The Hong Kong Institute of Surveyors

Payment Valuation and Post Contract Monitoring

Payment Valuation
What is payment valuation? A provision in the Contract which stipulates the Architects obligation to issue a certificate stating the amount due to the Contractor and the Employers obligation to pay the amount to the Contractor. (SFC 1999 Clause 30(1); SFC 2005 Clause 32.1(1) & (2)) Note: No provision in SFC 1999 requiring the Contractor to submit a statement of the Contractors valuation of the work done. In SFC 2005, this is stated in Clause 32.1(4).

Payment Valuation
When should payment valuation be made? A provision in the Contract stating the period of interim certificate to be issued by the Architect. (SFC 1999 Clause 30(1); SFC 2005 Clause 32.1(1) Who prepares the interim valuation? Under SFC 1999 Clause 30, it is the Architect who handles the various issues for the interim certificates. Under SFC 2005 Clause 32, it is the Quantity Surveyor who prepares the estimated amounts to be included in interim certificates and submits the valuation to the Architect for issuing the interim certificates. (SFC 2005 Clause 32.1(3), (4) & (5).

Payment Valuation
How long should the Architect / Quantity Surveyor prepares the valuation of interim certificates? Under the SFC 1999 Clause 30(1), the Architect is obliged to prepare the interim valuations whenever he considers to be necessary for the purpose of ascertaining the amount to be stated as due in interim certificate. Under SFC 2005 a time mechanism is built-in to prepare and issue the interim certificate in Clause 32.1(1) & (5).
[e.g. Suppose Period of Interim Certificates = 28 days; 1st Interim Certificate not later than 42 days after the Commencement Date, then time for QS to issue valuation recommendation to Architect = 7 days and the Architect to issue the interim certificate = 7 days]

Payment Valuation
What should be included in the gross valuation of interim certificate? Under SFC 1999 Clause 30(2), the gross valuation should be the estimated value of the work properly executed and of the materials and goods delivered to or adjacent to the Works for use thereon up to and including a date not more than seven days before the date of the interim certificate less any amount which may be retained by the Employer and any installments previously paid. Payment for materials off site (Clause 30(2)(A)) shall be specifically stated in the Specification if deemed to be part of the Contract.

Payment Valuation
What should be included in the gross valuation of interim certificate? Under SFC 2005 the items to be included in the gross valuation is stated in Clause 32.2(3). Valuation for materials off site shall only be made at the Architects discretion or where expressly provided in the Contract (Clause 32.3).

Types of Payment
Progress Payment / Stage Payment / Milestone Payment / Phases of Works Must have a clear and unambiguous definition of stages and milestones Must have a clear scope of work included in the various stages and milestones Preferably to have a time schedule of achieving the various stages and milestones Preferably to arrange the Bills of Quantities / Pricing of the Works into stages or phases of works (e.g. sources of funding / cost centres)

Payment
Payment can be made by: By cheque payment By letter of credit By bank draft By bank transfer By document against acceptance Caution: Must be to the party who signed the Contract Must pay the exact amount (in one payment or multiple payments) as included in the Payment Certificate Should ask for a receipt of the payment

Payment Assessment
First Payment To agree the format and presentation of the payment application To ensure the application of percentage discount (if applicable) is in the right place To take out the provisional quantities / provisional sums To make allowance for the adjustment of prime cost rates items (if any) To adjust the prime cost sum items for payment of the profit and attendance to the Main Contractor To agree the payment of the preliminaries items payment for establishment works, payment for work related / time-related works (maintenance / running cost items), payment for final removal / cleaning, etc.)

Payment Assessment
Items to consider in the evaluation of work done The completion status of the items of work The pricing for the items of the work Temporary works Materials on site (previously certified) Materials on site (amount to be certified) Variation works (when to pay / how much / eligibility) Setting off and procedures (surety bond premium) Other expressly stated special considerations

Payment Assessment
Advanced Payment / Deposit Payment Require an advanced payment bond prior to release of advanced payment / deposit payment Time to release the advanced payment bond / deposit payment bond Arrangement to deduct from future interim payments for the advanced payment / deposit payment

Cost Control (Post Contract)

Financial Reports periodic submission and to suit the project progresses to anticipate the final contract sum as a register of the cost breakdown of the variation works addition / omission as a reference for the allocation or matching of funding and costs must be up-to-date with no time lag between the actual design development / construction progress and the time of report

Cost Control (Post Contract)

Items to be included in the Financial Report Awarded contract sum Provisional sums Provisional quantities items Prime cost items Prime cost rate items Variation works instructed / proposed / pending confirmation Loss and expenses claims anticipated / pending confirmation / confirmed / amount Acceleration / Delay Recovery Measures

Cost Control (Post Contract)

Architects Instructions Under SFC 1999 and SFC 2005 there is no provision for specific form that must be followed for Architects Instructions. Under SFC 2005 Clause 13.1(2), it is required that the instruction requiring a variation shall describe the change required to the design, quality or quantity of the Works or the imposition of or change to any obligation or restriction on the Contractor and where appropriate the Architect shall issue revised drawings and/or schedules.

Cost Control (Post Contract)

Cashflow Forecast A cashflow forescast will give the Employer an anticipation of the likely payment to be made to the Contractor; subject to the revision of works programme prepared by the Contractor.
HK$ 400,000,000

Cash Inflow

350,000,000

300,000,000 250,000,000

200,000,000

150,000,000

100,000,000 50,000,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Month

Cost Control (Post Contract)

Cashflow
HK$

Cash Outflow
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

(50,000,000)

(100,000,000)

(150,000,000)

(200,000,000)

(250,000,000)

(300,000,000)

(350,000,000)

(400,000,000) Month

Cost Control (Post Contract)

Cashflow
HK$ 30,000,000

Net Flow

20,000,000

10,000,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 (10,000,000)

(20,000,000)

(30,000,000)

(40,000,000)

(50,000,000) Month

Cost Control (Post Contract)

Things to note in the preparation of cashflow forecast to separate the time related costs and work related costs to take reference to the pricing in the Contract to take reference to the works programme prepared by the Main Contractor to take reference to the payment method, e.g. progress payment or stage / milestone payment to take reference to the period of interim payment, e.g. monthly or biweekly or by stage / milestone achievement dates to take reference to the time of certifying the payment and the time of actually making the payment, e.g. 28 days of honouring the payment by the Employer to the Main Contractor [cashflow forecast is in general based on the time of making the actual payment] to note that the amount paid in interim payment should exclude retention money [retention money to be released in accordance with the Contract provisions and separately identified in the cashflow forecast] cashflow forecast to be updated periodically to take into account the adjustments made to the works programme and the anticipated final contract sum, e.g. delay in work progress or payment for variation work

Cost Control (Post Contract)

Valuation of variation works Contract rates Similar rates (pro-rata rates) New rates Daywork + cost of materials + packing + carriage + delivery + ___% (15%) for O/H & P Cost of hiring plant, equipment + transportation, fuel, maintenance, insurance Abortive works Redundant works Night / overtime works Measurement of variation works Omission of works (loss of profit)