.

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The provision of a guarantee is the most cost-effective solution for the Contractor that
can afford it. It is generally based on the Contractors assets as a security to the bank
and a nominal monthly fee is charged for the establishment and ongoing costs.
According to the conditions of bank guarantees the holder may at any time convert it
to cash. Recent cases in Australia have upheld the right of the holder to convert the
guarantee to cash even for relatively unrelated reasons.

When cash retention is held the Principal holds the money in trust for the Contractor
and any interest earned goes to the party holding the security.

AS 4000 clause 5 sets out the requirements and procedures of retention or security.

Contract Sum Adjustments

It is incorrect to assume that CSA are always related to variations, only one form of
CSA is related to variations and that is the one that arises from approved variations.
The administration of a CSA demands clear thinking in contract administration.
Variations
Variations are variations to the work not the price. An adjustment to the Contract Sum
is derived from adding to a variation (the base value) any margins or percentages that
are applicable to the form of contract being used. The basic rate for variations allows
the Contractor something in addition to the cost of the variation to allow for overhead
costs administration, preliminaries, profit and the like. Under AS 4000 all adjustments
to the Contract Sum are made using variations.

Final Account
AS 4000 makes allowance for the adjustment, up or down, of PS under clause 3. The
adjustment is made toward the end of the contract when the full figures are known and
all the PS items have been let or dealt with. When the contract sum adjustment is
made the PS sums will be deducted and the total value of the work together with the
applicable profit and attendance is substituted.

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Where work described as a PS is carried out by the Contractor they are priced in the
same manner as varied work (see variations notes). Upon adjustment within the Final
Account the PS value included within the tender is substituted by the agreed remeasured value.

Financial Control
Principles
The aim of financial control is accountability and the system of accounting used must
explain where the money has gone and what is has been used for. The arithmetic must
be correct.

It must be remembered that none of the money belongs to the Superintendent, if it

belongs to anyone it belongs either to the Contractor or the Principal.

The

Superintendent in the administration of the finances, as with its administration in

general, must be impartial and unbiased. The Superintendent is regarded as being in
a fiduciary position and must exercise its rights and powers in good faith for the
benefit of others. It is important that the dissecting of the building contract sum into
its various smaller components is understood and a financial statement is simply a
statement of monetary movements.

In medium to large contracts it is generally the Superintendent that carries out the task
with the cooperation of the Contractor. When the contract sum is very large, or the
scope of the works complicated either by definition, procurement method or function
then a quantity surveyor (QS) may be engaged by the Principal. A cost manager
employed within the Superintendents practice may also be employed, but it should be
noted that the most commonly used standard forms of contract make no reference to
this independent role.

More recent contracts, C21 for example, do allow for the

independence of the certifier.

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Topic 06 (Payments).doc

SELF ASSESSMENT QUESTIONS

See the attached progress claim and calculate the amount due this claim.

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Bibliography
Bailey, I. H. Construction law in Australia 2nd edition, North Ryde, N.S.W. LBC
Information Services, 1998.

Cremean, D. J.,Brooking on Building Contracts: the law and practice relating to

building and engineering agreements, 3rd edition, Sydney: Butterworths, 1995.

James, J. F. 1998, Contract Management in Australia, Longman, Melbourne.

Standen, D,. Construction Industry Terminology 3rd edition Melbourne RAIA Practice
Services. 1993.

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CONTRACT :- 864/96
CONTRACTOR :- B and B Block Builders

DESCRIPTION

CONTRACT
VALUE

PERCENT COMPLETE
Cumulative
Previous

SUMMARY - PROGRESS CLAIM NO. 2

ITEM No.
DESCRIPTION
1.00
SCHEDULE No. 1 - Preliminaries
2.00
SCHEDULE No. 2 - Alterations & Special Requirements
3.00
SCHEDULE No. 3 - Clearing
4.00
SCHEDULE No. 4 - Concrete
5.00
SCHEDULE No. 5 - Provisional Sums
TOTAL ALL SCHEDULES
APPROVED VARIATIONS

Contract Admin 341

PAYMENT CERTIFICATE NO. 1

PERIOD 01/03/99 TO 31/03/99

SERVETUS STREET

This Period

AMOUNT $

Cumulative
Total

Cumulative
Previous

$185,000.00
$61,700.00
$5,795.00
$76,002.50
$11,000.00
$339,497.50

4.05
34.04
25.02
23.20
9.09
14.31

0.00
0.00
0.00
0.00
0.00
0.00

0.00
0.00
0.00
0.00
0.00
0.00

$7,500.00
$21,005.00
$1,450.00
$17,633.75
$1,000.00
$48,588.75

$97,300.00

5.14

0.00

0.00

$5,000.00

$436,797.50

12.27

0.00

0.00

$53,588.75

Page 1 of 3

This Period

Cumulative
Total

Gervase Haimes

CONTRACT :- 864/96
CONTRACTOR :- B and B Block Builders

DESCRIPTION

CONTRACT
VALUE

PERCENT COMPLETE
Cumulative
Previous

Contract Admin 341

PAYMENT CERTIFICATE NO. 1

PERIOD 01/03/99 TO 31/03/99

SERVETUS STREET

1.00

SCHEDULE No. 1 - Preliminaries

1.01
1.02
1.03
1.04

Charges relating to Insurance

Construction Programs
Survey Information & Set Out
Technical Specification
SCHEDULE No 1 - TOTALS

2.00

SCHEDULE No. 2 - Alterations & Special Requirements

2.01
2.02
2.03
2.04

Special Requirements to Private Properties

Care of Vegetation
Restoration of Plants & Equipment
Removal of Boundary Fences
SCHEDULE No 2 - TOTALS

3.00

SCHEDULE No. 3 - Clearing

3.01
3.02
3.03
3.04

Clearing Vegetation
Remove Topsoil
Respread Topsoil
Import & Spread Topsoil
SCHEDULE No 3 - TOTALS

4.00

SCHEDULE No. 4 - Concrete

4.01
4.06
4.07
4.08
4.09

Concrete in Footings
Y12 reinforcing Bars
Y16 Reinforcing Bars
R10 Reinforcing bar
Control Joints 1200 x 300mm
SCHEDULE No. 4 - TOTAL

This Period

AMOUNT $

Cumulative
Total

Cumulative
Previous

$10,000.00
$5,000.00
$15,000.00
$155,000.00
$185,000.00

50.00
50.00
0.00
0.00
4.05

50.00
50.00
50.00
0.00
0.00

100.00
100.00
50.00
0.00
0.00

$5,000.00
$2,500.00
$0.00
$0.00
$7,500.00

$14,500.00
$25,000.00
$15,000.00
$7,200.00
$61,700.00

25.00
40.00
30.00
40.00
34.04

30.00
40.00
25.00
40.00
0.00

55.00
80.00
55.00
80.00
0.00

$3,625.00
$10,000.00
$4,500.00
$2,880.00
$21,005.00

$725.00
$725.00
$1,450.00
$2,895.00
$5,795.00

100.00
100.00
0.00
0.00
25.02

0.00
0.00
0.00
0.00
0.00

100.00
100.00
0.00
0.00
0.00

$725.00
$725.00
$0.00
$0.00
$1,450.00

$66,825.00
$5,175.00
$1,575.00
$1,687.50
$740.00
$76,002.50

20.00
60.00
30.00
30.00
25.00
23.20

30.00
0.00
30.00
30.00
25.00
0.00

50.00
60.00
60.00
60.00
50.00
0.00

$13,365.00
$3,105.00
$472.50
$506.25
$185.00
$17,633.75

Page 2 of 3

This Period

Cumulative
Total

Gervase Haimes

CONTRACT :- 864/96
CONTRACTOR :- B and B Block Builders

DESCRIPTION

CONTRACT
VALUE

PERCENT COMPLETE
Cumulative
Previous

5.00

SCHEDULE No. 5 - Provisional Sums

5.01
5.02
5.03

Flashing Between Walls

Work Around Trees
Sheet Piling
SCHEDULE No. 5 TOTAL

Contract Admin 341

This Period

AMOUNT $

Cumulative
Total

Cumulative
Previous

$2,000.00
$4,000.00
$5,000.00
$11,000.00

0.00
25.00
0.00
9.09

10.00
50.00
20.00
0.00

80.00
100.00
100.00
0.00

$0.00
$1,000.00
$0.00
$1,000.00

Survey Set Out

Rock Excavation
Additional Site Office
Additional Culverts
Extra Signalling

$10,000.00
$50,000.00
$7,800.00
$9,500.00
$20,000.00

50.00
0.00
0.00
0.00
0.00

50.00
50.00
0.00
0.00
0.00

100.00
50.00
0.00
0.00
0.00

$5,000.00
$0.00
$0.00
$0.00
$0.00

APPROVED VARIATIONS

$97,300.00

5.14

0.00

0.00

$5,000.00

VO. NO
1
2
3
4
5

PAYMENT CERTIFICATE NO. 1

PERIOD 01/03/99 TO 31/03/99

SERVETUS STREET

This Period

Cumulative
Total

VARIATIONS

Page 3 of 3

Gervase Haimes