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5 Payment

5.1 Introduction
Payment, including assessment, certification and payment of amounts due, is cov-
ered by Clauses 50.1 to 51.2.
This section refers to two main terms:

(i) The Prices


These are the various elements that make up the total Price and are the amounts
stated in the Price column of the Price List.

(ii) The Price for Work Done to Date


This term is used in making the assessment of amounts due to the Contractor,
and is the total of:

• the Price for each lump sum item in the Price List which the Contractor has
completed;
• where a quantity is stated for an item in the Price List, an amount calcu-
lated by multiplying the quantity which the Contractor has completed by the
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rate.

5.2 Assessing the amount due


The Contractor is required to assess the amount due to him, and by each assess-
ment day, which is a date stated in the Contract Data he applies to the Employer
for payment (Clause 50.1). There is an assessment day each month from the start-
ing date until the month after the Defects Certificate has been issued (normally
12 months after Completion). Note that the Contractor’s application for pay-
ment is a pre-condition to him being paid, so it is essential that he submits his
detailed application on time (Figure 5.1).
There is no prescribed requirement for the application, but the Contractor
must include sufficient details for the Employer to assess properly the amount due.

Hughes, Kelvin. Understanding NEC3: Engineering and Construction Short Contract, CRC Press, 2014. ProQuest Ebook Central,
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Payment 95
Payment

Contractor
submits
application for Employer
payment Assessment Day pays

3 weeks Employer
pays late?
Interest paid

Figure 5.1 Application and payment timeline.

The Employer informs the Contractor of any amount the Contractor may have
wrongly assessed within his application, prior to making the payment.
The amount due to the Contractor is:

• the Price for Work Done to Date,

which is made up of:

• the Price for each lump sum item in the Price List which the Contractor has
completed, and
• where a quantity is stated for an item in the Price List, an amount calculated by
multiplying the quantity which the Contractor has completed by the rate;

plus

• other amounts to be paid to the Contractor (including any tax which the law
requires the Employer to pay to the Contractor).
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This will include VAT

less

• amounts to be paid by or retained from the Contractor.


This will include retention and delay damages. Note that there is no
retention-free amount as in the Engineering and Construction Contract
(ECC).
Note that the Employer is not required to certify amounts due to be paid to the
Contractor, though most commercial organisations using the Engineering and
Construction Short Contract (ECSC) tend to issue written confirmation of
acceptance of the Contractor’s application, then the Contractor raises an invoice
for the accepted amount.

Hughes, Kelvin. Understanding NEC3: Engineering and Construction Short Contract, CRC Press, 2014. ProQuest Ebook Central,
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Created from polyu-ebooks on 2018-03-17 03:06:23.
96 Payment
Delay damages in the ECSC are normally referred to in other contracts as liq-
uidated damages.
Delay damages are predefined amounts inserted into the Contract Data and paid
or withheld from the Contractor in the event that he fails to complete the works by
the Completion Date. Dependent on the applicable law, the amount of delay dam-
ages stated in the Contract Data should not normally exceed a genuine pre-estimate
of the damage suffered by the Employer as a result of the delay – not a penalty.
If delay damages are stated in the Contract Data, the Contractor pays them for
each day from the Completion Date (the date he is required to complete) until
Completion (the date he actually completes).
If a retention percentage is identified within the Contract Data, that percent-
age is retained from the Contractor in the assessment of each amount due until
Completion, then the amount retained is halved in the first assessment after Com-
pletion. No amount is retained after the Defects Certificate has been issued.
The ECSC retains the provision within the ECC with a sanction for failure to pro-
duce a first programme, should a programme be required (see Works Information).
It is essential that the Contractor either submits a first programme with his ten-
der or within the time scale specified within the contract if the Employer requires
a programme to be submitted. Any requirement for a programme, and its form and
content, would be stated by the Employer within the Works Information.
Failure to do so will entitle the Employer to retain one-quarter of the Price for
Work Done to Date in his assessment of the amount due. Note that the amount is
only withheld if the Contractor has not submitted a programme which shows the
information which the contract requires, e.g. method statement, provisions for
float, if stated in the Contract Data. If the Contractor has submitted a programme
which contains all the information that the contract requires, but the Employer
disagrees with, for example, part of the method statement or the programme has
not yet been accepted, then the provision does not apply.
This clause reflects the importance which attaches to the programme in man-
aging works even of small value.
N.B.: In September 2011, the NEC3 publishers issued a brief amendment to
the ECSC payment provisions to align it with the Local Democracy, Economic
Copyright © 2014. CRC Press. All rights reserved.

Development and Construction Act 2009:

Definitions
1.1
(1) The payment due date for an application for payment by the Contractor
is the assessment day which follows receipt of that application.
(2) The final date for payment is three weeks after the payment due date.

Assessing the amount due


1.2 The Contractor’s application for payment is the notice of payment speci-
fying the sum that the Contractor considers to be due at the payment due date

Hughes, Kelvin. Understanding NEC3: Engineering and Construction Short Contract, CRC Press, 2014. ProQuest Ebook Central,
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Created from polyu-ebooks on 2018-03-17 03:06:23.
Payment 97
(the notified sum). The Contractor’s application states the basis on which the
amount is calculated and includes details of the calculation.

1.3 The following replaces subclause 50.4


If the Employer intends to pay less than the notified sum, he notifies the
Contractor of the amount which the Employer considers to be due not later
than seven days (the prescribed period) before the final date for payment.
The Employer’s notification states the basis on which the amount is calcu-
lated and includes details of the calculation. A Party pays the notified sum
unless he has notified his intention to pay less than the notified sum.

5.3 Payment
The Employer is required to make payment to the Contractor within three weeks
of the next assessment day following receipt of an application from the Con-
tractor. This clause has mistakenly been interpreted by some as the Contractor
submitting an application by an assessment day, say 1 February, the payment not
having to be made by the Employer until three weeks after the next assessment
day, that next assessment day being 1 March. This is incorrect: the ‘next assess-
ment day’ in this example would be 1 February.
Interest is paid by the Employer if a payment is late, or if it includes correction
of an earlier payment. Interest is calculated from the date the correct payment
should have been made until the date it is paid. The interest is calculated at
the interest rate stated in the Contract Data, or if none is stated, at 0.5 per cent
of the delayed amount per complete week of delay. This equates to 26 per cent
per annum, which is very high, but it simplifies the interest calculation.

Box 5.1 Example


The interest due can be calculated for late payments on the basis of the fol-
lowing formula:
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Payment due × interest rate × the number of complete weeks late

So if one assumes the following:

• payment due = £60,000


• payment 2½ weeks late
• no interest rate is stated in the Contract Data, therefore interest rate is
0.5 per cent

The calculation is:

£60,000 × 0.5% × 2 weeks

Interest due = £600.00

Hughes, Kelvin. Understanding NEC3: Engineering and Construction Short Contract, CRC Press, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/polyu-ebooks/detail.action?docID=1707447.
Created from polyu-ebooks on 2018-03-17 03:06:23.
98 Payment
5.4 Project Bank Accounts
In 2008, the Office of Government Commerce (OGC) published a guide to fair
payment practices, following which the NEC Panel prepared a document in June
2008 to allow users to implement these fair payment practices in NEC contracts.
This document, entitled Z3: Project Bank Account, can be introduced to the
ECSC by means of a Z clause and authorises a Project Bank Account which
receives payments from the Employer and is in turn used to make payments to the
Contractor and Named Suppliers.
There is also a Trust Deed between the Employer, the Contractor and Named
Suppliers containing the necessary provisions for administering the Project Bank
Account. This is executed before the first assessment date.
The Contractor also includes in his subcontracts for Named Suppliers to
become party to the Project Bank Account through a Trust Deed. The Contrac-
tor notifies the Named Suppliers of the details of the Project Bank Account and
the arrangements for payment of amounts due under their contracts. The Named
Suppliers will be named within the Contractor’s tender, but also additional
Named Suppliers may be included subject to the Project Manager’s acceptance
by means of a Joining Deed, which is executed by the Employer, the Contractor
and the new Named Supplier. The new Named Supplier then becomes a party to
the Trust Deed.
As the Project Bank Account is maintained by the Contractor, he pays any
bank charges and also is entitled to any interest earned on the account. The
Contractor is also required at tender stage to put forward his proposals for a suit-
able bank or other entity which can offer the arrangements required under the
contract.
The process every month is that, at each assessment date, the Contractor sub-
mits an application for payment to the Employer, including details of amounts
due to Named Suppliers in accordance with their contracts.
No later than one week before the final date for payment, the Employer makes
payment to the Project Bank Account of the amount which is due to be paid to
the Contractor. If the Project Bank Account has insufficient funds to make all
Copyright © 2014. CRC Press. All rights reserved.

the payments, particularly to the Named Suppliers, the Contractor is required to


add funds to the account to make up the shortfall.
The Contractor then prepares the Authorisation, setting out the sums due to
Named Suppliers. After signing the Authorisation, the Contractor submits it to
the Employer for signature and submission to the Project Bank.
The Contractor and Named Suppliers then receive payment from the Project
Bank Account of the sums set out in the Authorisation after the Project Bank
Account receives payment.
In the event of termination, no further payments are made into the Project
Bank Account.

Hughes, Kelvin. Understanding NEC3: Engineering and Construction Short Contract, CRC Press, 2014. ProQuest Ebook Central,
http://ebookcentral.proquest.com/lib/polyu-ebooks/detail.action?docID=1707447.
Created from polyu-ebooks on 2018-03-17 03:06:23.