Inform Practice Note #16

November 2008
(Version 1 - November 2008)

Advance Payments

cidb’s Inform Practice notes provide guidance and clarity in achieving client objectives
in construction procurement and delivery. Practice notes inform clients and practitioners
on how to embrace best practice and how to deal with issues that may arise. They are aligned
with, but do not replace regulation.

Content Synopsis:
1. Introduction 2 Advance payments provide contractors with an interest free loan
which is repayable before the completion of the works.
2. Standard provisions for advance
payments 2
This practice note outlines the provisions for advance payment
3. JBCC Series 2000 provisions 3 made in the JBCC Series 2000, FIDIC and NEC forms of contracts
4. FIDIC provisions 3 and provides additional conditions of contract for inclusion in GCC
2004 to enable advance payment to be made in terms of this form
5. NEC Provisions 4 of contract.
6. Clauses for inclusion in GCC 5

Practice Note #16 • Version 1 • November 2008 1

 1. Introduction
An advance payment, or simply an advance,
The Latham Report “Constructing the Team” (1994), an is the part of a contractually due sum that
influential report commissioned by the United Kingdom’s is paid in advance, while the balance will
Government and Industry to review procurement and contractual only follow after completion of the works.
arrangements in the construction industry, concluded that the Advance payments are typically between 15
most effective form of contract in modern conditions should and 20% of the contract amount, but this
include: ….. depends on the nature of the works.

13. Making provision where appropriate for advance mobilisation An advance payment in effect provides the
payments (if necessary bonded) to contractors and subcontractors, contractor with an interest free loan during
including in respect of offsite prefabricated materials provided by the initial phases of the contract where the
part of the construction team. greatest strain is placed on a contractor’s
cash flow. An advance payment provides
the contractor with working capital at the
start of the contract in order to commence
Contractor’s cash flow the work.

Advanced payment repaid Practical completion

Advance payment received End of defects liability
An advance payment may also be used to
period purchase materials and plant at an early
stage as it provides the contractor with the
1 000
necessary cash flow to do so. This is done to
500
secure materials which are in short supply
Net cash flow

0
-500 or place early orders for imported plant.
-1 000
-1 500 Advance payments may also be used to
-2 000 provide potentially emerging contractors
-2 500
with the necessary financial support to
1 2 3 4 5 6 7 8 9 10 11 12 13
perform contracts in a higher contractor
Month
grading designation.
Legend:
With 20% advance payment
Without 20% advance payment
There is always the risk that for whatever
reason, the contractor to whom an advance
payment is made fails to repay the amount.
In order to protect employers against this
risk, advance payments should only be made
The provision of an advanced payment will allow the contractor to
against an approved advance payment
purchase critical materials or plant as soon as possible after the award
guarantee provided by the contractor.
of the contract. This minimises risk pricing to cover the potential under
recovery of costs associated with construction materials that escalate
in cost at a rate above the price adjustment provisions of the contract.
It also places contractors in a strong bargaining position as they have 2. Standard provisions for
the cash flow to purchase the materials or plant early in the contract advance payments
and in so doing fix the price and secure delivery of such materials or
plant. The cidb Standard for Uniformity in Construction
Procurement requires that one of the following
See inform practice # 17 Securing supplies of critical materials forms of contract be used in engineering and
and plant. construction works contracts:
• General Conditions of Contract for
Construction Works (GCC 2004);

Practice Note #16 • Version 1 • November 2008 2

 • Conditions of Contract for Construction, Conditions of Contract
for Plant and Design-Build, Conditions of Contract for FIDIC EPC/
Turnkey Projects or Short Form of Contract;
• JBCC series 2000 Principal Building Agreement or Minor Works
Agreement;
• nec3 Engineering and Construction Short Contract or nec3
Engineering and Construction Contract.

All of the above forms of contract with the exception of GCC 2004, the
FIDIC Short Form of Contract and the nec3 Engineering and Construction
Short Contract have standard provisions for advance payment.

3. JBCC Series 2000 provisions

The JBCC Series 2000 Principal Building Agreement
The JBCC Series 2000 Principal Building Agreement and the Minor (PBA) and the Minor Works Agreement (MWA)
works Agreement define an advance payment guarantee as a require that:
guarantee at call obtained by the contractor from an institution • The Employer provides an advance payment
approved by the Employer on the JBCC Advance Payment Guarantee on receipt of an advance payment guarantee
form for the amount as stated in the contract data. form the Contractor;
• The Contractor provides the guarantee
according to the JBCC Advance Payment
Guarantee form.

The JBCC PBA also requires that the Principal Agent inform the Contractor
that an advance payment guarantee will be made to a nominated or
selected subcontractor as the JBCC N/S Subcontract Agreement also
makes provision for advance payments.

The JBCC PBA also makes provision for:

• Payment of materials and goods stored off site in terms of an advance
payment guarantee.
• A recovery statement (a statement prepared monthly by the principal
agent in terms of the JBCC Recovery Statement form) to reflect the
adjustments to be made for advance payments from interim payment
certificates.

The JBCC Advance Payment Guarantee requires that the particulars of the
recoupment of the Advance Payment Sum be stated on the form in the
following format:

Recoupment period (no months)

Recoupment period commencement (start month)
Monthly recoupment (amount)
Note: W
 here the recoupment amounts and / or periods are irregular a schedule of recoupment
amounts and dates is to be attached.

Practice Note #16 • Version 1 • November 2008 3

 4. FIDIC provisions
Clause 14.2 of the FIDIC Conditions of Contract for Construction (Red
Book) allows the Employer to make an advance payment as “an interest
free loan for mobilisation” should the Contractor provide a valid and
enforceable guarantee until the advance payment has been repaid in
full. The details of the advance such as the total advance payment, the
number and timing of instalments (if more than one), and the applicable
currencies and the proportions are established in the Contract Data.

Similar provisions are provided in the Conditions

Annex E of provides an Example Form of Advance Payment of Contract for Plant and Design-Build and the
Guarantee in the Conditions of Contract for Construction, Conditions of Contract for FIDIC EPC/Turnkey
Conditions of Contract for Plant and Design-Build and Conditions Projects.
of Contract for FIDIC EPC/Turnkey Projects.
The Engineer, in terms of the procedures provided
for in these three forms of contract, issues an
Interim Payment Certificate for the first installment after receipt of
a Statement from the Contractor and once the Employer receives a
guarantee in the amount and in the currency of the advance payment.

The advance payment is repaid through percentage deductions in

Payment Certificates either as provided for in the Contract Data or, in the
case of the Conditions of Contract for Construction and the Conditions of
Contract for Plant and Design-Build, in terms of the following:
• Repayments commence when the total of the certified
interim payments, excluding the advance payment and
 deductions and repayments of retention, exceeds 10% of the
Accepted Contract Amount less Provisional Sums, and
• Repaid at a rate of one quarter the amount of each Payment
Certificate.

The rate of repayment needs to be such that repayment is achieved

before Completion. (The standard provisions for repayment of advanced
payments contained in Clause 14.2 are based on the assumption that the
total advance payment is less than a quarter of the Accepted Contract
Amount less retention e.g. 23,75% where the retention is 5%.)

The following data needs to be included in the Contract Data if the standard provisions are not used:

Clause Data
14.2 Total advance . . . . . .% of the Accepted Contract Amount

Number and timing of instalments .........................

Currencies and Proportions . . . . % in . . . . . . . . . . .
Start repayment of Advance payment when payments are . . . . % the Accepted
Contract Amount less Provisional Sums
Repayment amortisation of advance ....%

Practice Note #16 • Version 1 • November 2008 4

Example:

A 20% advance payment is made in payment certificate 1 where the Accepted Contract Amount is R 10,0 m and the retention
amount retention is 5% and the final amount is R10,0 m The repayments using the standard provisions will be as follows:

Payment Certified Value of Retention Total Comments

certificate amount (R) works (R) repayment
# executed of advance
(R) (R)
1 2 000 000 - - Advance payment paid against guarantee
2 2 475 000 500 000 - 25 000 No deduction as amount less advance
payment is <10% of Accepted Contract
Amount
3 3 425 000 2 000 000 475 000 100 000 Repayment = (2 000 000 - 100 000)/4
4 5 562 500 5 000 000 1 187 500 250 000 Repayment = (5 000 000 - 250 000)/4
5 8 550 000 9 000 000 2 000 000 450 000 Repayment = (9 000 000 - 450 000)/4
= 2 137 500
6 9 750 000 10 000 000 - 250 000 Retention halves upon completion

5. NEC Provisions
Provision for advance payment to the contractor is made in
secondary option X14 of the Engineering and Construction Contract
and the Engineering and Construction Subcontract.

The advance payment is made either within 4 weeks of the Contract

Date or, if an advance payment bond is required, within 4 weeks
of the later of the Contract Date and the date that the Employer
receives the advance payment bond. A delay in making the advance
payment is a compensation event.
A sample Advance Payment Bond for use with the nec3 ECC and
ECSC may be downloaded from www.jointcivils.co.za. The following data needs to be included in the
Contract Data:

The following data needs to be included in the Contract Data if the standard provisions are not used:

Clause Data
X14 The amount of the advanced payment is . . . . . . . . . . . . . . . . . .

The Contractor repays the instalments in assessments starting not less than . . . . . . . . . . . weeks after the Contract
Date.

The instalments are . . . . . . . . . . . . . . . . . . . . . . . (either an amount or a percentage of the payment otherwise due).

An advance payment bond is / is not required.

Practice Note #16 • Version 1 • November 2008 5

 6. C lauses for inclusion in GCC
GCC 2004 has no provisions for advance payment. It is
therefore recommended that the following additional condition
of contract be included in the Contract Data:

Advance payment

The Employer shall make an advance payment in an amount

of R ………., as an interest free loan for mobilisation, when
the Contractor submits a guarantee of an Insurance Company
or Bank in accordance with the provisions of the proforma
Advance Payment Guarantee in an amount equal to the amount
of the advance payment. The said Company or Bank shall be
Pretoria Head Office subject to the approval of the Engineer.
+27 12 482 7200/+27 86 100 cidb

Gauteng Provincial Office

The advance payment shall be repaid through . . . % deductions
Pretoria in payment certificates (excluding the advance payment and
0861 428 222 • cidbgp@cidb.org.za deductions and repayments of retention monies), commencing
when the total of all interim payments exceeds 10% of the
Western Cape Provincial Office
Cape Town Contract Price, until such time that the advance payment has
0861 927 222 • cidbwc@cidb.org.za been repaid.

Eastern Cape Provincial Office

Bisho The Engineer shall issue a payment certificate for the first
0861 222 327 • cidbec@cidb.org.za instalment after receiving and approving the Advance Payment
Guarantee.
Northern Cape Provincial Office
Kimberley
053 861 9631 • cidbnc@cidb.org.za The Advance Payment Guarantee shall be returned to the
Guarantor within 14 days of the advance payment being repaid.
Free State Provincial Office
Bloemfontein
0861 377 222 • cidbfs@cidb.org.za The proforma Advance Payment Guarantee should be modelled
on Annex E of the FIDIC Conditions of Contract for Construction.
KwaZulu-Natal Provincial Office
Durban
0861 596 222 • cidbkzn@cidb.org.za

Limpopo Provincial Office

Polokwane
0861 222 765 • cidblimpopo@cidb.org.za

Mpumalanga Provincial Office

Nelspruit (Mbombela)
0861 678 222 • cidbmpumalanga@cidb.org.za

North West Provincial Office

Mahikeng
0861 243 222 • cidbnw@cidb.org.za

Anonymous Fraud Line

0800 112 432
Call Centre: 0860 103 353
BM•12934•10/2013

email: cidb@cidb.org.za

www.cidb.org.za

Practice Note #16 • Version 1 • November 2008 6