No one can argue the many benefits of making timely payment of contractors’ interim payment certificates on the delivery of construction projects, nevertheless, the purpose of this article will be limited to the calculation of financing or interest charges that contractors will be entitled to receive for delayed payments. Those financing charges are usually considered as additional expenses that the project owner did not account for when the project’s business case was initially prepared and for which the project was approved and selected for delivery. For projects that are financed by funding agencies including banks and other financial institutions, those agencies will be reluctant to allow their funding to be used for payment of financing charges to contractors.
Payment for delayed payment finance charges can prove to be of great challenge to many public and private sector project owners. For public sector project owners, this would require requesting the approval for additional budget to secure the additional funding for the project. On the other hand, for private project owners, not only they would need to seek additional project financing but this additional cost would have direct impact on the project’s return on investment (ROI). Of course, the impact is not limited to the finance charges but also includes the additional costs and delays associated with the contractor’s right to slowdown or suspend the works and terminates the contract should payments are not made within the payment period set in the contract agreement.
For the purpose of this article, it is assumed that the FIDIC Red Book (1999 edition) is the form of agreement that will be used on construction projects. This is the most commonly used construction contract in the Gulf Corporate Council (GCC) countries region. Under the Red Book Clause 14.8 Delayed Payment, the Contractor may claim financing charges if he does not receive payment in accordance with Sub-Clauses 14.7 and 14.3. Payment is due within 56 days of the issue of an interim payment certificate (IPC) by the Contractor to the Engineer. Contractors are entitled to receive financing chargers compounded monthly on the amount unpaid for the period of delay. These financing charges are calculated at an annual rate equivalent to three per cent above the discount rate of the Central Bank of the country of the currency of payment. If payment is not made within the 56-day payment period, the contractor has two options, either give a 21-day notice of its intention to suspend the works (clause 16.1) or after 42 days, give notice of its intention to terminate the contract (clause 16.2). During any period of suspension, financing charges continue to accrue on the unpaid amount.
Using Project Management Information System (PMIS) like PMWeb, project owners or Employers can keep track of the payment status of interim payment certificates as well as the exposure for financing charges for delayed payment of IPC. The delayed payment financing charges include the charges due to the delay period if the Engineer fails to issue the IPC within 28 days after receiving the contractor’s statement and supporting documents, and charges due to the delay period if payment by the project owner is not made within the 56-day payment period. Those charges provide a perfect alert for the cost that the project owner could be exposed to due to delayed payments as a result of administrative or red-tape delays, failing to perform assigned duties, improper budget planning, delays in receiving promised project funding among others.
PMWeb out of the box commitment module will be used to monitor and track interim payment certificates. The option of multi-currency will be also enabled in the commitment module to allow having contracts that uses different currencies for different line items. For example, the contract could include equipment that need to be purchased from Europe where they are priced in Euro whereas the contract currency could be is US$. PMWeb allows having static or pre-fixed exchange rates or dynamic exchange rates that could be updated daily, weekly, monthly and annually. The level of detail of items to be displayed in PMWeb commitment module can be determined by the project owner for which the details of the work in place can be either captured in MS Excel or the planning and scheduling software like Primavera P6.
It should be noted that the same approach detailed in this article can be also implemented by the Contractor to keep track of finance charges due to him for delayed payments but instead of the commitment module, the contract module will be used. In addition, there will be few changes to the workflow tasks.
Since the delayed payment clauses could differ from one project to another, and sometimes between different contracts within the same project, it is recommended to add all those clauses to the commitment. PMWeb clauses module allows adding different groups to address the different requirements of managing construction contracts. One of those groups will be the delayed payment group which capture the details of clauses and sub-clauses 14.2, 14.3, 14.7, 14.8, 16.1 among others. Those clauses will be dragged and dropped into the clauses page of the commitment contract.
The commitment module will be also used to manage two other processes, the interim progress certificate and change orders. The progress invoice module will be used to capture the details of interim payment certificates whereas the change order module will be used to capture the details of the delayed payment finance charges. Of course, the change order module will be also used to capture other types of changes that will impact the project’s scope, cost and duration.
To avoid delays by the Engineer in reviewing and approving the Contractor’s interim payment certificate within the allotted 28 days, it is a must requirement that a detailed checklist of all documents and declarations that need to be submitted by the contractor along with the IPC to avoid the risk of rejecting the IPC submission by the Engineer due incomplete submission. PMWeb checklist module will be used to create this checklist which will become part of the IPC submission.
For each interim payment certificate submission, all supportive documents including the MS Excel calculation sheet, updated project schedule, copies of insurance and bond documents among others must be attached. Those documents can be either stored in PMWeb document management repository or directly uploaded to the record if needed. In addition, links to other relevant project communications and imported MS Outlook emails which will be stored in PMWeb can be also made.
The workflow assigned to the progress invoice will detail the sequence of tasks that need to be performed by the Engineer and the Project Owner to ensure that payment is made to the contractor within 56 days. The total duration for the sequence of the Engineer workflow steps should not exceed 28 days. The workflow will formalize the review and approval process as detailed in the responsibility assignment matrix (RAM). The workflow will detail the sequence of tasks to be performed by the different Engineer and Project Owner team members as well as the actions can be taken by each and to whom the communication should be returned if it is rejected. The workflow will also include conditions to incorporate the set authority approval levels as well as conditions set in the contract agreement. For example, the workflow could include the condition that the Contractor cannot upload the interim payment certificate (IPC) if the amount of the IPC is less than the minimum amount set for an IPC submission.
If the tracking of delayed payment was performed from a contractor perspective, the workflow will then include two tasks. The first is review and approve by Engineer which will be 28 days long and the second task is review and payment by Employer which will be also 28 days long.
The assigned workflow steps for the interim progress invoice, will provide a real-time alert of all due actions as well as escalation alerts when a workflow step is not completed within the allotted duration. Workflow status reports can be designed using PMWeb business intelligence reporting tool to report on the progress of all assigned workflow tasks for which red, cyan and green color alerts can be assigned respectively to delayed, due and not-due tasks for each project team member.
For the approved interim progress certificates, the payment tab will be used to capture the details of the actual amount paid including amount, payment method, bank name, etc. It is highly recommended that the actual payments amounts are aligned with the progress invoice items. Not only this will detail what IPC items were paid or not paid, but also details in what currency those payments were made to be aligned with the multi-currency contracts. Those actual payment made could be done to different bank account than the remainder of the IPC.
The information captured in the different PMWeb modules will become the basis for having a real-time tracking report for the status of payment against approved interim progress certifications and the exposure for additional finance charges due to delayed payments. The report will track the “Late Payment Certification by Engineer” by reporting the Contractor IPC issuance date, IPC due Date to Employer from Engineer, Actual Date of IPC from Engineer to Employer, Engineer’s Delay to Issue IPC in days, In addition, the report will track the “Late Actual Payment by Employer” by reporting the Payment Due Date, Actual Date of Full Payment as per IPC, Delay in payment, payment amount made and balance IPC payment not made by Employer.
The report will also include the calculations for the estimated interest finance charges per period associated with the Engineer failure to issue the IPC for payment within 28 days from submission and the estimated interest finance charges per period associate with Employer failure to make payment within 56 days from submission. The interest finance charges will be applied on the delayed portion of approved interim payment certificate amount only.
The calculated interest finance charges for the two types of payment delays detailed above will be added as to the commitment contract using PMWeb change order module to keep track of those additional costs. Similar to all other PMWeb modules, supportive documents can be added to change orders as well as workflow can be assigned to formalize the review and approval process.
The report can be also modified to display the actual notification reference and date issued by the Contractor under Sub-Clause 16.1. This will be used to calculate the date after which suspension/ reduced rates Progress is permitted under Clause 16 and the date after which termination is possible.
About the Author
Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with more than 35-year service record providing project management and controls services to over 100 projects with a total value in excess of US $5 Billion. Those projects included Commercial, Residential, Education and Healthcare Buildings and Infrastructure, Entertainment and Shopping Malls, Oil and Gas Plants and Refineries, Telecommunication and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training and business development.
Bassam is a frequent speaker in topics relating to Project Management, Strategic Project Management and Project Management Personal Skills. Over the past 35 years he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe and South America. He has written more than 250 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP) and Earned Value Professional (EVP) from the American Association of Cost Engineers (AACE) and Green Project Management (GPM).
Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation, George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and has attended many executive management programs at Harvard Business School, Boston, USA and London Business School, London, UK.