HKIS QSD PQSL Series Payment Valuation and Post-Contract Cost Monitoring

Transcription

1 HKIS QSD PQSL Series 2013 Payment Valuation and Post-Contract Cost Monitoring by Kenneth Poon FHKIS; FRICS; RPS Global Construction Consultants

2 Payment Valuation 1. Introduction Payment to contractors under most standard forms of construction contracts are normally under interim payments either based on monthly intervals or milestones (exceptions are contracts under PPP or PFI arrangement) Interim payments are vital for the cash flow of Contractors. Accurate assessments are therefore very important. Delay in payment will also amount to a fundamental breach of contract on the part of the Employer

3 Payment Valuation (Cont d) 2. Headings of Payment The normal headings of payment would be : a) Preliminaries incurred b) Works done c) Variations done d) Works carried out by NSC or NS e) Materials delivered on site and not yet installed f) Materials delivered off site (if allowed) g) Fluctuations to date (if allowed) h) Assessed loss and expenses claim

4 Payment Valuation (Cont d) 2. Headings of Payment (Cont d) Deductions shall be made for the following items : a) Retention b) Ascertained defective works to be rectified c) Contra-charges for works done by others on behalf of contractor d) Liquidated Damages to date (if any)

5 Payment Valuation (Cont d) 3. Carrying Out the Valuation (under the New Standard Form of Building Contract 2005) Contractor to submit an application to the Q.S. not less than 14 days before date on which the Interim Certificate is due to be issued (clause 32.1 (4)) Q.S. to make an interim valuation of the work in progress and submit his valuation to the Architect not less than 7 days before the Interim Certificate is due to be issued (clause 32.1 (5)) Note that the Q.S. will normally have only 7 days to do his valuation

6 Payment Valuation (Cont d) 4. Site Visits The contract requires the Q.S. to allow the Contractor to have the chance to be present when doing any site measurements and assessments Joint site visits with the Contractor for interim payment valuations are therefore necessary when work-in-progress is inspected Progress of work on site as seen on the date of valuation should be properly recorded. Any measurements taken jointly with the Contractor should be initiated by both parties

7 Payment Valuation (Cont d) 5. Valuation of Preliminaries Amounts for preliminaries items would normally be broken down into 3 categories according to the nature of the item : 1) Installation cost 2) Running/Maintenance cost 3) Removal cost The breakdown of each item can be discussed and agreed with the contractor at the start of the project.

8 Payment Valuation (Cont d) 5. Valuation of Preliminaries (Cont d) When there are signs that the construction period might be prolonged, suitable adjustments to the valuation method must be made as soon as possible to maintain a fair valuation of the cost that should be paid

9 Payment Valuation (Cont d) 6. Valuation of Materials on Site Materials on Site are valued by visual inspection and physical counting or measurements on site. When carrying out such valuations, the following points should be observed : 1) Do not blindly adopt the material prices given in the material invoices. Compare the price against the B.Q. rate and if it is disproportionately high, make suitable adjustments to avoid over-payment. 2) When using delivery notes to ascertain the quantities in lieu of detailed physical counting/measurement, remember to deduct the quantities already installed (plus wastage) and paid for under works done.

10 Payment Valuation (Cont d) 6. Valuation of Materials on Site (Cont d) 3) Compare the quantities on site against the quantities required for the to-be-completed works. 4) Do not bring forward materials on site assessed in previous payments to the new payment. The materials on site assessment for every payment valuation must be done from scratch every time. 5) Note that materials means materials to be incorporated into the permanent works. Plant and materials for temporary works are therefore not included. In such case, timber for formwork cannot be calculated as materials on site.

11 Payment Valuation (Cont d) 7. Payments to Nominated Sub-Contractors (NSC) and Nominated Suppliers (NS) Payments to NSC and NS should be carried out in the same manner as that for the Main Contract works The Q.S. should notify the NSC/NS on the amounts due to them (if any) in each Interim Valuation Payment issued. The NSC/NS can request the Employer to pay direct if they do not receive the payment from the Main Contractor Alternatively, the Q.S. can request the Main Contractor to give documentary proof that he has paid the NSC/NS according to the Interim Payment Certificates

12 Payment Valuation (Cont d) 8. Other Points The following points would be worth noticing : If a Contractor fail to submit their performance bond, the Employer may deduct the full bond amount (not the cost to provide the bond) from the interim payment valuations until such bond is provided The SFBC does not explicitly state that the contractor s submission of an application is a pre-requisite condition for issue of interim payment. The Q.S. should therefore prepare his interim payment valuation not withstanding whether an application is received or not

13 Payment Valuation (Cont d) 8. Other Points (Cont d) The Contractor s entitlement to assessed loss and expenses is not subject to retention (clause 32.4 (a)) After the Works are substantially completed, interim certificates shall only be issued when further amounts are, in the Q.S. opinion, due to the Contractor (clause 32.1 (3)) If the project is not completed by the Date or Extended Date for completion, liquidated and Ascertained Damages (LAD) may be offset from the valuation amount provided certain requirements have been complied (e.g. the Architect has issued the Failure to complete certificate). If LAD is not offset, a remark reserving the right to do so later should be expressly made

14 Post Contract Cost Monitoring 1. Introduction There are 3 main factors that may affect the total cost of a construction project during the post-contract stage : Design changes variations to the design, quality or quantity of the works; Supplementary information design of portions of the works that were not yet designed/completed; additional detailing of already designed works etc. External factors inflation, new government regulations, adverse weather, accidents etc.

15 Post Contract Cost Monitoring (Cont d) 2. Financial Statements One of the prime responsibilities of a Q.S. is to track down the cost of a construction project and to raise alarms when there may be potential budget over-runs The Financial Statements is the tool for the Q.S. to keep tracle of the continuously changing total cost of the project. Financial statements should therefore be continuously update notwithstanding whether the Employer requires it to be submitted or not

16 Post Contract Cost Monitoring (Cont d) 2. Financial Statements (Cont d) Financial Statements will normally have the following headings : 1) Provisional Sum for Contingencies. This is the built-in buffer for expenses to be spent in the construction stage. 2) Adjustment of Prime Cost Sums. A summary of the cost implication of NSC, NS and Direct Contractors. 3) Adjustment of Provisional Quantities, Provisional Sums and P.C. Rates. Preliminary assessment of the Supplementary information mentioned above.

17 Post Contract Cost Monitoring (Cont d) 2. Financial Statements (Cont d) 4) Variations. Preliminary assessments of Architect s instructions, site instructions etc. design changes. 5) Confirmation of Verbal Instruction (CVIs). Normally will become valid instructions if not rejected by the Architect within 7 days. Some Contracts have deleted such automatic validation. However, these should still be accounted for as the Architect can always confirm them at a later date. 6) Contractor s loss and expenses claims. Preliminary assessments of submitted or to-be-submitted claims that are known to the Q.S.

18 Post Contract Cost Monitoring (Cont d) 2. Financial Statements (Cont d) 7) Fluctuations. Assessment of the total fluctuations reimbursement to be paid under the contract (not only the fluctuations up to date). 8) Allowance for future variations. This is the most difficult part in the preparation of the Financial Statements to assess the quantum of future design changes that are being discussed but not yet confirmed close communication should be maintained with the Architect and the Project Manager to establish an accurate figure for this item.

19 Post Contract Cost Monitoring (Cont d) 3. Other Controls One of the most recent controls with an aim to enhance postcontract cost control is the use of Architect Instruction Preapprovals (A.I.P.). It normally works as follows : 1) When the Architect wants to issue an instruction, he will first submit an A.I. Request together with the intended scope and drawings. 2) The Q.S. shall, within 5-7 days, carry out a preliminary estimate of the financial effect of the instruction and report to the Project Manager. 3) The Project Manager shall consider and if satisfied, will approve the Architect to issue the instruction or reject his request.

20 Post Contract Cost Monitoring (Cont d) 3. Other Controls (Cont d) Note the following : The A.I.P. system is a pro-active manner to control the cost of a construction project and should be given its merits However, as there is no demarcation between (1) design changes changes which the Architect can control; and (2) supplementary information changes which the Architect has less control, the number of A.I.P.s become enormously large, making the system difficult to keep up with the works on site

21 Post Contract Cost Monitoring (Cont d) 3. Other Controls (Cont d) Note the following : The Q.S., in order to keep up with the pace of A.I.P.s, must develop skills to carry out preliminary assessments of instructions in the A.I.P. stage (just like preliminary cost estimates vs priced bills of quantities). Such skills are also required if we are to keep our Financial Statements always up to date

22 Post Contract Cost Monitoring (Cont d) 4. When to do A.I. Assessment and Re-measurements for the Final Account? The figures in the Financial Statements are preliminary assessments done within short periods of time Such figures should be replaced by accurate figures based on detail assessment and measurements as soon as possible after the instructions/supplementary information are issued

23 Post Contract Cost Monitoring (Cont d) A.I. Assessments Early assessment of A.I.s have the following advantages : 1) A lot of A.I.s do not contain the full information. Early assessment will allow the Q.S. to clarify the actual extent of work involved, making it easier to agree with the Contractor on its value 2) Early agreement would make the Financial Statement more accurate for its purpose

24 Post Contract Cost Monitoring (Cont d) Remeasurement Provisional Quantities/Sums should be remeasured once the first set of construction drawings are made available Do not wait for the construction works to be completed, trying to based your remeasurement on the As completed drawings

25 Post Contract Cost Monitoring (Cont d) Remeasurement Early remeasurement has the following advantages : 1) The remeasured amount will prove whether the original allowed quantities/sum was sufficient or not. 2) If there is a cost over-run, early remeasurement would allow time for the Employer to take measures to minimise the effect. 3) If there is a large cost-saving, early indication of the remeasured value to the Contractor will allow him to carry out cost control on his subcontractors to ensure his expense will not exceed what he will receive. This will help in the future finaliszation of the Final Account.

26 Post Contract Cost Monitoring (Cont d) 5. Conclusion Post contract cost monitoring is a monitoring process not a reporting process To monitor, the Q.S. must be proactive and advise the Employer early enough so that he can take actions that he deem necessary reporting the situation after anything can be done is not monitoring

27 Thank You All. Any Questions?