Payments 付款

Table of Contents

Generally

Scope

  1. This QS Practice Manual covers payment valuations
  2. The Contract clauses refer to those of SFBCwQ.1986(2ndAmend.July1999) and SFBCnQ.1986(2ndAmend.July1999)

Terms of payment

  1. There can be broadly two types of payment terms:
    • Progress payments 进度款 which are made at regular intervals, usually monthly, based on valuation of value of actual work done and materials delivered, with provisions for retention
    • Stage payments which are made not at regular intervals, but are made when certain stage of construction has been achieved, e.g. upon concreting of the floor at mid-height of the building, upon concreting of the roof, upon submission for Occupation Permit, etc.
  2. The progress payment method is the method used in the Standard Form of Building Contract and will be described in detail first in this Manual. Discussion of stage payments will be given at the end of this Manual
  3. The terms “milestone payments”, “regular milestone payments” and “time-related milestone payments” are also used in this manual. It should be noted that these terms are not terms with established definitions in the industry but are used here for identification purposes only

Standard Form of Building Contract

  1. For illustration purposes, the following Main Contract Form and Sub-Contract Form will be used:
    • Main Contract Form: “Agreement & Schedule of Conditions of Building Contract for use in the Hong Kong Special Administrative Region” drawn up by The Hong Kong Institute of Architects, The Royal Institution of Chartered Surveyors (Hong Kong Branch) and The Society of Builders, Hong Kong, First RICS (HK Branch) Edition 1986 (with quantities) incorporating up to Second amendments published in July, 1999
    • Sub-Contract Form: “Sub-Contract for use where the Sub-Contractor is nominated under the Standard Form of Building Contract for Hong Kong” drawn up by The Hong Kong Institute of Architects, The Royal Institution of Chartered Surveyors (Hong Kong Branch) and The Society of Builders, Hong Kong, First RICS (HK Branch) Edition 1986 incorporating up to Second amendments published in February, 2000
  2. The principle should be the same for most of other contracts
  3. Provisions for payment have been specified in:
    • Clause 30 “Certificates and Payments” of the Main Contract Form
    • Clause 11 “Main Contractor to apply for Certificates and Payment” of the Sub-Contract Form

Payment processes

  1. The usual processes for payment are:
    • Contractor’s Payment Application 付款申请 -> QS’s Valuation 付款估值 -> Architect’s Certification 批款证书 -> Contractor’s Presentation -> Employer’s Honouring
  2. A more detailed description is as follows:
    • the Main Contractor, Nominated Sub-Contractors and Nominated Suppliers supplies materials and, where applicable, carry out work
    • the Main Contractor, Nominated Sub-Contractors and Nominated Suppliers calculate the value of materials supplied and work done by them
    • the Nominated Sub-Contractors and Nominated Suppliers submit their payment application to the Main Contractor, with copies to the Architect, the Quantity Surveyor, the M&E Consultant (where applicable), and the Employer (usually)
    • the Main Contractor submits his payment application (incorporating applications from the Nominated Sub-Contractors and Nominated Suppliers) to the Architect, with copies to the Employer, the Quantity Surveyor, the M&E Consultant (where applicable)
    • the Quantity Surveyor visits the Site 现场视察, inspects and records the extent of unfixed materials and work done on site, in the presence of the Main Contractor’s representative (usually site quantity surveyor) and, if considered necessary, representatives from the Nominated Sub-Contractors and Nominated Suppliers
    • the Quantity Surveyor calculates the values of unfixed materials and work done on site
    • the M&E Consultant similarly visits the Site, value M&E works, and issue his payment recommendation to the Quantity Surveyor
    • the Quantity Surveyor issues his payment recommendation (incorporating the M&E Consultant’s recommendation) to the Architect, with copies to the Employer, the M&E Consultant, Main Contractor
    • the Quantity Surveyor issues advices to individual Nominated Sub-Contractors and Suppliers to inform them the amount of payment included in the main payment recommendation
    • the Architect issues his payment certificates certifying the amounts payable to the Main Contractor, Nominated Sub-Contractors and Nominated Suppliers
    • the Main Contractor presents the payment certificate to the Employer for payment
    • the Employer pays the Main Contractor

Timing

Date of Application

  • Date of Application” means the date of the Contractor’s payment application

Date on site

  • Date on site” means the date when the QS visits the Site to carry out valuation

Date of Valuation

  • Date of Valuation” means the cut-off date to calculate work done and materials on site. This is usually the same as the Date on site

Date of Recommendation

  • Date of Recommendation” means the date of the QS’s recommendation for payment. This can only be later than the Date of Valuation

Date of Certificate

  • Date of Certificate” means the date of the Architect’s Interim Certificate

Frequency of Interim Certificates

  1. The Standard Form of Building Contract does not have specific provisions regarding the time for payment application, site valuation and issuance of recommendation
  2. The Standard Form of Building Contract does specify that Interim Certificates shall be issued “at the Period of Interim Certificates”. “Period of Interim Certificates” means the time interval between successive payment certificates. This is usually one month. This means that Interim Certificates should be issued at regular interval of one month. An Interim Certificate should not be issued later than one month after the previous Interim Certificate
  3. The Standard Form of Building Contract also specifies that the value of work done and materials on site that can be included in an Interim Certificate can be those done or delivered up to and including a date not more than seven days before the date of the Certificate”. This means that the Date of Valuation should not be more than 7 days before the Date of Certificate. Within this period of 7 days, the QS Payment Recommendation and the Architect’s Interim Certificate should be issued. This is seldom achieved in practice. The QS usually would take a few days to issue the Payment Recommendation after site visit, and the Architect would also take a few days to issue the Interim Certificate. Some people misunderstood that the Architect has 7 days to issue the Interim Certificate after receipt of the QS’s Recommendation

Period for Honouring Certificates

  1. The Main Contractor will not get his payment upon receipt of the Interim Certificate. The Employer will have a grace period for making payment. This is called “Period of Honouring Certificates”. This is usually set at “14 calendar days from presentation of certificate”. It means that the Main Contractor has to present the Certificate to the Employer for payment, and the Employer has 14 days to make payment

  2. The Main Contractor usually would issue an invoice for the same amount when presenting the Certificate

  3. Some developers would require a period long than 14 days

Payment to Nominated Sub-Contractors and Suppliers

  • The Main Contractor shall pay the Nominated Sub-Contractors and Suppliers within 14 days of receipt by the Main Contractor of the relevant payment from the Employer

Pay-when-paid

  1. Payment to Nominated Sub-Contractors and Suppliers is a “pay-when-paid” arrangement. The Main Contractor would not pay if he has not received the same money from the Employer
  2. Argument would arise if due to deductions as a result of certain defaults of the Main Contractor, the total amount certified as due to the Main Contractor is less than that certified as due to Nominated Sub-Contractors and Suppliers, but the Main Contractor denies that the defaults are his, then the Main Contractor would declare that he has not received sufficient payment in respect of the Nominated Sub-Contracts and Supply Contracts and therefore he would not pay in full. The situation would become messier if the defaults in question relate to delays and disruptions where the Nominated Sub-Contractors and Suppliers are implicated as well
  3. Further discussion on the “pay-when-paid” and its variances like “paid-if-paid” and “pay-when-and-if-paid” would be beyond the scope of this Manual

Amounts

Gross valuation

  • Gross valuation” of payment is the estimated value of:
    • the work properly executed and of
    • the materials and goods delivered to or adjacent to the Works for use thereon

Retention

  • Retention is a portion of the Gross Valuation retained from payment and is to be released until after Practical Completion

Nett valuation

  • Nett valuation” of payment is gross valuation less retention

Nett amount due

  • “Nett amount due” is the nett valuation less previous payments. The relationship of the various terms can be illustrated by the following example:

Gross Valuation

Work properly executed

  1. The value of work done should include all those work partially or wholly done on site but shall exclude those non-conforming or defective work
  2. If an item of work is specifically rejected by the Architect, its value should not be included the Gross Valuation
  3. If defects are found in an item of work which has partially been done but the defects are not serious enough for rejection of the whole of the work, then when calculating the proportion of the value of the work to be included in the Gross Valuation, some reductions should be made to account for the defects
  4. Difficulties would arise upon Practical Completion when substantially all items of work are done but there are still defects to be made good. Contractors would obviously not like to see that all items in questions are subject to a reduction. They would argue that there is still retention to be retained. Whether reduction on top of retention should be made would depend on the seriousness of the defects. In theory, defective work should be rejected and therefore not paid. However, if the work is basically all right but with some minor imperfections which require making good but not complete replacement of the work, and if the cost of making good such minor imperfections can be covered by the retention money, then the full value of the work should be included in the Gross Valuation
  5. To avoid doubt, it is advisable for the Architect to formally reject the whole of those items of work which have serious defects

Unfixed materials on site

  1. A simplified term for “materials and goods delivered to or adjacent to the Works for use thereon” would be “unfixed materials on site”. If the materials and goods have been fixed, their value would be included in the value of work done. If materials are not on or adjacent to the Site, they would not normally be included in the Gross Valuation
  2. Materials and goods can be easily taken out of the Site or may be stolen. Unfixed materials and goods are more vulnerable to loss and damage whether due to natural or human causes. Some materials such as cement and lime may easily deteriorate if they are not stored with proper protection. Therefore, to qualify for inclusion in the Gross Valuation, materials and goods must have been:
    • reasonably, properly and not prematurely brought to or placed adjacent to the Works
    • adequately protected against weather or other casualties
  3. Most materials and goods should be delivered not more than one month in advance of the time required for use. Quantities delivered more than one month in advance should be queried
  4. Possibly acceptable reasons are:
    • The total quantity involved is so small that it is not economical to divide into more than one delivery
    • The quantity must be delivered in one batch to ensure consistency in colour, e.g. stone
  5. The following reasons which are for the contractor’s own benefit and convenience would not be acceptable:
    • Larger quantities are delivered to secure earlier payment
    • Larger quantities are delivered to secure the cheaper supply price
    • Larger quantities are delivered to reduce off-site storage costs
  6. Prompt delivery in accordance with the original programme without regard to the actual progress may still be a premature delivery
  7. Quantities delivered more than two months in advance can be reviewed as premature

Materials off-site

  1. Payment is not normally made for materials not yet delivered to site
  2. Clause 30(2)(A) of the Main Contract Form which deals with payment for materials off-site is part of the Contract only if specifically so stated in the Contract Bills
  3. Payment for materials off-site is subject to the discretion of the Architect. The Architect would obviously not exercise this discretionary power without the Main Contractor’s request and without the Employer’s consent. Therefore, payment for materials off-site is usually subject to a special agreement detailing the conditions to exercise the discretionary power. The agreement needs not be very formal but should be in writing
  4. The provisions in Clause 30(2)(A) of the Main Contract Form can be used a guideline for drafting the agreement
  5. To qualify for payment, the following conditions should be met:
    • (a) The materials or goods are intended for inclusion in the Works
    • (b) The materials or goods are in accordance with this Contract
    • (c) The Main Contractor furnishes to the Architect reasonable proof that the premises where the materials or goods have been assembled or stored are owned or leased by the Main Contractor
    • (d) The materials or goods have been and are set apart at the premises where they have been assembled or stored, and have been clearly and visibly marked, individually or in sets, so as to identify
      • . the person to whose order they are held
      • . their destination as being the Works
    • (e) The Main Contractor furnishes to the Architect evidence that such materials or goods are insured against the perils similar to those set out in the insurance clause of the Contract
    • (f) The Main Contractor furnishes to the Architect reasonable proof that the property in such materials or goods is in the Main Contractor and that the conditions set out in paragraphs (a) to (e) above have been complied with
  6. The requirements of paragraphs (a) and (b) are obvious
  7. The requirements of paragraphs (c) and (d) are to ensure the materials and goods are distinguishable from other materials and goods in the same storage place
  8. The requirements of paragraph (e) are to ensure appropriate insurance cover against loss or damage after payment and prior to delivery
  9. The requirements of paragraph (f) are very important. If the Main Contractor does not validly possess the property in the materials or goods, the property cannot validly pass to the Employer even if the Employer has paid for it. This is particularly so if the materials and goods are store off-site and mixed with other materials and goods not for the Works

Total value to-date instead of value since last

  1. One very important rule in making payment valuation is: always value the total value to-date since the beginning instead of value the value since the last payment. This rule is implied by the Form of Contract and is a golden rule to follow
  2. Valuation every month cannot be exact. There could be errors in previous valuations. Work or materials included in previous valuation could subsequent be found to be defective. Therefore, by valuing the total value to-date since the beginning and subtracting from it whatever was previously valued, whether the previously valued was correct or incorrect, previous errors would not perpetuate unnoticed

Retention

Use of retention

  • The primary intention to have retention is to reserve some money in case the contractors fail to make good defects and the Employer has to employ others to do so. However, “the Main Contractor's beneficial interest therein shall be subject only to the right of the Employer to have recourse thereto from time to time for payment of any amount which he is entitled under the provisions of this Contract to deduct from any sum due or to become due to the Main Contractor.” (Clause 30(2) of the Main Contract Form). The Employer is entitled to make other deductions from the retention so long as he is entitled to make deductions from the Contract

No interest for retention

  • Retention is held by the Employer. “The Employer's interest in any amounts so retained shall be fiduciary as trustee for the Main Contractor (but without obligation to invest)” (Clause 30(2) of the Main Contract Form). The retention will not have increase for interest upon release

Percentage of Certified Value retained

  1. The percentage of the Gross Valuation that the Employer may retain is called “Percentage of Certified Value Retained” or “Retention Percentage”. “Certified Value” means the Gross Valuation
  2. The percentage is usually 10%
  3. If the Contract Sum includes Prime Cost Sums for Nominated Sub-Contracts, the Percentage of Certified Value Retained would be stated as “10% of the certified value of the Main Contractor’s own work plus the Retention Funds held in respect of Nominated Sub-Contractors”. This means that the retention in respect of the Main Contractor’s own work is to be calculated separately from that of the Nominated Sub-Contractors
  4. Retention in respect of Nominated Sub-Contractors shall be dealt with in accordance with the Nominated Sub-Contracts. The provisions and percentages would usually be similar to the Main Contract
  5. Nominated Supply Contracts usually do not have retention
  6. Nominated Sub-Contractors’ retentions are also held by the Employer

Limit of Retention

  1. When the amount of retention reaches certain limit, the retention would not be increased further. That limit is called “Limit of Retention Fund” or “Limit of Retention
  2. The Limit of Retention is usually 5% of the Contract Sum
  3. If the Contract Sum includes Prime Cost Sums for Nominated Sub-Contracts and Supply Contracts, the Limit of Retention would be stated as “5% of the Contract Sum excluding prime cost sums for Nominated Sub-Contractors’ works (to the nearest one thousand dollars) plus the Retention Funds held in respect of Nominated Sub-Contractors”. This means that the limit in respect of the Main Contractor’s own work is calculated separately from the Nominated Sub-Contractors’ works. The Main Contractor’s own Limit of Retention is calculated based on “the Contract Sum excluding prime cost sums for Nominated Sub-Contracts”. Therefore, this is less than that based on the Contract Sum. However, it should be noted that prime cost sums for Nominated Supply Contracts are not subtracted. This means that the Main Contractor has to share a burden of retention in respect of the value of Nominated Supply Contracts which usually do not have retention

Release of one moiety of retention upon Practical Completion

  1. One moiety” means “half”. One moiety of the retention is to be released upon the issue of the Certificate of Practical Completion and the other moiety is to be released upon the issue of the Certificate of Completion of Making Good Defects
  2. It the time is not too distant or the Main Contractor does not have serious objection, the release of the first moiety of retention can be included in the next Interim Certificate following Practical Completion, otherwise, a special Interim Certificate should be issued to release the retention

Release of balance of retention

  1. The balance of the retention is to be released on the expiration of the Defects Liability Period or on the issue of the Certificate of Completion of Making Good Defects, whichever is the later
  2. It is rare that the Certificate of Completion of Making Good Defects would be issued before the expiration of the Defects Liability Period. Certificate of Completion of Making Good Defects would usually be issued after the expiration of the Defects Liability Period and the completion of the making good of defects discovered prior to the expiration of the Defects Liability Period
  3. A payment certificate is to be issued to release the balance of the retention

Other things to check before release of balance of retention

  1. Release of the balance of the retention does not have to wait till the settlement of the Final Account. However, the Final Contract Sum assessed at that moment should be checked to see if there has been overpayment. If there has been overpayment, part of the balance of the retention may need to be used to off-set the overpayment
  2. The Contract may also specify in the Special Conditions, the Bills of Quantities or the Specification that the release of retention is subject to submission of all guarantees, warranties, bonds, maintenance manuals, operating instructions, as-built drawings, etc. The contract provisions should be checked to ensure compliance before release of the balance of the retention

Final Payment

Final Certificate

  1. Payment of the balance of the Final Account to the Main Contractor is certified by means of the Final Certificate
  2. The Final Certificate is to be issued so soon as is practicable but before the expiration of three months from the latest of the following events:
    • the end of the Defects Liability Period
    • completion of making good defects
    • receipt by the Architect from the Main Contractor of the documents necessary for the preparation of the Final Account
  3. The Final Certificate shall state the balance of money payable to the Main Contractor or special circumstances the money owed by the Main Contractor to the Employer
  4. The Main Contractor may in the end owe money to the Employer due to, without limitation:
    • Overpayment of variations and provisional items
    • Retention being inadequate to cover the Employer’s cost of making good defects not made good by the Main Contractor
    • Deduction for loss and expense arising from defaults of the Main Contractor
    • Deduction for liquidated damages
  5. Subject to any deductions authorized under the Contract, the Main Contractor shall be entitled to receive the amount certified as due from the fourteenth day after presentation of the Final Certificate by the Main Contractor to the Employer
  6. Usually the Final Account shall cover all deductions authorized under the Contract. However, if the Final Account is agreed much earlier than the issue of the Final Certificate, the Final Certificate should take into account of all authorized deductions arising after the agreement of the Final Account. Further deduction from the amount stated as due in the Final Certificate should be a very rare occurrence

Final payment pre-requisites

  • Before the Final Certificate is issued, the following should be done:
    • Issue of Certificate of Completion of Making Good Defects
    • Settlement of Final Account
    • Settlement of extension of time and liquidated damages
    • Submission of proof of previous payments to Nominated Sub-Contractors and Suppliers
    • Submission of warranties and guarantees
    • Submission of as-built records
    • Handover of specified spares, and handover of surplus materials supplied by the Employer and specified to be returned

Final Certificate as conclusive evidence

  1. Final Certificate is not only a certificate of payment but is also a certificate of satisfaction of the work done by the Main Contractor. Clause 30(7) of the Main Contract Form states that “Unless a written request to concur in the appointment of an arbitrator shall have been given under clause 35 of these Conditions by either party before the Final Certificate has been issued or by the Main Contractor within fourteen days after such issue, the said certificate shall be conclusive evidence in any proceedings arising out of this Contract (whether by arbitration under clause 35 of these Conditions or otherwise) that the Works have been properly carried out and completed in accordance with the terms of this Contract and that any necessary effect has been given to all the terms of this Contract which require an adjustment to be made to the Contract Sum, except and insofar as any sum mentioned in the said certificate is erroneous by reason of any of the following:
    • Fraud, dishonesty or fraudulent concealment relating to the Works, or any part thereof, or to any matter dealt with in the said certificate
    • Any defect (including any omission) in the Works, or any part thereof which reasonable inspection or examination at any reasonable time during the carrying out of the Works or before the issue of the said certificate would not have disclosed
    • Any accidental inclusion or exclusion of any work, materials, goods or figure in any computation or any arithmetical error in any computation
  2. In England, where the wordings of the equivalent clause in the standard form of contract are different and where the consumer protection extends to subsequent buyers and occupiers of the buildings, the Final Certificate is no longer final and conclusive evidence that the Works have been properly carried out and completed. The Main Contractor is not completely released by the Final Certificate

Advance Payments 预付款 and Deposit Payments

Meaning

  1. Advance payment or deposit payment is a portion of the Contract Sum to be paid upon the award of the Contract as a security for the Contract and to facilitate the Contractor to procure materials and to cover his early expenses
  2. Both terms usually mean the same thing for everyday use. However, there can be some important difference between deposits payments and advance payments in some contracts. For some sales contracts, deposit is a consideration for securing the formal execution or further performance of the contract. If the buyer fails to proceed, the deposit he paid would be forfeited. If the seller fails to proceed, he has to refund the deposit in double. Advance payments do not have such implied meaning. However, the actual meaning of the two terms would depend on the terms of the individual agreements or contracts
  3. Advance payments in the following discussions include deposit payments

Advance payments not preferred by Employer

  1. Normal progress payments do not provide for advance payments or deposit payments or advance payments
  2. Advance payment is an overpayment from the point of view of the Employer, and the overpayment would possibly exists until the end of the Contract, depending on the terms of recovering the advance payments in subsequent payments

Situation where advance payments are adopted

  1. Advance payments are usually required by suppliers or contractors for sales contracts, lift and escalator contracts, fitting out contracts, minor contracts of short durations, contracts in Mainland China
  2. Advance payments are also appropriate for contracts which involve substantial up-front expenditure before materials are delivered to site

​Terms of payment with deposit

  1. Terms of payment in the form of “10% deposit upon commencement, 85% progress payment, 2.5% retention to be released upon practical completion and 2.5% retention to be released at end of Defects Liability Period ” is quite common for less formal contracts. This means that after payment of the 10% deposit, 85% of the value of work done and materials delivered is to be paid during the course of the Works
  2. An example of payment valuation with deposit is as follows: << to insert >>
  3. A drawback of this format is that retention withheld is not shown. Another drawback is that if there is increase or decrease in the Contract Sum, the increase should not be paid 85% only and the deposit should be reduced in the case of a decrease in the Contract Sum, otherwise fatal overpayment will occur

Recovery of advance payments relative to progress payments

  1. A better way to present the payment valuation is as follows:
  2. Here, the retention is seen. The advance payment is decreasing rather than being fixed
  3. It should be noted that advance payment should not be subject to retention. This is in accordance with the terms of payment mentioned above, and is also conceptually in order
  4. Advance payments made up-front are recovered from subsequent payments. Recovery of the advance payments in subsequent payments is pro-rata to the progress value of work done and materials delivered
  5. Like the example just given above, the amount of advance payments to be reduced can be calculated as:
    • Original advance payment x Gross amount of progress payment / Original Contract Sum
  6. Suppose the original advance payment is equal to 10% of the Original Contract Sum, the amount to be reduced is also equal to 10% of the gross amount of progress payment
  7. If the Contract Sum is increased during the course of the Works, the recovery of deposit will be quicker. However, if the Contract Sum is reduced during the course of the Works, the recovery will be slower and it create leave a portion unrecovered upon Practical Completion. Therefore, this method of calculation still cannot resolve the earlier comments regarding increase or decrease to the Contract Sum. It is advisable that the formula should be revised to relate to the Estimated Final Contract Sum instead of the Original Contract Sum as follows:
    • Original advance payment x Gross amount of progress payment / Estimated Final Contract Sum
  8. No matter which of the above calculations are used, only until the contract works are fully completed will the advance payment be fully recovered. That is why advance payment creates overpayment until Practical Completion or beyond

Faster recovery of advance payments

  1. To avoid leaving the advance payments there for too long, other methods to ensure quicker recovery of advance payments can be used, subject to agreement by both contract parties
  2. A method which would not be welcome by contractors would be full recovery in the second Interim Certificate
  3. Other more moderate methods are:
    • (a) Rate of recovery of advance payments being faster than the progress of work – for example advance payment made equal to 10% of the Contract Sum to be recovered at 20% of the gross amount of progress payment
    • (b) Recovery by instalments at specified number of Interim Certificates, e.g. at the 3rd, 5th and 7th payments
    • (c) Recovery by instalments at Interim Certificates issued after specified days, e.g. x, y, z months after commencement of the Works
  4. The methods described in paragraphs (b) and (c) above are not dependent on the progress of work, it has the advantage of forcing the contractors not to be late in progress, otherwise he may receive less cash inflow due

Bonds

  • Advance payments or deposits are a kind of overpayment before they are fully recovered. If the Contractor or Supplier disappears or repudiates the Contract after receipt of advance payments or deposits, the Employer will have no redress unless measures like the following are implemented:
    • The amount of surety bond to be increased to cover the advance payments or deposit payments and the surety bond to be obtained before payment
    • Advance payment bond to be provided by the Contractor or Supplier as security

Stage Payments

Stage payment

  1. Under a “stage payment” method, the Works are broken down into a number of stages of completion each with a value which will be paid on completion of the relevant stage of the Works. Unlike the normal progress payment method where work done and materials on site are valued and paid for at regular intervals, stage payments are not made at regular intervals but are made only when a certain stage of the Works is completed
  2. For some contracts when the various stages of completion of the Works are defined by means of milestones, the stage payment method is called “milestone payment” method
  3. An example of stage or milestone payment would be:
  4. The value assigned to each stage or milestone should preferably be equal to the value of the work required to achieve the stage or milestone, but they can also be made different purposely

Use of stage or milestone payments

  1. Stage payment method is usually for sales contracts, lift and escalator contracts, fitting out contracts, contracts for single block speculative residential building, minor contracts, civil engineering contracts
  2. Stage payment method would be appropriate for contracts which can have easily defined stages of completion of the Works, for contracts which are of simple nature, for contracts which the Architect would not like to spend time to value the quantities of work and materials delivered on regular basis
  3. Stage or milestone payments are simple to operate if not subjected to Employers’ changes or Contractors’ abuse
  4. Stage or milestone payments are not suitable for complex projects which are prone to design and programme changes
  5. Substantial design and programme changes may render the original terms of payments not workable and require revisions which may be too frequent and laborious that the original intent to save work in carrying out normal valuation based on work done and materials delivery is no longer realized

Problems with stage or milestone payments

  1. If the definitions of stages and milestones should be broad and simple enough to enable easy judgment as to their achievement by visual inspection without requiring detailed valuation
  2. If the definitions of the stages are too rigid, literal interpretation of the definitions may result in non-achievement of the stages and hence non-payment. A definition of “100% completion”, if interpreted literally, would always lead to argument
  3. If the definitions of the stages are too complex thus requiring detailed calculations, the original intent to have a simple payment valuation method is defeated
  4. On the other hand, if the definitions are too loose, the Contractor may take advantage to do work just enough to match the definitions while the value assigned for the stage may in fact have already allowed for greater extent of work

Regular milestone payments

  1. A variance of the stage payment or milestone payment method is to break down the Works into greater number of more detailed stages or milestones and to value the Works at regular intervals. By the regular valuation date, the various stages or milestones are checked to see if they are achieved. The corresponding amounts of those stages or milestones achieved will be included in the current payment certificate. No payment will be made in respect of those not achieved. An example of such milestone payment calculation is as follows:
  2. The time factor is made a factor in making payments

Use of regular milestone payments

  • The advantage of the regular milestone payment method is that valuation is made at regular intervals, such that the Contractor can receive money regularly though smaller in amount as compared to non-regular stage payment method

Problems with regular milestone payments

  1. To enable regular milestone payments to work, the Works have to be broken done into greater number of milestones. Some degree of concurrency would be created. A case may be encountered where the Contractor may be so unlucky that substantial number of milestones are only 95% achieved and therefore he cannot be entitled to payment though the Works if viewed as a whole may be 40% complete
  2. Furthermore, the milestones are usually defined with reference to a programme planned before tendering. The programmed activities planned before tendering without the Contractor’s input may not be realistic when compared to the Contractor’s intended sequence of work after contract award. If there is any further critical variation to the Works or serious disruption to the original programme and logic such that the definitions of the activities can no longer be achievable or can only be achieved until the very late stage of the Works, payments will be seriously deferred. The milestone payment schedule needs to be revised to be realistic or workable The task of making such revision may be similar to that required to do a normal progress valuation. If the milestone payment schedule needs to be constantly revised to be realistic, it may be better to use normal progress method

Time-related milestone payment

  1. A more stringent form of time-related milestone payments is to relate the milestone to a specific calendar day or a specific period after commencement. Failure to achieve the milestone by the prescribed date or within the prescribed period will lead to no payment and payment will have to wait till a subsequent qualifying milestone. An example would be like this:
  2. If Milestone B cannot be achieved by 1/6/2002, no payment will be made. If Milestone C is achieved by 1/9/2002, payment will be made for Milestones B and C, otherwise, depending on the detailed terms of the milestone payment method, no payment will be made for both or payment will be made for Milestone B only

Use of time-related milestone payments

  1. Time-related milestone payments put strong emphasis on achievement in relation to time and greater commitment from contractors towards time
  2. Time-related milestone payment method is suitable for time critical projects

Possible solutions to alleviate problems

  • To alleviate some of the problems with stage or milestone payments mentioned above, the following measures may be adopted:
    • Use realistic definitions for stages or milestones with margin for interpretation
    • Minimize concurrent activities when devising the stages or milestones
    • Minimize post contract changes
    • Include a condition to the effect that in case the cumulative total of stage payments deviates from the value based on work done and materials delivery by a certain percentage then payments will be based on the latter. (Valuation needs not be done every time but would be done only when it is suspected that the deviation is great.)
    • Re-agree the terms when it is consider necessary to better represent the latest situation

Valuation < The following raw scripts not completed >

Valuation format

  • The simplest form of a payment valuation is as follows:

First payment format and procedure

  1. Set up payment valuation pro-forma
  2. Pro-forma to be converted from BQ
  3. Change the BQ file into a file format capable of doing calculations, such as EXCEL, if not already in such file format
  4. If QS software is used for BQ and payment valuation, facilitate the Contractor to use the same software
  5. Group BQ items into suitable groups (e.g. under sub-headings) to reduce the items to be valued
  6. Valuation to be based on percentages rather than based on absolute quantities
  7. Valuation to be based on gross value to-date rather than nett value since last payment
  8. Discuss with the Contractor to agree format and procedure
  9. Agree with the Contractor the principle and calculation methods for paying preliminaries
  10. Running totals to be kept for material delivery
  11. A.I. as authority for paying variations

Payment for preliminaries 开办经营要求 / 措施费的支付

  • Work-related items may be paid as time-related items if clauses similar to the following are included in the Contract:
    • In the event of the amount inserted in respect of an item in this Preliminaries Section for which whole payment or substantially whole payment would normally be made at the outset of the Contract (e.g. insurances) being higher than the amount which the Contractor can substantiate, payment for the excess amount will be effected over the period of the Contract or such prolonged period caused by the Contractor
    • Payments for amounts inserted against time related items in this Preliminaries Section such as overtime, plant, foreman, watching etc. will be effected over the period of the Contract or such prolonged period caused by the Contractor in the same proportion as the value of Contractor's work carried out is to the total value of Contractor's work (excluding Preliminaries)
    • In the event of no amounts being inserted by the Contractor in respect of this Section, no relative payment whatsoever will be included in interim payments

​Wastage

  1. Wastage to be allowed for when considering supply quantities
  2. Flat wastage factor acceptable as a quick method
  3. Wastage factors to be used for different items of work, depending on the difficulty of work

Acceptability of Contractor’s suppliers’ quotations

  1. Quotations not necessarily contracts
  2. Beware of false quotations and contracts
  3. Counter-check required

Effect of BQ rates on value payable of materials on site

  1. Upon analysis of the material supply rates, Candidates should be able to conclude that the contract rates were under-priced
  2. In case of under-priced all-in rates, should the material costs payable be in full, or be a proportion of the all-in rates, or be limited to the costs after deducting the costs to complete?

​Arrive at the value

  1. Systematic
  2. Clear
  3. Reasonable factors
  4. Arithmetically correct calculations

Sample Forms