How are payments to contractors, design consultants and subcontractors normally structured?
Payments under a construction contract are normally made against the certification of partially completed works by the works supervisor, which usually happens monthly. In fixed price contracts, the works to be delivered and payments to be made are normally set out in a works and payment schedule.
In public works contracts, the tender documents usually provide the method of payment.
The Civil and Commercial Code (CCC) provides that construction services can be hired and paid in a global lump sum (Ajuste Alzado), which includes all the services and works to be performed by the contractor. Another payment method provided by the CCC is payment in instalments, upon completion of certain milestones to be determined by the parties (Unidad de Medida); lastly, advance payment for each work to be performed is also provided in the CCC (Por coste y costas). Parties may choose the payment method that they deem convenient. If no payment method is provided, the law presumes that the Ajuste Alzado system has been chosen and that contractor will provide the materials.
Consultants are usually paid upon service termination. Sub-contractors are paid according to the payment method that the contractor has agreed with the client.
Methods of payment vary according to the works. The four main types of contract sum are calculated as follows:
For each of these methods, payment is usually made against the certification of completed works by the contract administrator. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre-agreed specific milestones or stages).
Each Australian state and territory now has legislation dealing with security of payment for contractors, suppliers and subcontractors in the infrastructure industry and for those who provide related goods and services (such as engineers and architects).
While the detail varies from state to state, the SOP legislation has the following features:
Some SOP Acts (such as those enacted in the Northern Territory and Western Australia) give a party a right to claim payment in respect of the work or services only if the relevant contract does not contain any provision for payment.
In other SOP Acts, notably those in Victoria, New South Wales and Queensland, the statutory right exists regardless of the presence in the applicable contract of provisions giving a right to a party to claim payment for work and services. This statutory right sits in parallel with the contractual right to payment.
The SOP legislation enacted in Australia has the following important impacts:
Depending on the jurisdiction in which the works are being carried out, most construction and infrastructure contracts need to contain provisions dealing with SOP.
Such provisions will not be standard, as careful consideration needs to be given to the nature of the project and how the payment provisions are intended to work. For example:
Most contracts determine a payment schedule whereby payment instalments are due in proportion to the progress of the works. Some contracts foresee the circumstance where the contractor is required to submit pro forma statements by way of a payment procedure or structure, which is to be approved by the architect or principal within a set period, after which the contractor can accordingly submit his invoice. In this case the works can be put on hold if payment is withheld.
The Law of 9 July 1971 which governs house construction and the sale of houses to be or being built, contains a number of specific mandatory provisions which deal with payments and which are to the benefit of purchasers.
When specific conditions laid down in articles 35/6/1-5 of the act of 12 April 1965 regarding the protection of remuneration are met, the principal could be held jointly liable for serious breaches of the legal obligations to pay salary to employees committed by its direct contractor, and in some cases even by the subcontractor of its direct contractor. This joint liability could be avoided by making specific, legally defined written arrangements between the principal and its direct contractor, eg by adding a specific clause to this effect in the service agreement with the direct contractor.
There is no strictly defined mode of payment. The parties to the contract are free to decide and agree on such issues. Payments are most commonly made on completion of agreed stages of development.
The answer depends on the procurement arrangement. The employer can pay the contractor, who pays the subcontractors, including design consultants. The employer may also pay the subcontractors directly. Although not expressly set forth in law, subcontracting is possible if not prohibited in the contract, as construction activity is not considered strictly personal and the contractor is expected to use subcontractors to carry out all the work. However, it is recommended that subcontracting be expressly authorized in the contract.
There’s no restriction to procurement arrangements, but there are two arrangements expressly set forth in law: empreitada, meaning task, which is equivalent to a lump sum price agreement; and administração, meaning administration, which is a construction management contract.
Empreitada
This is a fixed price contract that includes all necessary costs to complete the work. Empreitada is divided into two modalities: lavor (meaning work) and mista (meaning mixed). In the first case, the contractor carries out the work with its manpower using materials supplied by the employer, while in the second, the contractor supplies both manpower and materials, assuming a higher degree of responsibility. This payment can be made in stages.
Even if there is no contractual relationship between the employer and the subcontractors, the latter will be liable in tort to the employer or any third party for any damage suffered.
Administração
In this case, the general contractor − who is, in fact, a construction manager − is contracted exclusively responsible for managing the work and the trade contractors hired by the employer. All materials and work force are paid/supplied directly by the employer. The construction manager is entitled to a fee corresponding to a percentage of the total cost of the work.
In both cases, the contractor is responsible to the employer for all the scope of the works, unless otherwise agreed in the contract.
Several payment methods exist in order to compensate the above-described parties. Some of the methods of payment are described below.
For contractors and subcontractors, the most common payment methods are lump sum, cost plus a fee, and cost plus a fee with a guaranteed maximum price.
The contract sets out a pre-agreed sum that the contractor/consultant/sub-contractor will be paid to carry out either a stage or the whole of the works that are required under the contract (subject to various provisions, including variations for which the contractor may receive additional monies).
Under a cost plus fee arrangement, the owner pays the contractor for the entire cost of the work, including, without limitation, the cost of engaging workers (including employee benefits), equipment, materials, supplies, supervision etc The owner also pays the contractor a fee representing the contractor’s profit and other items, such as office overhead. The fee can be a percentage of the cost of the work or a lump sum. If the fee is a percentage, then the fee generally will increase or decrease as changes are made to the scope of the work through change orders or construction change directives (see Variations). If the fee is a lump sum, then any additional fee will have to be provided for in the change order or the construction change directive.
A guaranteed maximum price is the cost plus a fee compensation structure (immediately above) but with a not-to-exceed price guaranteed by the contractor. If the cost of the project exceeds the guaranteed price, then contractor must complete the project and bear responsibility for such excess costs. If the cost of the project is less than the guaranteed maximum price, then the difference between the guaranteed price and the actual cost becomes savings and may be shared in an agreed-upon proportion between the owner and contractor.
Variations exist on the above as well. For example, under the cost plus a fee, the contractor might agree on a not-to-exceed price for the general conditions costs. Under any of the above methods, the contractor might agree not to charge a fee for changed work unless the changed work exceeds a certain dollar amount. In such a case, the contractor might agree that it is not entitled to a fee until the dollar amount of change orders exceeds a specific collar amount (called a ‘fee holiday’ or ‘dead band’).
A schedule of values also may be used to determine that payment remains on course during course of the construction loan. In such a case, a schedule of values listing the trades and other activities on the Project is made, together with the amount then due such parties.
For design consultants, payments are generally made periodically in accordance with a method agreed upon by the parties in the governing agreement. For design work, the phases of work might be assigned a certain value of the entire contract price (eg $X for the schematic design phase, $Y for the design development phase, $Z the construction document phase, $A for the bidding and negotiation phase, $B for construction administration phase, and possibly $C for sustainable design). Within a phase, the parties might agree that the design professional will receive a pro rata share of such value corresponding to the amount for that phase.
Each jurisdiction in Canada has legislation that grants those who supply construction services and make improvements to the land a charge against the owner of the land. This type of charge is referred to as a ‘builders’ lien’, ‘mechanics’ lien’ or ‘construction lien’ depending on the jurisdiction. Although the legislation differs in each jurisdiction, the main purpose of the legislation is to provide payment protection for sub-contractors and material suppliers. Owners are required to holdback a certain portion of all payments made under the contract with the contractor. In the event of a claim by a subcontractor for payment, such payment amount can be paid out of the holdback in priority to other claimants. Subcontractors can also register a claim of a builders’ lien against title to the property on which the project was constructed. Certain jurisdictions provide for liens against chattels in addition to liens against the property.
Several jurisdictions across Canada, including the federal government, have recently introduced amendments to their construction and lien legislation implementing prompt payment and adjudication, which is modelled after jurisdictions that have had similar legislation in place for many years. Currently, the only jurisdiction in which this legislation has fully taken effect is the Province of Ontario; other provinces will soon follow. Although the requirements will vary from jurisdiction to jurisdiction, the prompt payment regime imposes statutory payment deadlines that cascade down the construction pyramid and are structured around the delivery by a contractor to an owner of a “proper invoice”. Adjudication, also governed by statute, is an interim, binding dispute resolution process that facilitates enforcement of any breach of the prompt payment requirements and also allows for a broader range of disputes to be resolved early. In jurisdictions where these concepts are implemented, it is not permissible to contract out of them. Prompt payment and adjudication are likely to have a significant impact upon the construction industry in the years to come.
There is no standard payment structure for contractors or design consultants. Some agreements provide for payments to be made in stages (including the obtaining of key permits). Other agreements provide for payments to be made on the basis of hourly rates.
In construction contracts, payments to contractors, design consultants and subcontractors are usually structured as follows:
Methods of payment vary according to the works. The three main types of payment are:
Payment is usually made after the supervising engineer (appointed by the investor) has certified the completed works. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre-agreed specific milestones or stages).
All payment issues depend on the agreement between the parties. However, in the case of larger projects, gradual financing in the form of advances in connection with the completion of individual sections of the works is normally applied. The final payment is usually transferred after the handover of the building or very often held as a security in the form of a deposit which is paid after the lapse of the warranty period.
According to the general conditions in the standard form construction contracts, AB 18 and ABT 18, the total contract sum can be paid under two different systems:
The parties are free to provide for any method of payment (lump sum, measurement, a schedule of payment, etc). Payment against measurement is most common.
The owner (maître d’ouvrage) shall either provide for a direct payment by the bank to the contractor in the event a loan was secured by the owner to finance the construction works or deliver a joint bank guarantee equal to the entire price of the contract to the contractor (entrepreneur) in order to secure the payment obligation owed to the contractor.
The owner is entitled to retain an amount not exceeding 5% of the entire price of the project in order to guarantee the remediation of any defects arising on the date of acceptance of the works. The contractor has the right to replace this retainer by a bank suretyship (cautionnement bancaire).
The contracting parties may agree on various pricing arrangements. The following terms are provided for by the Construction Contract Procedures Part B (VOB/B):
Payments are usually made in instalments according to the progress of the works already carried out. In relation to defects, the principal can make retentions or even refuse to pay instalments, Section 16 para. 1 no. 2. Usually the construction contract sets out the payment schedule, the instalments and the effects of defects to the payment claims. Advance payments are usually secured by bank guarantees. The final account (Schlussrechnung) ensures the final settlement of the project, and precludes any subsequent claims.
The principal is only obliged to remunerate the contractors engaged by it directly. Where sub-contractors are engaged, these are not remunerated by the principal but by the relevant contracting party (ie the general or prime contractor or other sub-contractors). Sub-contractor agreements mostly follow the payment arrangements described above.
Methods of payment vary according to the works. The four main types of payment are:
Payment is usually made when the works are completed. However, it is common for the contractor to have the right of payment by instalment or interim payment in the progress of the construction as it gives the contractor funding for the performance of works and supply of materials during construction.
As an alternative to the interim payment, a lump sum contract may provide for milestone payment. The employer will make periodic payments to the contactor by reference to certain stages of the work or stated intervals. In other words, the milestone payment approach makes interim payments subject to achievement of predetermined progress milestones.
Although the method of payment is subject to the parties’ agreement, the most typical scenario is that payment is made after completion of each milestone.
Fixed-price contracts are common in Hungary, although other payment and calculation methods are also in use, including prime cost and cost plus fee arrangements. The contractor may become entitled to additional payment(s) if variations to the original technical specifications are requested by the employer.1
To ensure that the funds earmarked for certain construction and building activities are used for the purposes specified in the construction contract, the Construction Act, requires the employment of a project fund manager for construction works exceeding the current value of EUR5,382,000. The most important aspect of ‘project fund management’ is that the funds to cover the costs of the construction works must be deposited into a separate account accessed exclusively by the project fund manager who is responsible for the distribution of these funds to the contractor and sub-contractors. Construction concessions and works awarded through public procurement are not subject to ‘project fund management’.
1 Civil Code 6:245.§
Methods of payment vary according to the works. The four main types of payment are:
Payment is usually made against the certification of completed works by the contract administrator or architect
Payments to contractors and sub-contractors are ordinary structured as periodical (usually monthly) instalments corresponding to the actual progress of the works as certified by the director of the works for the account of the employer. A retention (in the range of 5-10% of each instalment) is applied to each instalment as security of the fulfilment of the contractor’s/subcontractor’s obligations and is released upon positive testing of the works.
Advance payment may be agreed by the parties. In such a case, specific collateral may be requested to the contractor/subcontractor to secure the reimbursement of the advance payment in case of early termination of the contract.
In the case of design consultants, payments are usually agreed on a milestone basis (at pre-agreed specific milestones or stages).
Parties can freely decide on methods and terms of payments in a construction or design contract. In small and short-term projects, payments are commonly made at the completion of the construction work. In large and long-term projects, payments are commonly made at the completion of agreed stages of construction. In public works, certain percentage of the contract price is often paid to a contractor before starting the construction.
There are various ways in which payments can be structured between parties (charging net costs plus fee, fixed price, etc). The most clear-cut method is the situation in which the client pays all parties (contractor, architect, structural engineer) separately. Another possibility – particularly in respect of private housing – is that the private buyer pays the contractor who must, in turn, transfer the payment to the developer.
This varies depending on the circumstances. However, in the case of contractors and sub-contractors, payments are generally monthly based on work undertaken in the relevant period (with an amount deducted for retention monies). 50% of retentions are paid on practical completion of the contract works with the remainder released at the end of the defects liability period (as specified in the contract). The retention amounts are amounts that would otherwise be payable by one party to another party, but is retained as security for the performance of that other party's obligations under the contract.
The retention money regime is governed by the Construction Contracts Act 2002, which has recently been amended to strengthen and clarify the requirements around how retention amounts are to be held by the other party. Under the new regime, retainable amounts become retentions at the time at which the contract allows the first party to withhold payment from the other party. Once the retainable amounts become retention money, they are to be deposited in a separate bank account as soon as practicable and are to be held on trust. The account must be used solely for the purpose of holding retentions and must only be used and dealt with in accordance with the retention regime and construction contract. To further strengthen the regime, the new amendments impose criminal liability on both the withholding party and its directors, where they have failed to comply with the retention regime. Design consultants are commonly paid on a milestone basis (ie on completion of the various steps in the design process).
Generally, payments are structured in phases or stages. The contractor upon completion of each phase submits an invoice for the works and the employer on confirmation of the works issues a certificate of completion whereupon the payment is made to the contractor.
The parties may agree on an advance payment to the contractor of a sum representing 10% of the total contract sum for mobilization and commencement of the works which is deducted from payments due to the contractor under the contract. Usually, there is provision for retention from each payment due to the contractor to rectify defects after completion of the project or paid back to the contractor upon certification by the employer’s architect that all defects have been rectified by the contractor.
This mode of payment may also be adopted for design consultants where their responsibilities run for the entire span of the project duration.
The responsibility of paying subcontractors is on the contractor and this is also structured in line with payments upon successful completion of each phase or stage of the works until completion of the specific subcontractors’ contractual obligations.
The three main types of payment are:
Methods of payment vary according to the works. In Poland there are two main types of payment:
Contractors and sub-contractors are generally paid as they perform their obligations and carry out the works. To this end, construction milestones are agreed and payments are made if, and when, the milestones are met by the contractor. If the parties agree, a third party entity (typically a quantity surveyor) may be appointed to assess the works, for payment purposes. In public works contracts, payments according to construction milestones are the general rule. Each time part of the construction is completed, the parties calculate the value of the works carried out and a corresponding payment is made to the contractor.
Normally, in a construction contract, the price is pre agreed, taking into consideration an estimate of the costs. The employer makes an advance payment, as an interest-free loan to facilitate mobilization and the contractor submits a guarantee. The rest of the price will then be paid in instalments.
The total advance payment, the schedule of payments, and the applicable currencies and proportions, are stated in the construction contract.
A construction contract may only lay down the criteria for the subsequent determination of the price. In this situation, the works are measured and valued for payment by the engineer.
Furthermore, generally, a performance guarantee of 10 percent of the price is withheld. The performance guarantee is usually returned to the contractor in the following tranches:
Methods of payment will vary according to the works. The four main types of payment are:
Under the contract, the client will be bound to pay the contractor the price within the agreed time period. Unless the contract or Slovak law provides otherwise, entitlement to payment arises following the execution of the work. However, this does not prohibit the parties agreeing on another payment time or method, for example, a payment made following the approval of the completed works.
Payments under a construction contract are normally made against the certification of partially completed works by the works manager, which usually happens monthly. In fixed price contracts, the works to be delivered and payments to be made are normally set out in a payment schedule.
An inspection of the works in order to authorise a payment does not normally imply either acceptance or delivery of the works.
Commonly, payments are reduced by 5 percent, with that amount being placed in a deposit account aimed at guaranteeing the quality of the works.
Payments to professional consultants may be calculated in accordance with the recommended practice of the relevant professional society (eg the Society of Architects), and are normally made on delivery of the documentation or on a periodical basis.
The price can either be fixed or set according to prime cost principle. The prime cost principle refers to certain works, including cost of materials and goods, cost of la-bour and cost of sub-contracts etc, as stipulated in the General Conditions for Con-tracts - AB 04 and ABT 06. Usually the plan of payment is set so that the contractor gets paid after carrying out certain elements of the works. Normally the employer withholds 10 percent of the total price until the contract works have been approved by a final inspection.
There are various methods of payment, each of which is stipulated in the construction contract.
The payment will generally be made on an installments basis in connection with the progress of each stage of the works. Once the works have been inspected, the payment to the contractor will be made in accordance with the payment dates agreed upon and outlined in the construction contract. In addition, unless otherwise provided in the contract, a retention is usually required in order to guarantee the remediation of any defects incurring after the date of delivery of the works.
Methods of payment vary according to the works. The four main types of payment are:
Payment is usually made against the certification of completed works by the contract administrator. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre-agreed specific milestones or stages).
There is no readily effective legislative system dealing with security of payment to the contractor and/or subcontractors for private contracts.
The Abu Dhabi Executive Council issued a circular in 2019 instructing government departments and state-owned companies to pay contractors and suppliers within 30 days of receipt of undisputed invoices. This directive shows the government's proactive approach to tackling the cash flow problems that contractors and subcontractors face in the UAE construction industry.
Methods of payment vary according to the works. The four main types of payment are:
Payment is usually made against the certification of completed works by the contract administrator. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre-agreed specific milestones or stages).
There is no legislative system dealing with security of payment to contractor and/or subcontractors.
Methods of payment vary according to the works. The four main types of payment are:
Payment is usually made against the certification of completed works by the contract administrator. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre-agreed specific milestones or stages).
The Housing Grants, Construction and Regeneration Act 1996 introduced a more certain system for payment. This was aimed at facilitating cash flow throughout the course of the contract. It requires every construction contract to provide an adequate mechanism for determining what payments become due, when they become due and a final date for payment. It also introduced the concept of ‘payment notices’ and ‘pay less notices’. The party making payment ( the employer) is required to issue payment notices. These must state the amount it intends to pay. If the paying party fails to isuse a payment notice, the party receiving payment (the contractor or consultant) may issues its own payment notice. This will usually take the form of a contractual application for payment. If the paying party wishes to pay less than the sum notified in the payment notice, it must issue a pay less notice setting out the sum the payer considers to be due on the date the notice is served (which can be zero), and the basis on which the sum is calculated.
Methods of payment vary according to the works. The four main types of payment are:
Payment is usually made against the certification of completed works by the contract administrator. The inspection and certification of completed works can be made on a periodic basis (usually monthly) or a milestone basis (at pre‑agreed specific milestones or stages).
The Housing Grants, Construction and Regeneration Act 1996 sought to introduce a more certain and satisfactory system for payment, aimed at facilitating cash flow throughout the course of the contract. It requires every construction contract to provide an adequate mechanism for determining what payments become due, when they become due and a final date for payment. On 1 November 2011, the Local Democracy, Economic Development and Construction Act 2009 came into force and amended the payment regime for contracts entered into on or after 1 November 2011. The Housing Grants, Construction and Regeneration Act 1996 as amended by the Local Democracy, Economic Development and Construction Act 2009 sets out a two notice system. The first notice is intended to fix the amount due to be paid. The second notice must be issued by the paying party if it wishes to pay less than the notified sum. In addition, any contract provision which states that any payment to the contractor is conditional upon the issue of a certificate or notice by the employer or its representative is unenforceable (unless the ultimate payee becomes insolvent).
Generally, most construction contracts in Ukraine contain a clause providing for advance payments that should be paid to the contractor before the commencement of construction works. The rest of the contract price is usually divided into payments that are made on completion of specific stages of the construction works or periodically (eg monthly). The final retention payment is usually paid within one to two years after the completion of construction (after the expiration of the construction guarantee period).
Several payment methods exist in order to compensate the above-described parties. Some of those methods are described below.
For contractors and subcontractors, the most common payment methods are lump sum, cost plus a fee, and cost plus a fee with a guaranteed maximum price (known as GMP or GMAX):
Under a cost plus fee arrangement, the owner pays the contractor for the entire cost of the work, including, without limitation, the cost of engaging workers (including employee benefits), equipment, materials, supplies, supervision etc. The owner also pays the contractor a fee representing the contractor’s profit and other items, such as office overhead. The fee can be a percentage of the cost of the work or a lump sum. If the fee is a percentage, then the fee generally will increase or decrease as changes are made to the scope of the work through change orders or construction change directives (see variations). If the fee is a lump sum, then any additional fee will have to be provided for in the change order or the construction change directive.
A guaranteed maximum price is the cost plus a fee compensation structure (immediately above) but with a not-to-exceed price guaranteed by the contractor. If the cost of the project exceeds the guaranteed price, then contractor must complete the project and bear responsibility for such excess costs. If the cost of the project is less than the guaranteed maximum price, then the difference between the guaranteed price and the actual cost becomes savings and may be shared in an agreed-upon proportion between the owner and contractor.
Variations exist on the above as well. For example, under the cost plus a fee, the contractor might agree on a not-to-exceed price for the general conditions costs. Under any of the above methods, the contractor might agree not to charge a fee for changed work unless the changed work exceeds a certain dollar amount. In such a case, the contractor might agree that it is not entitled to a fee until the dollar amount of change orders exceeds a specific collar amount (called a ‘fee holiday’ or ‘dead band’).
A schedule of values also may be used to determine that payment remains on course during course of the construction loan. In such a case, a schedule of values listing the trades and other activities on the Project is made, together with the amount then due such parties.
For design consultants, payments are generally made periodically in accordance with a method agreed upon by the parties in the governing agreement. For design work, the phases of work might be assigned a certain value of the entire contract price (eg $X for the schematic design phase, $Y for the design development phase, $Z the construction document phase, $A for the bidding and negotiation phase, $B for construction administration phase, and possibly $C for sustainable design). Within a phase, the parties might agree that the design professional will receive a pro rata share of such value corresponding to the amount for that phase.
Payment to contractors are regulated by the unique agreement between the parties. Thus payments depend on sources of finance and the agreement between the contracting parties.
