Page 48 - Civil Engineering Project Management, Fourth Edition

Payment arrangements, risks and project cost estimating
inflation of prices after he has tendered. Without such a clause the contractor
has to add a margin to his prices to cover expected inflation, so he runs a risk
he might not have allowed enough while the employer runs the risk that he
might have to pay more than the actual inflation increase. 33
Calculating extra costs due to inflation can be complicated and time con-
suming for the contractor and the employer’s supervisory staff, so that often
a formula using officially published indices of prices is used instead. The con-
tract has to set out how such indices will be used (see Section 16.8).

(b) Payment terms

Most standard conditions of contract contain specific provisions for interim
payments and require payment of interest to the contractor if the employer
fails to pay on time. The timing of these interim payments as the work pro-
ceeds is of importance to both employer and contractor. A contractor has to
lay out large sums of money to get work started, especially on overseas jobs;
hence the earlier he can receive substantial payments the less he has to borrow
from his reserves or the bank.
On the other hand the earlier the employer has to pay out money, the more
interest he will have to pay on his borrowings to fund the project. Also, he
cannot pay out too large a sum or he may not recover his payment should the
contractor get into financial difficulty and be unable to complete the work.
The same result can follow if he pays out too little, and forces a contractor who
is not in a strong financial position into further financial difficulties (see also
subsection (e) below).
In the UK the Housing Grants, Construction and Regeneration Act 1996 set out
terms which must be included in construction contracts (see Section 1.6).
These include a requirement for a clear system of payments by instalments,
notice of the payment due and a date for payment, and notice of any money
withheld. Where a contract does not contain the requirements of the 1996 Act,
The Scheme for Construction Contracts Regulations 1998 applies, setting out
details of the payment provisions required by the 1996 Act. Most engineering
standard forms used by employers already contained terms largely comply-
ing with the 1996 Act.

(c) Bonus payments

An employer can include in a contract the payment of bonuses to the contractor
for completion of the works, or stages of it, on or before the time or times
stipulated in the contract. Provided the times set are reasonably achievable
and do not encourage the contractor to skimp work, bonuses can be rewarding
to both contractor and employer. Early completion can reduce borrowing costs