CON4541 CONSTRUCTION CONTRACT MANAGEMENT

4. Contract Administration (refer Private Standard Form with Quantities for HK)
Contd

I. Certificates and Payments (Clause 32)

Interim Certificate

Interim Certificate is a payment certificate issued by the Architect usually on

monthly basis to the Contractor to certify for the valuation of the work done on
site, unfixed materials stored on site or unfixed materials stored off-site, if
applicable up-to-date at the time of the valuation.

A. Frequency of Valuations and Valuation Date

Under the Conditions of Contract, the Employer is obliged to pay the

Contractor such sums as are stated to be due in Interim Certificate issued by
the Architect at the periods stated in the Appendix.

The Interim Certificate is to be issued regularly i.e. at an agreed intervals. In

practice, this normally mean monthly, commencing one month after the date
on which the Contractor shall commence the Works on the Commencement
Date.

The Architect shall rely on the Quantity Surveyor to advise him as to the sum
which should be stated as due in any such certificate.

As an alternative to regular monthly certificates, the Contract Conditions may

be provide for stage payments instead of regular progress payments i.e. for
payments to be made when certain defined stages in the construction work
have been completed.

Stage payments are more appropriate to contracts where the stages are often
readily or satisfactorily definable. i.e. Lift & Escalator Installations, etc.

Note: The Architect shall issue the first Interim Certificate within 42 days after
the Commencement Date. The first Interim Certificate will set the program of
certificates for the subsequent payments due in the Contract. e.g. 3rd May for
the issue date of the first I.C. then , the next certificate date of issue to be 3rd
June. Thus, it is important to decide from the start a fixed date in each month
on which to do valuations. ( the valuation date )

B. General Procedure

The proper way to prepare an interim valuation is to value, on each occasion,

the amount of work which has been done since the beginning of the Contract
and the value of unfixed materials and goods stored on the Site on the
valuation date

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From the total value so arrived at (accumulated total) , less the previous
payments on account if any, leaving a balance due for payment for that
month.

By following this procedure strictly, any under-valuations or over-valuations on

the last valuation date will be automatically corrected.

It is important that the QS should not attempt to value in isolation the work
done and the unfixed materials delivered since the last valuation.

C. Preparing the valuation on Site

The QSs first task on visiting the Site for valuation purposes ( having first
made his presence known to the site agent and clerk of works), is to tour the
Works, making notes as necessary of the extent of work done and listing the
quantities of the various unfixed materials and goods stored on the Site.

The Contractors surveyor shall submit a detailed application for interim

payments themselves which they submit to the QS a few days before the
valuation date. In any case, the application shall be submitted at least 14 days
before the date on which an Interim Certificate is due to be issued.

It should be noted that the PQS has no obligation to make use of them,
although he may find it convenient to use them as a basis for his own
valuation by checking each of the constituent amounts and, if necessary,
amending any as he sees fit.

D. Inclusions in Valuations

The amounts to be included in the gross valuation and the Interim Certificate
are set out in Clause 32.2. Briefly, these are the value of :

1. Preliminaries
2. Main contractors work ( work properly executed as billed )
3. Variations
4. Unfixed materials properly stored on Site
5. Unfixed materials properly stored off Site if Cl.32.3 applies (deal with
great care)
6. Amounts directed for payment to N.S.C. and N.S.
7. Fluctuations in cost of labor, materials etc. if Cl.38 applies
8. Amount ascertained for direct loss and/or expense
9. Retention

1. Preliminaries

a) Breakdown of Preliminaries

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Preliminaries items are either occurrence-related or time-related.

Prior to the date of the first valuation, it will be necessary to make an

apportionment of the contract sum to each of its principal constituents.

The preliminaries constituent will then need to be broken down into separate
amounts such as would normally be seen in the preliminaries section of a bill
of quantities.

Preliminaries items are of three kinds, namely, cost-related, time-

related, occurrence- related or a combination of two or more of the others.

Those which are cost-related ( e.g. water for the Works, construction levies,
etc. ) depend for their value on that of the reminder of the Contract Sum or of
its labour content.

Time-related items ( e.g. site supervision, watchman expense ) depend for

their value on the contract period.

Occurrence-related or single-payment items ( e.g. the provision of temporary

access roads, temporary redirection of traffic ) are those whose value is not
affected either by the value of the rest of the contract or by the contract period
but are carried out at a particular point in the progress of the Works.

b) Valuation of Preliminaries

It is not uncommon to deal with the total value of the preliminaries as if the
items were either all cost-related or all time-related.

For cost-related case, the total of the preliminaries is calculated as a

percentage ( % ) of the Contract Sum after deducting the preliminaries and
the prime cost sums. In each valuation, this percentage is applied to the total
value of main contractors work.

For time-related case, the total of the preliminaries is divided by the contract
period ( in months ) and the resulting sum is multiplied by the number of
months which have elapsed to date. This amount is then included in the
valuation as the total amount for Preliminaries.

It should be recognized that they give only approximate results. It may be

resulted in overpayment of some items and underpayment of others.

Where the time-related method is used and if the contract runs behind
schedule, there will be a danger of overpayment, unless the fixed monthly
amounts are adjusted.

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2. Main contractors work

The value of the work carried out by the main contractors own workforce is
ascertainable from the measured work sections of the bills of quantities.

It should be noted that the price contained in the bills of quantities ( the
Contract Bills ) must be used in the valuation of the main contractors work,
regardless of whether the contractor under-priced or over-priced the work
when compiling the tender.

The notes made during the initial tour and inspection of the Works ( include
only those works that are properly executed ) is used in assessing
approximately the value of completed works. The completed work as a
percentage of the whole item should be indicated opposite the bill reference.

3. Variations

The Conditions of Contract required that effect on measurement and

Valuation of Variations should be made in the interim payments.

Each Variation must be valued, either approximately or accurately, as soon as

possible after issue of the Architects Instructions.

4. Materials on Site

The value of material and goods brought on Site may be included in the
Interim Certificate. The materials and goods must be reasonably, properly and
not prematurely delivered and protected.

The QS will need to be satisfied that the materials and goods are physically
stored on the Site and to ascertain approximately how much of each material
or good there is.

The Contractors surveyor may be required to provide the QS a list of all the
materials with their respective quantities to be claimed under the materials on
Site item together with their supporting delivery notes and invoices.

The value of the claimed MOS items may be cut down if

(a) inadequately protected materials or those which have deteriorated or been

damaged;

(b) quantities which are clearly in excess of requirements and

(c) any materials or goods which have been delivered prematurely, i.e. when
the length of time before they are likely to be required is unreasonably long.

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5. Materials off site (Clause 32.3)

The value of Materials off site claimed may be considered by the QS to be

included in a valuation if the Architect may, at his discretion to instruct or
where expressly provided in the Contract.

6. The amounts directed for payment to N.S.C. and N.S.

a) Nominated sub-contractors work

It is common practice for Nominated Sub-contractors to make application

from time to time, through the main contractor, for the amounts on account to
which they consider they are entitled.

It is advisable to let the Nominated Sub-contractors know the valuation date in

each month and so that they can make payment applications accordingly.

Note : the sums included for Nominated Sub-contractors work are also the
cumulative value of total work done up to the date of valuation in each month.

b) Nominated suppliers goods

The value of goods and/or materials supplied by Nominated Suppliers should

be included in valuations on the same basis as those supplied by domestic
suppliers.

The goods and materials are properly protected and stored, not damaged or
defective.

7. Retention

It is a common provision in all the standard forms of building contract for a

percentage of the valuation total to be deducted.

The sum of money deducted is said to be retained by the Employer and is

called the Retention Money.

The purpose in retaining part of the total value of work competed is :

- to provide an incentive for the Contractor to complete the Works promptly,

and
- to cushion the Employer to some extent against the possible effects of the
Contractor defaulting, should that happen.
- to withhold a sum of money to pay for the work executed by the other
contractor to rectify defects if the Contractor fails to do so within the Defects
Liability Period.

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The actual percentage retained will be stated in the Contract Conditions.

( usually 10% of the Interim Certificate due and maximum of 5% of the
Contract Sum )

The Conditions of Contract provides that one-half of the total retained to be

paid to the Contractor in the next interim certificate after the Architect has
issued a Certificate of Substantial Completion.

The second half of the retention monies is released when the Defects Liability
Period stated in the Appendix of the Conditions of Contract has expired and
upon the issue of the Certificate of Completion of Making Good Defects by
the Architect.

E. Not receive the Interim Certificate

Under the Conditions of Contract, the Contractor can determine his own
employment in accordance to Clause 36.1 if the Employer fails to honor an
Interim Certificate, but not fail to issue an Interim Certificate.

If the Contractor does not receive his copy of an Interim Certificate at the
proper time. Notices stating the absence of receipt of Interim Certificate
should be given to the Architect and to request for the issue. Otherwise, the
Contractor can go for Arbitration.

F. Disagreement of Valuation of Interim Certificate

The Conditions do not expressly contemplate the position where the

Contractor is dissatisfied with the amounts included in an Interim Certificate.

Where the Contractor is seriously aggrieved by the amount of an Interim

Certificate, notice should be given to the Architect (copy to the Quantity
Surveyor).

Such notice :
refer to the Interim Certificate in question
inform the Architect of the dissatisfaction of the Contractor of the amount
included
give a brief explanation of the reason for the dissatisfaction.
request that the Architect immediately issue a revised Interim Certificate.

G. Set-off

The Conditions of Contract grants to the Employer an express right to deduct

or set off from monies due to the Contractor in an Interim Certificate.

The circumstances/ purposes under which the Employer is entitled to set-off

the monies are :

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the amount of direct payments to Nominated Sub-Contractor following the

failure of the Contractor to make payment to them.

the cost to the Employer of the failure of the Contractor to comply with
Architects Instructions.

the amount for deduction of Liquidated and Ascertained Damages if any.

the cost to the Employer of insurance following the failure of the Contractor to
insure.

Note :
No deduction can be made from Retention monies until they have been
included in an Interim Certificate.

The Conditions require Employer to inform the Main Contractor for the
exercise of the set-off (including the reason for making the deduction).

Final Account (Clause 32.6)

Final account (FA) is a summary of the total Final Contract Sum taking into
consideration of all monetary adjustments to the Contract Bill as required.

Before the Final Certificate can be issued, the final account has to be
prepared by the Quantity Surveyor, who is required to adjust the Contract
Sum in the Contract Bills to include all the monetary additions and omissions
of the following items :

1. Contingency sum
2. Architects Instructions
3. Provisional Quantities and Items
4. Provisional Sums and Prime Cost Sums
5. Fluctuations
6. Agreed amount of Contractors direct loss and/or expense

The Period of Final Measurement and Valuation should begin with issue of
the Certificate of Substantial Completion and be completed within the time
stated in the Appendix; twelve months unless otherwise stated.

All adjustments made to the Contract Sum should be agreed by the main
contractors quantity surveyor. When the final account together with the Final
Contract Sum has been agreed, a summary is prepared setting out all the
adjustments, which should be signed by the Contractor, the Quantity Surveyor
and the Architect.

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Interim Certificates Vs Final Account

Where the interim certificates represent a fair evaluation of all the work
contained in the contract, including billed items, variations and extras, the
settlement of the final account should not be too difficult.
In practice many factors combine to prevent this ideal arrangement taking
place.

Contractor to submit supporting documents for final account

Not later than 6 months after Substantial Completion of the whole of the
Works or 3 months before the end of the period for completion of the final
account, whichever is earlier, the Contractor shall submit to the Quantity
Surveyor all the documents that are, in opinion of the Quantity Surveyor,
reasonably necessary for the adjustment of the Contract Sum including those
relating to NSC and NS.

Supporting documents required by QS to assess the FA

Most of the information should already be with the Quantity Surveyor in the
form of the following documentation:

1. the Contractor's valuation of the measured work as submitted in monthly

statements

2. the records and other cost data relating to Variations which have usually
been submitted to and discussed with the Architect/Engineers

3. the full and detailed particulars of all claims for direct loss and expense
which should have been delivered as soon as reasonable to the QS

Although not necessary the Contractor will submit his own statement of final
account to the Quantity Surveyor for agreement, the Contractor will take the
opportunity to substitute accurate amounts for earlier approximations, correct
any errors and, in the case of claims covering activities which continued up to
the end of the construction period, it is probable that he can now provide all
the necessary supporting financial data.

The provisional sums, items and/or quantities are often re-measured on

completion. In the case of new or varied work, it is necessary to establish
rates for items of work which did not appear in the original bills in accordance
with Valuation rules of Clause 13.4.

Work of NSC or NS

The QS will prepare the final accounts for Nominated Sub-contractors and
Nominated Suppliers similar to the main contract.

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The Contractor's profit will be computed at the same percentage as inserted

in the Contract Bill, while the sum included for attendance and special
attendance in the original bill should only be adjusted when the quantity,
quality or scope of the sub-contractor's work is substantially changed.

Final Certificate (Clause 32.8)

The Final Certificate is issued to certify that the Works have been entirely
completed to the Employers satisfaction in accordance with the terms of the
Contract between the two parties.

The Final Certificate shall be conclusive evidence in any proceedings arising

out of the Contract whether by arbitration or otherwise that:

(a) the materials, goods, workmanship and work were provided or carried out
to the Architects satisfaction;

(b) the final account is prepared and arrived with the Final Contract Sum.

(c) all appropriate extension of time has been given

(d) all claims including direct loss and expense for breach of contract, duty of
care, statutory duty, etc. have been settled.

Cl 32.8(1) provides that the Architect shall issue the Final Certificate to each
parties by special delivery soon after the issue of Defects Rectification
Certificate provided that the Final Certificate shall not be issued until 28 days
after a copy of the signed final account has been given to each parties.

The Final Certificate will include the sum of all amounts previously certified
and the Contact Sum adjusted as necessary in accordance with the
Conditions of the Contract. The difference between these two sums (i.e. Final
Contract Sum less previous amount certified in Interim Certificates) will be
expressed as a balance due to Contractor from the Employer or to the
Employer from the Contractor as the case may be.

This balance due shall be a debt payable 28 days after the issue of the Final
Certificate either by the Employer or Contractor as the case maybe but
subject to:

(a) all deduction authorized by the Contract; and

(b) the general rights of set off at law.

The balance due to either party is described as a debt payable and these
words make it certain that a final payment can be properly the subject of the
High Court action if that payment is not made after 28 days prescribed.

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