In our first article on payment under the JCT Standard Building Contract With Quantities 2016 (“SBC”), we looked at the payment procedure included within clauses 4.7 to 4.13. As with most modern standard forms of contract SBC prescribes a specific procedure and timetable that must be instigated and used by both parties, failing which both Employer and Contractor may suffer adversely if they do not comply strictly. This procedure has been driven primarily by the introduction of the Construction Act to ensure that there is an adequate payment regime which ensures fairer and more transparent payment practices for construction contracts.
However, adopting the correct procedure is only part of the process for getting paid. The amount of the Interim Certificate has to be calculated correctly and this is the subject of this article. Clauses 4.14 – 4.15 fall under the heading “Interim Payments – calculation of sums due”, where 4.14 relates to Gross Valuation and 4.15 “Sums due as interim payments”. The remaining clauses of SBC section 4 relate to other matters that are relevant to the calculation of the Interim Certificate. Clause 4.16 relates to Listed Items, 4.17 – 4.19 deals with Retention, 4.20 – 4.24 deal with Loss and Expense while 4.25 – 4.26 details the procedure to be utilised at the end of the project when making the Final Adjustment and Final Payment.
The starting point when establishing the amount of an interim payment is to calculate the Gross Valuation. This is set out in clause 4.14. The SBC, as per most JCT contracts, is rather un-user friendly in that there are lots of cross references to other clauses which makes the form more difficult and unintelligible than it needs to be, especially for those less familiar with its contents. One solution is to have a separate copy of the contents available with those clause numbers referred to in 4.14 highlighted for cross reference purposes. This saves having to flick through the contract every time an unfamiliar clause number is stated.
Clause 4.14 directs that the Gross Valuation is calculated as follows:
|4.14.1: the total value of items subject to Retention
|4.14.2: the total value of items not subject to Retention
|4.14.3: any deductions under clauses 188.8.131.52 and 184.108.40.206
Retention can only be deducted from those items specifically stated in 4.14.1. Hawk, from experience, has seen may valuations where retention has incorrectly been applied as a percentage across all items. This shows the importance of reading the contract carefully and applying the rules correctly.
The work subject to retention is, essentially, the “work properly executed” which includes the “Valuation of Variations and Provisional Sum Work” under clause 5.2.1, the value of Site Materials (cl 220.127.116.11) and Listed Items (cl 18.104.22.168). Variations and Provisional Sums are an article in their own right so will not be covered in detail here, suffice to say when establishing the Gross Valuation you must be familiar with the rules for establishing what a Variation is (link to variation article), as defined by the SBC, and how it is valued.
The amounts calculated under clause 4.14.1 are adjusted in accordance with any fluctuations provisions if they apply or where an Acceleration Quotation has been accepted. It also states the rules for valuing work where an Activity Schedule is the pricing document. Note that there is no definition of what constitutes the “work properly executed” and how this is calculated, so there is an element of subjectivity to the approach. As the contract is a lump sum and with quantities (i.e. a bill of quantities is typically included), work executed is frequently valued as a percentage of the quantities completed. However, it is recommended that accurate progress measurements of all works carried out are undertaken to justify any percentages used and kept on record. These can be useful for a multitude of other purposes not just valuation.
Work not subject to retention includes:
- 14.2.1: where adjustments to the Contract Sum are required under clause 4.4 for various reasons including early use by employer (cl 2.6.2), fees or charges legally demandable (cl 2.21), patent rights (cl 2.23), inspection and tests (cl 3.17) and various insurance related matters under section 6.
- 14.2.2: costs and expenses incurred by Contractor due to his right of suspension.
- 14.2.3: Amounts due for loss and expense and Confirmed Acceptance of a Variation Quotation.
- 14.2.4: certain insurance payments
- 14.2.5: applicable Fluctuations Provisions (other than under 4.14.1)
Amounts that are to be deducted under 4.14.3 include:
- 14.3.1: deductions relating to levels and setting out (2.10), defects (2.38), non-compliance with instructions (3.11), work not in accordance with the Contract (3.18.2), failure to provide evidence of insurance (6.12.2) and breach of Joint Fire Code (6.19.2).
- 14.3.2: Terrorism insurance cover (6.10.2) and applicable Fluctuations Provisions (other than under 4.14.1)
Under clause 4.15 once the Gross Valuation is established, the sum due as interim payment is calculated as follows:
|4.15.1: the Retention under 4.17 to 4.19
|4.15.2: cumulative amount of any advance payments
|4.15.3: sums stated as due in previous Interim Certificates
|4.15.4: any sum paid in respect of any Payment Notice given after the issue of the latest Interim Certificate
The rules for dealing with Listed Items are included in clause 4.16 and generally refer to rules relating to proof of ownership, insurance of the item and if a bond is applicable etc.
In respect of retention, the SBC states that the Employer’s interest in the retention is fiduciary as trustee for the Contractor. In other words the money is not the Employer’s and it cannot use it as if it was it’s own. This clause is frequently amended by bespoke conditions. The key clause to note is 4.17.2 which requires the Architect/CA, or Quantity Surveyor if instructed, to prepare for the Contractor a statement of retention deducted prior to the date of issue of each Interim Certificate.
Clause 4.18 deals with retention bonds and that the retention is not deducted when a retention bond is in place as well as other provisions for dealing with the retention bond.
Clause 4.19 deals with the amount of retention and applicable periods. Effectively the full retention percentage is applied where works have not reached practical completion (cl 4.19.1), whilst half the retention may be deducted when the Works or a section of the Works have reached practical completion but the Certificate of Making Good has not been issued.
Preparing an Interim Certificate is not a straightforward process and there are lots of opportunities for mistakes or errors to be made; inadvertently or otherwise. If a project is falling into difficulties, the monthly valuation frequently becomes the basis around which adjudication proceedings focus. Consequently, it is imperative to follow the contract as closely as possible whilst keeping detailed records of how you have established the amount due as this may become the subject of detailed scrutiny. Hawk cannot stress the importance of using an experienced and qualified quantity surveyor as their knowledge and experience is invaluable in implementing the contract accurately and fairly.
If you have any questions or queries relating to payment under SBC or other forms of contract, please do not hesitate to contact Hawk.
This article does not provide specific commercial or legal advice. It is general information about commercial and legal matters. Nothing in this article is intended to provide legal advice and it should not be relied upon for such purposes. For specific advice regarding a particular project or issue, please contact Hawk Surveying directly.
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 Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009