Advance Payments - CIDB

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

2.

Standard provisions for advance payments

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3.

JBCC Series 2000 provisions

3

4.

FIDIC provisions

3

5.

NEC Provisions

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6.

Clauses for inclusion in GCC

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Practice Note #16 • Version 1 • November 2008

Advance payments provide contractors with an interest free loan which is repayable before the completion of the works. This practice note outlines the provisions for advance payment made in the JBCC Series 2000, FIDIC and NEC forms of contracts and provides additional conditions of contract for inclusion in GCC 2004 to enable advance payment to be made in terms of this form of contract.

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1. Introduction The Latham Report “Constructing the Team” (1994), an influential report commissioned by the United Kingdom’s Government and Industry to review procurement and contractual arrangements in the construction industry, concluded that the most effective form of contract in modern conditions should include: ….. 13. Making provision where appropriate for advance mobilisation payments (if necessary bonded) to contractors and subcontractors, including in respect of offsite prefabricated materials provided by part of the construction team.

Contractor’s cash flow

Net cash flow

Advanced payment repaid Advance payment received

Practical completion End of defects liability period

1 000 500 0 -500 -1 000 -1 500 -2 000 -2 500 1

2

3

4

5

6

7

8

9

10

11

12

13

Month Legend:

With 20% advance payment Without 20% advance payment

The provision of an advanced payment will allow the contractor to purchase critical materials or plant as soon as possible after the award 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 the cash flow to purchase the materials or plant early in the contract and in so doing fix the price and secure delivery of such materials or plant. See inform practice # 17 Securing supplies of critical materials and plant.


An advance payment, or simply an advance, is the part of a contractually due sum that is paid in advance, while the balance will only follow after completion of the works. Advance payments are typically between 15 and 20% of the contract amount, but this depends on the nature of the works. An advance payment in effect provides the contractor with an interest free loan during the initial phases of the contract where the 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 the work. An advance payment may also be used to purchase materials and plant at an early stage as it provides the contractor with the necessary cash flow to do so. This is done to secure materials which are in short supply or place early orders for imported plant. Advance payments may also be used to provide potentially emerging contractors with the necessary financial support to perform contracts in a higher contractor grading designation. 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 against an approved advance payment guarantee provided by the contractor.

2. Standard provisions for advance payments The cidb Standard for Uniformity in Construction Procurement requires that one of the following forms of contract be used in engineering and construction works contracts: • General Conditions of Contract for Construction Works (GCC 2004);

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• 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 and the Minor works Agreement define an advance payment guarantee as a guarantee at call obtained by the contractor from an institution approved by the Employer on the JBCC Advance Payment Guarantee form for the amount as stated in the contract data.

The JBCC Series 2000 Principal Building Agreement (PBA) and the Minor Works Agreement (MWA) require that: • The Employer provides an advance payment on receipt of an advance payment guarantee 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.


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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.

Annex E of provides an Example Form of Advance Payment Guarantee in the Conditions of Contract for Construction, Conditions of Contract for Plant and Design-Build and Conditions of Contract for FIDIC EPC/Turnkey Projects.

Similar provisions are provided in the Conditions of Contract for Plant and Design-Build and the Conditions 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 Number and timing of instalments Currencies and Proportions Start repayment of Advance payment Repayment amortisation of advance


. . . . . .% of the Accepted Contract Amount ......................... . . . . % in . . . . . . . . . . . when payments are . . . . % the Accepted Contract Amount less Provisional Sums ....%

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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 certificate # 1 2

Certified Value of amount (R) works executed (R) 2 000 000 2 475 000 500 000

Retention (R)

-

3 4 5

3 425 000 5 562 500 8 550 000

2 000 000 5 000 000 9 000 000

475 000 1 187 500 2 000 000

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9 750 000

10 000 000 -

Total Comments repayment of advance (R) Advance payment paid against guarantee 25 000 No deduction as amount less advance payment is <10% of Accepted Contract Amount 100 000 Repayment = (2 000 000 - 100 000)/4 250 000 Repayment = (5 000 000 - 250 000)/4 450 000 Repayment = (9 000 000 - 450 000)/4 = 2 137 500 250 000 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.


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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

Pretoria Head Office +27 12 482 7200/+27 86 100 cidb Gauteng Provincial Office Pretoria 0861 428 222 • [email protected] Western Cape Provincial Office Cape Town 0861 927 222 • [email protected] Eastern Cape Provincial Office Bisho 0861 222 327 • [email protected] Northern Cape Provincial Office Kimberley 053 861 9631 • [email protected] Free State Provincial Office Bloemfontein 0861 377 222 • [email protected]

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 subject to the approval of the Engineer. The advance payment shall be repaid through . . . % deductions in payment certificates (excluding the advance payment and deductions and repayments of retention monies), commencing when the total of all interim payments exceeds 10% of the Contract Price, until such time that the advance payment has been repaid. The Engineer shall issue a payment certificate for the first instalment after receiving and approving the Advance Payment Guarantee. The Advance Payment Guarantee shall be returned to the Guarantor within 14 days of the advance payment being repaid. 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 • [email protected] Limpopo Provincial Office Polokwane 0861 222 765 • [email protected] Mpumalanga Provincial Office Nelspruit (Mbombela) 0861 678 222 • [email protected] North West Provincial Office Mahikeng 0861 243 222 • [email protected]

BM•12934•10/2013

Anonymous Fraud Line 0800 112 432 Call Centre: 0860 103 353 email: [email protected] www.cidb.org.za


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Advance Payments - CIDB

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