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T

opic 7

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PRELIMINARIES, PROGRESS CLAIMS & RETENTION

CONTENTS
LEARNING OUTCOMES FROM THIS TOPIC ............................................................. 3

PRELIMINARIES, PROGRESS CLAIMS & RETENTION............................................. 3


Preliminaries introduction............................................................................................... 3
Preliminaries evaluation.................................................................................................. 3

Cost ................................................................................................................................... 4

Time .................................................................................................................................. 4
In Contract 864/96 ........................................................................................................... 4

Proportional to contract payment ................................................................................... 4

Progress percentage: ........................................................................................................ 4

PAYMENT PROCEDURES ............................................................................................. 5


Assessment (1).................................................................................................................. 5

Content of claim ............................................................................................................... 5


Assessment (2).................................................................................................................. 5

Other costs ........................................................................................................................ 5


Inclusions in the Progress Claim..................................................................................... 5
Other points...................................................................................................................... 6
Unfixed Material .............................................................................................................. 6

Further points of consideration....................................................................................... 6


Retention........................................................................................................................... 6
References......................................................................................................................... 7

FILE TASK NUMBER SEVEN......................................................................................... 8


Objectives.......................................................................................................................... 8
Scope ................................................................................................................................. 8
Format of submission....................................................................................................... 8

Curtin University of Technology, 1999

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Dates ................................................................................................................................. 9

Assessment ....................................................................................................................... 9

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LEARNING OUTCOMES FROM THIS TOPIC

Be familiar with payment procedures within standard forms of contract and how
interim payments are assessed.
Be able to describe three methods of administering preliminary items.
Understand specific obligations with regard to unfixed material.

PRELIMINARIES, PROGRESS CLAIMS & RETENTION

Preliminaries introduction
It seems that preliminaries are increasingly becoming the subject of investigation as
the characteristic elements of procurement are changed over time. The preliminary
element of projects increased proportionally with the increase of projects carried out
under the management contract procurement method.
In a lump sum (as Contract 864/96) contract preliminaries are of little concern to the
principal. However we need to know that sufficient allowance has been made.

Preliminaries evaluation
It is a more straight forward exercise to value preliminaries with a priced BQ than
without. The BQ will identify each item, and the price in the BQ may be
apportioned for inclusion in the progress claim.
Preliminary items may be defined under four headings; cost related, time related,
single payment or a combination of two or more.
Cost related depends on the contract sum expended for their value.
Time related items depend on the contract duration expired for their value.
Single payment items (spot items) have no relationship to either duration or
value of the works and are selected at a particular point in the contract.
Scaffolding for example, has erection costs, dismantling costs and a weekly hire
charge in between that may be related to either time or the cost value of the works.
The most appropriate method to determine the monthly preliminary claim is to
establish the figures as the example in Exhibit 1 shown below;
Item
Cost related Time related Lump sum Lump sum Totals
erect
dismantle
Scaffolding
$40,000
$8,000
$5,000
$53,000
Site set out
$3,000
$3,000
Insurances
$15,000
$15,000
Supervision
$270,000
$270,000
Exhibit 1 Preliminaries Breakdown
Two further and more simple methods may be used to establish the preliminaries
and these are either to consider them all cost or all time related.

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COST

In situation one (cost) the total preliminaries is calculated as a percentage of the


contract sum after deducting the preliminaries and prime cost sums. In each
progress claim the percentage is applied to the measured work.

TIME

In the second case (time) the preliminary value is divided by the number of weeks or
months the contract is to run and the sum of this is applied to the number of weeks
or months that have elapsed.
The preliminaries may be dealt with in any of the three ways described, the first
method is more time consuming initially, but overcomes the problems associated
with over and under valuation that may be inherent with methods two and three.
Examples:
When using the time related method a contract running behind schedule will be
overpaid in terms of preliminaries, unless the monthly amounts are adjusted.
When using the cost related method an over payment may occur when a large
number of variations have increased the builders works.

In Contract 864/96

preliminaries are itemised,


items not costed are deemed to be included,
check documentation for method of payment, e.g. are they proportional to the
contract payment or progress percentage?

PROPORTIONAL TO CONTRACT PAYMENT

Progress is assessed on all schedules other than Schedule 1 (Preliminaries),


The total of the progress for the five schedules is calculated as a percentage of
the total amount of the five schedules,
The percentage derived is applied to all item in Schedule 1.
This means one off items and progressive items are not paid at their actual cost.

PROGRESS PERCENTAGE:

The progress of each item in Schedule 1 is assessed,


A percentage progress is payable against each item as per the assessment,
This allows for payment of one off items as well as progressive items at their
actual cost.
Much simpler but beware front end loading.

Curtin University of Technology, 1999

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PAYMENT PROCEDURES

The required procedure for payment is as follows (McLagan, 1991):


1. The builder carries out a quantity of work.
2. The builder submits a progress claim to the architect (often monthly, they may be
tied to specific milestones or achievements).
3. The architect or QS examines the claim, comparing rates against work done.
4. A progress certificate is issued in accordance with the contract documents.
5. The certificate is presented to the client for payment.
6. The client pays the builder in accordance with the contract document.
The Final Certificate is the only conclusive certificate and therefore anything
included in one certificate may be subject to amendment in a later
certificate(Murdoch & Hughes, 1996).

Assessment (1)

CONTENT OF CLAIM

Value of work executed including Contract Sum Adjustments


Unfixed material
Actual cost of:
Architects instructions,
Site conditions,
Adjoining owners,
Separate contractors.

Assessment (2)

OTHER COSTS

Re-nomination,
Opening up work,
Insurances.

Inclusions in the Progress Claim


JCC-C indicates that the following should be included in the progress claim:
the builders valuation of the works executed, including variations, completed or
partly completed;
the builders valuation of any unfixed material;
the amount and particulars of Contract Sum Adjustments;
the retention amount;
the amount previously certified;
the total amount previously paid;
the amount then claimed by the builder;
the amounts for Nominated sub-contractors, together with any variations;
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evidence of payment to Nominated sub-contractors previously certified.

Other points

Architect advises Liquidated Damages to withhold in required under the terms


of the contract,
If the claim varies from the certificate issued the architect is to advise builder,
Architect to advise NSC of payments in progress certificate,
Builder to provide evidence of payment to NSC,
No obligation to pay until insurance details are submitted,
Special payment may be issued at any time,
Non-payment accrues interest after 15 days from claim submission.
Consider alternatives to monthly progress claims.

Unfixed Material
It is often requested by the builder that the principle pay for unfixed material, JCC-C
accommodates this, as do most Standard Forms of Contract. Certain conditions
must be complied with and these are set out in clause 10.04 in the case of the JCC-C.
Payment should only be made when adequate insurance is taken out. Particularly
care is advised if the materials are to be stored off site. It must be established that
clear ownership of the materials is vested in the proprietor. The materials should be
identified and stored in a manner so that they cannot be confused with other goods
of various ownership.
Often a Bank Security or Guarantee is requested by the proprietor as security against
the full value of the goods. Prior to payment the material should be inspected by the
architect to determine that all is in order. All additional costs in respect of security
or insurance arising from payment for materials on or off site are to be borne by the
builder.
Mutual advantages include; for the builder, an increase in cash flow and knock-on
effects of saving interest payments; for the client, a reduction in escalation (R&F)
payments on incomplete work (McLagan, 1991).
Further reference to this is covered by PN 24B, RAIA (1995).

FURTHER POINTS OF CONSIDERATION

On site considerations
Are the goods the property of the client, or are they the builders responsibility
Off site considerations
Fabrication, stockpiling delivery lead in time, advance purchase items, ownership
problems insurance and labeling.

Retention
Security or retention is held to ensure that the builder provides the service stated in
the contract and in accordance with the provisions of the general contract. This may
be established in two ways;
cash deduction, the withholding of a portion of the monies due to the builder,
often expressed as 10% to a maximum of 5% of the contract sum,
security, in the form of a bankers undertaking, a guarantee in lieu of cash
deductions.
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The provision of a guarantee is the most cost effective solution for the builder that
can afford it. It is generally base on the builders assets as a security to the bank and
a nominal monthly fee is charged for the establishment and ongoing costs.
According to the conditions of bank guarantees the holder may at any time convert
it to cash. Recent cases in both the UK and Australia have contested this position.
When cash retention is held the monies are to be placed in a joint account in the
names of the proprietor and builder. They are held in trust for the proprietor subject
to certain conditions.
JCC-C clauses 10.20-10.25 set out the requirements and procedures of retention or
security, and further reference on this topic is covered by PN 92A, CN84 and LN49,
RAIA (1995).

References
McLagan, D. 1991, An introduction to building contracts, Law Book Co., Sydney.
Murdoch, J. & Hughes, W. 1996, Construction contracts : law and management, 2nd
edn, E & FN Spon, London.

Curtin University of Technology, 1999

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FILE TASK NUMBER SEVEN

Objectives
1. To understand how progress claim and progress payment certificates are
managed as part of the 864/94 project.
2. To be able to update a cash flow with actual work in progress and progressively
manage the cash flow for the 864/94 project.

Scope
Using the proforma Microsoft excel spread sheets provided, you are to generate
accurate progress claim and progress certificates suitable for the 864/94 project. You
are to include the payment schedules at summary level and showing an itemised
breakdown of other elements.
Following this activity you are to introduce actual figures to the earlier produced
cash flow model and re-generate figures that show the cost to complete the project.
Additionally you should provide a brief (one page) report to the Project Manager of
the 864/94 project that details the circumstances in which the owner is obliged to
pay for unfixed material, goods and plant under the contract being reviewed.
Explain the safeguards from which the owner benefits in these circumstances.

Format of submission
The answers should be concise, well referenced and researched.
The reports must be typed on A4 paper in single space typing (10-12 font). They
should be presented as required in the unit outline.
All pages should be numbered. Your assignment should be thoroughly checked for
typographical, spelling and grammatical errors prior to submission. Work of an
unacceptable quality will be returned for correction and re-submission.

ACKNOWLEDGMENT OF SOURCES

All source material must be acknowledged. Any form of plagiarism will result in
failure of the assignment.
As these are reports and should be presented in an appropriate way footnotes1 as
this example should be used where acknowledgement of source material2 is
required.
1

This a simple example of one footnote that may be used to provide additional information
about a specific point that would not in the normal business way be elaborated upon in a
report. Or you can insert references as below;

Curtin University of Technology 1997, Curtin University of Technology Handbook and


Calendar 1998, Publications and Events Management Group Curtin University of Technology,
Perth WA.
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DATES

Assignment given
Assignment due
Assignment rules-see unit outline under Essential Information.

ASSESSMENT

This file task is worth XX% of the unit mark.


It will be assessed on the basis of the attached marking plan. You are reminded to
read the question(s) carefully and address them. Assess your own paper once
complete and determine whether you have met the objectives.
The marking plan is attached for your assistance in preparation of your assignment
you can see where most marks will be allocated, concentrate on these areas.

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