@ENTRUSTY (88-95)

rticleA

1 s t Q u a r t e r 2 0 0 8

Must The Contractor Submit His Interim Payment Claims Before The Superintending Officer Certifies For Payment?

88

Your Contractual Questions Answered

By The Entrusty Group

Entrusty Group, a multi-displinary group of companies, of which, one of their specialisation is in project, commercial and contractual management, has been running a regular contractual questions and answers section for Master Builders members in the Master Builders Journal.

In this instalment of this series, Entrusty Group will provide the answer to another frequently asked question above.

Payments are of major concern to Contractors and Employers. As the duration of the construction

projects are usually long, contract sums involved are large and payments are only progressively paid rather then on delivery, thus the payments are lifeblood of the Construction Industry. In common law and in the absence of any provision in the contract for interim payments during the progress of work, the Contractor would not be entitled to such payment for his work done progressively unless he has fully or substantially completed his contracted work.

Nevertheless, in the present construction industry, almost all construction contracts have claims or payment application and certification provisions, which are usually applied and implemented on monthly or stage payment basis. Interim or progress payment claims are usually prepared by the Contractor and submitted to the Consulting Quantity Surveyor for valuation, which in turn is then submitted to the Architect/Engineer/Superintending Officer (SO)/Project Director (PD) for certification. The Employer is required to pay within a specified period after having received the said interim payment certificate

from the Architect/Engineer/SO/PD, who usually acts as the Contract Administrator of the project.

Before we go further to answering the above question, let us look into the standard form of contract provision for interim payment applications that is commonly used in the Malaysian Construction Industry.

Standard Forms of Construction Contract

Many standard forms of construction contract in Malaysia provide for payment application and certification clauses. The relevant payment clauses in respect of the various conditions of contract in use in Malaysia are: -

● PAM 1998 and PAM 2006 Clause 30 – Certificate and Payment (refer to Flow Chart 1 for PAM 1998 and Flow Chart 2 for PAM 2006)● IEM/JKR Clause 47 – Payment to Contractor and Interim Certificates (refer to Flow Chart 3 for IEM and Flow Chart 4 for JKR)● CIDB Clause 42 – Payment (refer to Flow Chart 5)● JKR PWD Form DB/T (2002 Edition) Clause 50 – Interim Payment (refer to Flow Chart 6)

PAM 1998 Sub-Clause 30.2 and PAM 2006 Sub-Clause 30.1 requires the Contractor to submit sufficient details/particulars to Architect for him to value and ascertain the works (including materials and goods on site) and issue interim certificate for Contractor’s entitlement to payment. The materials and goods on site shall be reasonably, properly and not prematurely delivered with adequate protection against weather or other casualties. PAM 1998 Sub-Clause 30.2 provides that the Architect shall have the discretion to make the interim valuation whenever he considers necessary for issuing the interim certificate.

The following Flow Chart 1 details the procedures of the interim payment process under PAM 1998 form of contract.

However, PAM 2006 Sub-Clause 30.1, which has been revised from PAM 1998, states that the Interim Certificate is to be issued within 21 days from the Contractor’s submission of their interim payment application. In addition, PAM 2006 clearly provides that in the event the Contractor fails to submit the payment application, it shall be deemed to be a waiver

rticleA

1 s t Q u a r t e r 2 0 0 8

89

Flow Chart 1: PAM 1998 Form Of Building Contract Clause 30 - Interim Payment Process

Flow Chart 2: PAM 2006 Form Of Building Contract Clause 30 - Interim Payment Process

START

Contractor submits details and particulars to Architect during the Period of Interim

Certificate stated in the Appendix

Architect ascertains the amount due to the Contractor

Architect corrects or modifies previous certificate in next

certificate

Architect ascertains:(a) the total value of works

properly executed including those executed by sub-contractors

(b) the total value of materials and goods including:-(i) delivered to or

adjacent to the Works(ii) delivered up to and

not more than 7 days before the date of certificate

(iii) reasonably, properly and not prematurely brought to or adjacent to the Works

(iv) adequately protected against weather or other casualties

Architect issues Interim Certificate with a copy to the Employer

Contractor may serve default notice

Contractor proceeds with the Works

Notice of determination by contractor

Carry out provisions of Clause 26.2

END

No

Yes

No

Yes

Yes

No

Error or discrepancy in the previous certificate detected

Employer pays within the Period of Honouring Certificate stated in the

Appendix

Employer stops default in 7 days

START

Contractor submits details and particulars to Architect during the Period of Interim

Certificate stated in the Appendix

Architect ascertains the amount due to the Contractor

Error or discrepancy in the previous certificate detected

Architect corrects or modifies previous certificate in next

certificate

Architect ascertains:(a) the total value of works

properly executed including those executed by sub-contractors

(b) the total value of materials and goods including:-(i) delivered to or

adjacent to the Works(ii) delivered up to and

not more than 7 days before the date of certificate

(iii) reasonably, properly and not prematurely brought to or adjacent to the Works

(iv) adequately protected against weather or other casualties

Architect issues Interim Certificate with a copy to the Employer within 21 days from receipt Contractor’s Application

Employer pays within the Period of Honouring Certificate stated in the

Appendix

Contractor may serve default notice


Notice of determination by contractor within 10 days

Carry out provisions of Clause 26.4 & 26.6

END

No

Yes

No

Yes

Yes

No

Employer stops default in 14 days

rticleA

1 s t Q u a r t e r 2 0 0 8

90

Flow Chart 3: IEM Form Of Building Contract Clause 47 - Interim Payment Process

of his contractual entitlement for that interim certificate, and the Architect may at his discretion, issue or not issue the interim certificate under the circumstances. After the issuance of the Certificate of Practical Completion, interim certificate shall be issued as and when further amounts are ascertained by the Architect as payable to the Contractor by the Employer.

Flow Chart 2 details the procedures of the interim payment process under PAM 2006 form of contract.

Similarly with PAM Form of Contract, IEM/JKR Clause 47 (a) to (d) deals with the interim payment claims, certifications and payments on a monthly basis. IEM/JKR Clause 47 (a) states that when the Contractor has executed the Works including the material on site has reached the minimum value requirement as stated in the Appendix for the First Interim Certificate, the SO shall make the first valuation of the Works, for which is the first claim can be less or more than a month. For subsequent claims, the amount must also exceed the minimum amount as stated in the Appendix, whereby the claims can be on monthly basis or more than a month (at the discretion of the SO). The Engineer/SO is required to make a fair valuation of works properly executed and 75% of the value of unfixed material and goods on-site and issue Interim Certificate to the Contractor for payment by Employer/Government. It is implied that the Engineer/SO is to value the executed works and issue an Interim Certificate on a monthly basis. IEM/JKR Sub-Clause 47 (b) requires the SO to issue an Interim Certificate within 14 days from the date of valuation.

The following Flow Chart 3 and Flow Chart 4 detail the procedures of the interim payment process under IEM and JKR respectively.

For CIDB Form of Contract, the Sub-Clause 42.1 requires the Contractor to submit a Statement of Work Done (SoWD), which would incorporate the work properly executed (subject to any agreement as to stage payment stipulated in the Appendix), any items priced in the contract including Construction Plant, Temporary Works, percentage (as stated in the appendix) of value of equipment, material or goods delivered for incorporation in the Works and any amount due to the Contractor under an Option Module.

Sub-Clause 42.2 (a) requires that the S.O. shall subject to sub-clause 42.2 (c) and (d) issue an Interim Certificate within 21 days from receiving SoWD. As provided under sub-clause 42.2 (c), the Interim Certificate must be issued at regular interval (as stated in the Appendix). After the Practical Completion of the Works, the SO may issue Interim Certificate as and when he ascertains further amounts due to the Contractor. Sub-Clause 42.2 (d) provides that the SO is not required to issue an Interim

START

Contractor submits claims to Engineer when the value of executed work including delivery of materials had reached

the sum referred to in the Appendix

Engineer makes the first* valuation of the Works

Engineer makes fair valuation of the Works and materials delivered each succeeding month, provided the total value is not less

than the sum referred to in the Appendix

Within 14 days from the valuation, Engineer issues Interim Certificate stating the amount die to the Contractor


Within the Period of Honouring Interim Certificate stated in the Appendix / Within 30 days if the issues of Interim Certificate, Employer makes

payment to the Contractor

Amount of Interim Certificate includes:-(i) Estimated total value of work done(ii) 75% of value of unfixed materials up to

and including date of valuation

Less(iii) Installment previously paid(iv) Retention Fund

Contractor gives notice of default under Clause 52 (a)

Contractor terminates the Contract under Clause 52

Recover monies outstandingusing Clause 55

END

YES

NO

rticleA

1 s t Q u a r t e r 2 0 0 8

91

Flow Chart 4: JKR Form Of Building Contract Clause 47 – Interim Payment Process

Certificate if the amount claimed or the amount certified is less than the minimum amount stated in the Appendix.

The following Flow Chart 5 details the procedures of the interim

payment process under CIDB form of contract.

JKR D&B/T Clause 50 deals with interim payment. The Interim Payment shall be made as set out in the Appendix 2 drawn up by

mutual agreement of the contracting parties. However, the PD reserves the right to make payment according to the value of work done or Payment Schedule. Sub-Clause 50.2 requires the Contractor to submit to the PD written application for Interim

Contractor returns Letter of Acceptance of Tender

START

Contractor deposits relevant insurance policies

Contractor deposits the Performance Bond

Total value more than the sum referred to in Appendix

Within 14 days from the valuation, S.O. issues Interim Certificate stating the amount due to the

Contractor

No Interim Certificate shall be issued

Contractor executed works including delivery of materials

S.O. makes valuation of the Works executed and materials delivered every month

Amount of Interim Certificate includes:-(i) Estimated total value of work done(ii) 75% of value of unfixed materials up to and including date of valuationLess(iii) Installment previously paid

Within the Period of Honouring Interim Certificate stated in the

Appendix / Within 30 days of the issue of Interim Certificate, Government

makes payment to the Contractor


END

Dispute or differences arise

Refer Settlement of Dispute Clause 54.0

No

No

Yes

No

No

Yes

Yes

No

Yes

rticleA

1 s t Q u a r t e r 2 0 0 8

92

STA

RT

Cont

ract

or s

ubm

its to

th

e S.

O. a

t the

inte

rval

s sp

ecifi

ed in

App

endi

x as

“Sta

tem

ent o

f Wor

k D

one”

“Sta

tem

ent o

f Wor

k D

one”

sh

all c

onta

in:

(i)

valu

e of

wor

ks p

rope

rly

exec

uted

(ii)

item

s se

para

tely

pric

ed in

th

e Co

ntra

ct(ii

i) pe

rcen

tage

of v

alue

of

equi

pmen

t, m

ater

ials

de

liver

ed to

Site

(iv) a

mou

nt e

ntitl

ed(v

) am

ount

due

und

er O

ptio

n M

odul

e

S.O

. Sha

ll no

tify

the

Cont

ract

or in

writ

ing

with

in

21 d

ays

of re

ceiv

ing

“Sta

tem

ent o

f Wor

k D

one”

S.O

. at h

is d

iscr

etio

n de

cide

s no

t to

issu

e In

terim

Cer

tifica

te

Tota

l am

ount

Co

ntra

ctor

sta

ted

in

“Sta

tem

ent o

f Wor

k D

one”

gre

ater

than

th

e m

inim

um a

mou

nt

spec

ified

in th

e A

ppen

dix

Tota

l am

ount

w

hich

the

S.O

. co

nsid

ers

Cont

ract

or

to b

e en

title

d to

gr

eate

r tha

n th

e m

inim

um a

mou

nt

spec

ified

in th

e A

ppen

dix

Cont

ract

or is

en

title

d to

som

e re

med

y w

here

the

Empl

oyer

is li

able

. Cl

ause

42.

12

S.O

. iss

ues

Inte

rim

Cert

ifica

te to

the

Empl

oyer

(c.c

to th

e Co

ntra

ctor

) sta

ting

amou

nt a

scer

tain

ed

with

in 2

1 da

ys o

f re

ceiv

ing

“Sta

tem

ent

of W

ork

Don

e”

Inte

rim C

ertifi

cate

sha

ll in

clud

e:(i)

Th

e am

ount

Con

trac

tor i

s en

title

d to

Less

(ii)

Rete

ntio

n M

onie

s(ii

i) A

ny a

mou

nt p

revi

ousl

y st

ated

(iv) A

ny a

mou

nt p

revi

ousl

y ce

rtifi

ed to

be

dedu

cted

S.O

. may

mak

e an

y co

rrec

tion

or

mod

ifica

tion

on e

rror

in

prev

ious

cer

tifica

tes

Aft

er is

suan

ce o

f Ce

rtifi

cate

of P

ract

ical

Co

mpl

etio

n, In

terim

Ce

rtifi

cate

sha

ll be

is

sued

as

and

whe

n fu

rthe

r am

ount

s ar

e as

cert

aine

d by

the

S.O

Empl

oyer

pay

s th

e Co

ntra

ctor

with

in 2

1 da

ys/t

he P

erio

d of

H

onou

ring

Cert

ifica

te

stip

ulat

ed in

the

App

endi

x

Opt

ion

Mod

ule

E / P

aym

ent B

ond

appl

icab

le

Inte

rest

in

resp

ect o

f the

un

paid

am

ount

ac

crue

d

Empl

oyer

s pa

ys c

ertifi

cate

an

d in

tere

st

Empl

oyer

’s fa

ilure

to

pay

for f

urth

er

14 d

ays

Cont

ract

or

give

s no

tice

of h

is

inte

ntio

n to

su

spen

d w

ork

Empl

oyer

’s fa

ilure

to m

ake

paym

ent a

fter

fu

rthe

r 14

days

Cont

ract

or s

uspe

nds

who

lly /

part

ly /

redu

ces

the

fate

of t

he W

ork

prog

ress

Cont

ract

or

prot

ect a

nd

secu

re th

e W

orks

dur

ing

susp

ensi

on

Cont

ract

or

entit

led

to

Exte

nsio

n of

Ti

me

Cont

ract

or

entit

led

to L

oss

and

Expe

nse

Cont

ract

or

subm

its L

oss

and

Expe

nse/

EoT

clai

ms

S.O

. eva

luat

es

clai

ms

Add

to C

ontr

act

sum

Empl

oyer

’s fa

ilure

to p

ay

subs

eque

ntly

Cont

ract

or li

fts

susp

ensi

on

Refe

r Set

tlem

ent o

f D

ispu

tes

Clau

se 4

7D

eter

min

atio

n su

bjec

t to

Clau

se 4

5.1

(b)

Refe

r Not

ice

of

defa

ult C

laus

e 45

.1 (a

)Co

ntra

ctor

reco

vers

th

e un

paid

am

ount

fr

om th

e Bo

nd

Cont

ract

or p

roce

eds

the

Wor

ks

END

YES

NO

NO

YES

YES

YES

YES

YES

YES

YES

YES

NO

NO

NO

NO

Flo

w C

hart

5: C

IDB

Form

Of B

uild

ing

Cont

ract

Cla

use

42 –

Inte

rim P

aym

ent

Proc

ess

rticleA

1 s t Q u a r t e r 2 0 0 8

Brief Description of Relevant Contract Clauses

Contract Clauses

PAM 2006

PAM 1998 JKR 203A

IEM1989

CIDB 2000

FIDIC 4th Edition

The Contractor shall submit a payment application at the Interim Claim Interval stated in the Appendix. 30.1 30.2 47 (a) 42.1 50.2

The Architect / Engineer / Superintending Officer shall within the stipulated period after the Contractor submitted Interim Payment Claims issues the Interim Certificate.

30.2 within 21

days

Architect discretion

14 days after Valuation

42.2(a) within

21 days

50.3 (a)14 days after application

The Employer has to make the payment to the Contractor within stipulated period after the Architect / Engineer / Superintending Officer issued the Interim Payment Certificate.

30.2 30.3 47 (d) 42.9 (a) 50.3 (c)

Interest imposed on Employer for late payment. 30.17 - - 42.9 (b) -

Flow Chart 6: JKR PWD DB/T Form Of Building Contract Clause 50 – Interim Payment Process

Payments showing the amounts due under the contract, variations, expenditure of provisional sums and material on site for use in the Works.

Where Payment Schedule is included in the Contract, PD shall issue the Interim Certificate within 14 days upon receipt of Contractor’s application for Interim Payment. Where no Payment Schedule is included in the Contract, the Interim Payment shall be made by the Government based on PD’s monthly valuation of the Works properly executed and any goods or unfixed materials delivered to Site intended for use in the Works.

Flow Chart 6 details the procedures of the interim payment process under JKR D&B/T form of contract.

Table 1 shows the relevant payment clauses in the standard forms of construction contract.

Whilst most of the above stipulated forms of contract provided for similar words ‘...... shall on submission of payment application ........’, which make it a mandatory obligation on the Contractor to submit his payment application for the Architect/Engineer/SO/PD consideration and certification. Whether such obligation

START

Contractor executed works including delivery of materials

Contractor submitpayment application

PD shall issue a notice to Contractor with reasons to the effect

Payment Schedule included in Appendix 2 of the Contract

Contractor executed works and payment application in accordance with Contract

PD do valuation of the executed Works (including

materials delivered) on monthly basis and the total value shall be more than

the sum referred to in Appendix 1

PD shall issue interim certificate within 14 days upon received

Contractor payment application

PD shall issue Interim Certificate within 28 days from the Contractor’s payment application stating the amount due to the Contractor

Within the Period of Honouring Interim Certificate

stated in the Appendix / Within 30 days of the issue of Interim Certificate Government makes

payment to the Contractor

Dispute or differences arise


Refer Settlement of Disputes Clause 56.0

END

No

No

Yes

Yes

No

Yes

No

Yes

Table 1

93

rticleA

1 s t Q u a r t e r 2 0 0 8

1 Ir. Harbans Singh K.S., Engineering and Construction Contracts Management – Post-Commencement Practice, Chapter 3 – Payments, LexisNexis (Singapore) Pte. Ltd., 2003.

Kuala Lumpur high rise offices

is indeed a mandatory requirement is debatable, except when it is expressly provided for as condition precedent, as in the case of PAM 2006 Clause 30.1.

According to Ir. Harbans Singh K.S.1, ‘...... non-compliance to such requirements is not fatal to the contractor’s entitlement, since the employer is obliged, in the absence of such breaches anyway to proceed with the discharge of his side of the bargain.’

CONCLUSION

In normal practice, the Architect/Engineer/SO/PD usually prepares the Interim Certificate only after the Contractor has submitted their payment application. Whether the

Contractor has to submit their payment application prior to the Architect/Engineer/SO/PD issuance of the interim certificate at the interval period as prescribed in the Appendix of the Conditions of Contracts depends on different forms of Conditions of Contract.

PAM 2006 Form of Contract make it a condition precedent in that the Contractor must submit their payment application to the Architect/SO, otherwise it is deemed a waiver of his contractual entitlement for that interim certificate. Nevertheless, the Architect may issue the interim certificate at his discretion, depending on the circumstances.

PAM 1998, CIDB and JKR PWD Form DB/T Forms of Contract require the Contractor to submit their payment application to the Architect/PD. However, there is no provision stating that the failure of the Contractor to do so will cause the Contractor to waive his contractual entitlement for that interim certificate. Thus, it is still depends on the Architect/SO/PD’s discretion to make an interim valuation whenever he considers necessary for ascertaining the amount due in an interim certificate.

IEM/JKR Forms of Contract do not have any provisions that the Contractor must submit his payment application for the Engineer/SO to

94

rticleA

1 s t Q u a r t e r 2 0 0 8

The Entrusty Group includes Entrusty Consultancy Sdn Bhd (formerly known as J.D. Kingsfield (M) Sdn Bhd), BK

Burns & Ong Sdn Bhd (a member of the Asia wide group BK Asia Pacific) , Pro-Value Management, Proforce Management Services Sdn Bhd / Agensi Pekerjaan Proforce Sdn Bhd and International Master Trainers Sdn Bhd. providing project, commercial and contractual management services, risk, resources, quality and value management, recruitment consultancy services and corporate training programmes to various industries, particularly in construction and petrochemical, both locally and internationally.

For further details, please visit website: www.entrusty.com. or contact HT Ong at 22-1& 2 Jalan 2/109E, Desa Business Park, Taman Desa, 58100 Kuala Lumpur, Malaysia. Tel: 6(03)-7982 2123 Fax: 6(03)-7982 3122 Email: [email protected].

Entrusty Group provides 30 minutes of free consultancy (with prior appointment) to MBAM members on their contractual questions. The Group also provides both in-house and public seminars/workshops in its various areas of expertise.

In the next issue of the MBAM journal the article will answer the question on ‘Is determination of employment and termination of contract the same in meaning and implications?’

REFERENCE/BIBLIOGRAPHY

1. Malaysian standard forms of contract: -i. PAM Form of Building Contract (1998 & 2006) ii. JKR/PWD Form of Contract (203A - Rev 10/83)iii. IEM Conditions of Contract for Works Mainly of Civil Engineering

Construction (1st Edition – 1989) iv. CIDB Form of Contract for Building Works (2000 Edition)v. JKR PWD/ Standard Form of Design & Build/Turnkey Contract (PWD

Form DB/T) (2002 Edition)2. Sr. Ong Hock Tek, Payment Claims, Valuations, Certification and Final

Account, one day seminar organised by Entrusty Management Sdn. Bhd. and B.K. Burns & Ong Sdn. Bhd., 2 November 2004.

3. Ir. Harbans Singh K.S., Engineering and Construction Contracts Management – Post-Commencement Practice, Chapter 3 – Payments, LexisNexis (Singapore) Pte. Ltd., 2003.

4. Vincent Powell Smith, The Malaysian Standard Form of Building Contract, Clause 30 – Interim Certificate and Valuation, Malaysia Law Journal Sdn. Bhd., 1990.

5. Ling Tek Lee, Natural Justice in Adjudication, Chapter 2 – The Dilemma in the Construction Industry, University Technology Malaysia, March 2006.

do the valuation and then issue the interim certificate. However, the Engineer/SO is required to make the first valuation when the Contractor has executed the Works (including material on-site) have reached the minimum value as stated in the Appendix of the said form of contract. Subsequently, the Engineer/SO is also required to do the valuation and issue an Interim Certificate when the Works (including materials on site) have exceeded the minimum amount stated in the Appendix either monthly or more than a month. Failure of the Engineer/SO to issue the Interim Certificate is a breach of conduct for which the Employer/Government can be liable under the Contract.

Although certain standard forms of contract do not expressly require the Contractor to submit their payment application, they impose such duty on the Contract Administrator (Architect/Engineer/SO/PD) to initiate the payment process. It is therefore pertinent that the Contractor is proactive and in his interest, to make the necessary payment application regularly and timely, as it will definitely assist the Contract Administrator to expedite the payment process and in turn for the Employer to fulfil his payment obligation, accordingly.

95

Payment calculations

@ENTRUSTY (88-95)

Documents

Transcript of @ENTRUSTY (88-95)