Comparing the Final Payment Terms

in Different Construction Contracts and Choosing the Best using MADMA

 

FEATURED PAPER

By Deekshith Kumar Shetty

SKEMA Business School

Lille, France & India

 


 

ABSTRACT

Architects proficient service in a construction venture, for the most part takes an extensive stretch, it might contain a while or even quite a long while. Amid such long haul, the venture may happen a plenty of changes which may influent the final payment. Therefore, this paper is established to analyze the issue and provide suggestions by making use of Multi attribute decision making method to compare different standard forms such as the Construction Specifications Institute (CSI), International Federation of Consulting Engineers (FIDIC), Engineers Joint Contract Documents Committee (EJCDC), American Institutes of Architects (AIA), and Consensus Docs. Based on this analysis and comparison, the author recommends the use of final payment certificate and set some specific deadline for the owner to make the final payment. Also, the author suggests that the owner and the contractor shall constitute a waiver of claims after making the final payment.

Keywords: Final Payment, Payment Certificate, Construction, Construction Contract, Owner, Contractor, Sub-contractor

INTRODUCTION

Due to the rapid growth of globalization, a greater number of construction companies start to work in an international atmosphere with people from different part of the world and cultures. As we all know, contract plays a very important role from the beginning of the project till the end, particularly for a global construction as it is more manifold and very much complex to control the whole duration. “Basically, a contract is an agreement between two or more people or entities that creates a legal duty or responsibility.”[1]

One of the most important issue in any construction contract is the payment. Its an issue for both the party making payments and the party receiving them. i.e. Owner and the contractor. “The construction industry has its own rules regarding the payments by way of the Housing Grants, Construction and Regeneration Act (1996) and Part II of the Scheme for Construction Contracts.”[2] “The parties dealing with the construction contracts need to be aware of a number of other issues apply to construction contracts which include retention, loss and expenses, provisional sums, and disputes. In simple words, a construction contract is an agreement whereas the contractor agrees to carry out works for the owner, and in return, the owner agrees to pay the contractor.”[3]

Retention

“Retention is when the owner retains the amount from the interim payments it makes to the contractor, as security for future performance. Retention is basically about 3-5% of the contract sum.”[4]

Loss and Expense

“It is the term used to describe the additional cost incurred by a contractor due to the result of disturbance to the regular progress of works caused either by risks or breaches of contract by the owner.”[5]

Provisional Sums

“Provisional Sums are often included in the contract for the elements of work that has not been fully intended.”[6]

“Provisional sum refers to an amount inserted in the bill of quantities or contract sum analysis, to cover a certain amount of work in a construction contract which cannot be defined accurately, detailed or valued at the time when the tendering documents are delivered by the owner.”[7]

Disputes

Every day, individuals and organizations enter into contracts for building and construction work. Sometimes in the contracts, the disputes arise over payments. “According to Max Wideman, Disputes are disagreements not settled by mutual consent which could be decided by litigation or arbitration.”[8]

  • Interim Application Disputes

“If the interim applications of a sub-contractors are delayed or unpaid, it will suffer serious financial hardship.”[9]

  • Final Account disputes

Most sub-contractors find it difficult to finalize their final account applications. They negotiate for a few months and then come to conclusion by accepting a very low sum.

  • Initial Debt Letters

“Most of the debtors pay on a properly worded and credible letter from a solicitor demanding payment. Initial debt is a bona fide disagreement between the creditor and the committee as to the existence of the debt or the amount owed by the committee.”[10]

More…

To read entire paper, click here

 

Editor’s note: This paper was prepared for the course “International Contract Management” facilitated by Dr Paul D. Giammalvo of PT Mitratata Citragraha, Jakarta, Indonesia as an Adjunct Professor under contract to SKEMA Business School for the program Master of Science in Project and Programme Management and Business Development.  http://www.skema.edu/programmes/masters-of-science. For more information on this global program (Lille and Paris in France; Belo Horizonte in Brazil), contact Dr Paul Gardiner, Global Programme Director paul.gardiner@skema.edu.

How to cite this paper: Shetty, K.S. (2019). Comparing the Final Payment Terms in Different Construction Contracts and Choosing the Best using MADMA, PM World Journal, Vol. VIII, Issue VI, July.  Available online at https://pmworldlibrary.net/wp-content/uploads/2019/07/pmwj83-Jul2019-Shetty-comparing-final-payment-terms-in-construction-contracts.pdf

 


 

About the Author


Deekshith Kumar Shetty

India and France

 

 

Deekshith Kumar Shetty is a MSc student in SKEMA Business School, Lille, major in Project and Programme Management and Business Development (PPMBD). He graduated from Srinivas Institute of Technology, affiliated to Visvesvaraya Technological University, Karnataka, India and holds a bachelor’s degree in Mechanical Engineering. In 2017, he has worked for Plant-Tech Industrial Services Limited, a company which provides specialized maintenance services to refineries, oil and gas industries in India as a Project Coordinator. He speaks fluent English, Hindi, Kannada, Tulu and basic French. He lives in Lille, France now and can be contacted at deekshithkumar.shetty@skema.edu or LinkedIn at https://www.linkedin.com/in/deekshith-shetty-389049136/

 

[1] What is a contract? (Online). Retrieved from https://www.rocketlawyer.com/legal-documents-forms.rl/

[2] Payment in Construction Contract- An overview (Online). Retrieved from https://www.lexisnexis.com/uk/lexispsl/construction/document/391372/56M8-D6T1-F186-34S6-00000-00/Payment-in-construction-contracts%E2%80%94overview

[3] Payment in Construction Contract- An overview (Online). Retrieved from https://www.lexisnexis.com/uk/lexispsl/construction/document/391372/56M8-D6T1-F186-34S6-00000-00/Payment-in-construction-contracts%E2%80%94overview

[4] Payment in Construction Contract- An overview (Online). Retrieved from https://www.lexisnexis.com/uk/lexispsl/construction/document/391372/56M8-D6T1-F186-34S6-00000-00/Payment-in-construction-contracts%E2%80%94overview

[5] Payment in Construction Contract- An overview (Online). Retrieved from https://www.lexisnexis.com/uk/lexispsl/construction/document/391372/56M8-D6T1-F186-34S6-00000-00/Payment-in-construction-contracts%E2%80%94overview

[6] Mina Anis Abdelshahid (December 13, 2016). Final Account Procedures https://www.linkedin.com/pulse/final-account-procedures-construction-projects-mina-anis/

[7] Payment in Construction Contract- An overview (Online). Retrieved from https://www.lexisnexis.com/uk/lexispsl/construction/document/391372/56M8-D6T1-F186-34S6-00000-00/Payment-in-construction-contracts%E2%80%94overview

[8] Max Wideman Comparative glossary. (1987) Source: Various original authors quoted in Project Management Body of Knowledge Glossary of Terms, Project Management Institute http://www.maxwideman.com/pmglossary/PMG_D05.htm

[9] CornerStone- Payment Disputes (Online). Retrieved from https://www.birketts.co.uk/insights/legal-updates/cornerstone-payment-disputes-%E2%80%93-when-is-the-final

[10] How to handle disputed debts? (Online). Retrieved from https://www.fec.gov/help-candidates-and-committees/handling-loans-debts-and-advances/disputed-debts-candidate/