Introduction
Understanding the payment process in construction contracts is crucial for both the Employer and the Contractor. Clause 14 of the FIDIC Yellow Book 2017 provides a comprehensive framework for the sequence of payment events. This article aims to break down this clause into easily digestible sections, explaining each step in detail.
Expert Opinion
Clause 14 is often considered the financial backbone of the contract. It ensures that the Contractor is fairly compensated for the work done, thereby maintaining the project’s financial health.
Application for Interim Payment (Clause 14.3)
What It Entails
After the end of each payment period stated in the Contract Data, the Contractor is required to submit a Statement to the Engineer. This Statement should be in a form acceptable to the Engineer and should include all the amounts the Contractor believes they are entitled to.
Key Components
The Statement should be detailed, showing the estimated contract value of the work executed, any amounts to be added or deducted for changes in laws or costs, and any other relevant additions or deductions. It should also be supported by adequate documentation, such as progress reports.
Duration and Format
The Statement should be submitted in one paper-original, one electronic copy, and any additional paper copies as stated in the Contract Data.
Interaction with Other Clauses
This clause often interacts with Clause 4.20 (Progress Reports), as the Statement usually requires supporting documents like progress reports.
Expert Opinion
The Statement serves as a formal request for payment and should be meticulously prepared to avoid any disputes or delays.
Points to Keep in Mind
- Ensure the Statement is in the format acceptable to the Engineer.
- Always include supporting documents.
Issue of Interim Payment Certificates (Clause 14.6 & 14.6.1)
Preconditions
Before any amount is certified or paid to the Contractor, two conditions must be met:
- The Employer must have received the Performance Security.
- The Contractor must have appointed their Representative.
Engineer’s Role
Within 28 days of receiving the Statement and supporting documents, the Engineer issues an Interim Payment Certificate (IPC) to the Employer, with a copy to the Contractor. This IPC states the amount the Engineer fairly considers to be due and includes any additions or deductions that have become due under the Contract.
Interaction with Other Clauses
In the context of Clause 14.11.1 (Draft Final Statement), it’s important to understand its relationship with Clause 14.10 (Statement at Completion). While Clause 14.11.1 deals with the draft final Statement that is submitted after the issue of the Performance Certificate, Clause 14.10 focuses on the Statement that is prepared at the completion of the Works.
The Statement at Completion under Clause 14.10 serves as a preliminary document that outlines the value of all work done up to the point of completion. This Statement is then further refined and detailed in the Draft Final Statement under Clause 14.11.1, which is submitted after the issue of the Performance Certificate.
Expert Opinion
The Draft Final Statement is essentially an evolved version of the Statement at Completion. It includes any additional amounts or deductions that may have occurred after the completion of the Works and before the issue of the Performance Certificate. Therefore, it’s crucial to ensure that both these Statements are aligned and consistent to avoid any financial discrepancies.
Points to Keep in Mind
- The Statement at Completion is not the final financial document; it serves as a basis for the Draft Final Statement.
- Ensure consistency between the Statement at Completion and the Draft Final Statement to streamline the financial closure of the project.
Draft Final Statement (Clause 14.11.1)
Submission and Content
Within 56 days after the issue of the Performance Certificate, the Contractor must submit a draft final Statement to the Engineer. This Statement should be in the same form as previous Statements and should show in detail the value of all work done in accordance with the Contract.
Engineer’s Response
If the Engineer disagrees with or cannot verify any part of the draft final Statement, they must promptly notify the Contractor, who then has to submit further information or make necessary changes.
Interaction with Other Clauses
This clause often interacts with Clause 14.10 (Statement at Completion), as the draft final Statement serves as a precursor to the final Statement.
Expert Opinion
The draft final Statement is a critical step towards the closure of the financial aspects of the project. It should be prepared with utmost care to ensure that all dues are settled.
Points to Keep in Mind
- Submit the draft final Statement within the stipulated 56-day period.
- Be prepared to provide additional information if the Engineer requests it.
Agreed Final Statement (Clause 14.11.2)
If there are no disagreements or pending amounts, the Contractor prepares and submits the final Statement as agreed. However, if there are disagreements or estimated amounts, a Partially Agreed Final Statement is prepared and submitted.
Payment (Clause 14.7)
Employer’s Obligations
The Employer is obligated to make payments within specific periods after receiving the various certificates:
- Advance Payment Certificate: Within 21 days (or as stated in Contract Data).
- IPC: Within 56 days (or as stated in Contract Data) after the Engineer receives the Statement and supporting documents.
- Final Payment Certificate (FPC): Within 56 days (or as stated in Contract Data) after receiving the FPC.
Issue of Final Payment Certificate (Clause 14.13)
Within 28 days of receiving the Final or Partially Agreed Final Statement, the Engineer issues the FPC, stating the amount they consider is finally due and the balance due from either the Employer or the Contractor.
Discharge (Clause 14.12)
Upon submitting the Final or Partially Agreed Final Statement, the Contractor also submits a discharge, confirming that the total of such Statement represents full and final settlement of all monies due under the Contract.
Flowcharts
Detailed Explanation:
- Contractor Submits Statement (Clause 14.3):
- The Contractor initiates the payment process by submitting a Statement to the Engineer. This Statement is a comprehensive document that outlines all the amounts the Contractor believes they are entitled to.
- Duration: This is typically done after the end of each month or the period of payment stated in the Contract Data.
- Engineer Receives Statement:
- The Engineer receives the Statement and supporting documents from the Contractor for review.
- Performance Security Received (Clause 14.6):
- Before any amount is certified or paid, the Employer must have received the Performance Security from the Contractor.
- Issue of IPC (Clause 14.6.1):
- The Engineer issues an Interim Payment Certificate (IPC) to the Employer, stating the amount they consider to be due to the Contractor.
- Duration: Within 28 days after receiving the Statement and supporting documents.
- Employer Receives IPC:
- The Employer receives the IPC from the Engineer.
- Payment by Employer (Clause 14.7):
- The Employer makes the payment to the Contractor based on the IPC.
- Duration: Within 56 days (or as stated in the Contract Data) after the Engineer receives the Statement and supporting documents.
- Contractor Submits Draft Final Statement (Clause 14.11.1):
- After the issue of the Performance Certificate, the Contractor submits a draft final Statement to the Engineer.
- Duration: Within 56 days after the issue of the Performance Certificate.
- Engineer Receives Draft Final Statement:
- The Engineer receives the draft final Statement for review.
- Issue of FPC (Clause 14.13):
- The Engineer issues the Final Payment Certificate (FPC) to the Employer, stating the final amount due.
- Duration: Within 28 days after receiving the Final Statement or the Partially Agreed Final Statement.
- Employer Receives FPC:
- The Employer receives the FPC from the Engineer.
- Final Payment by Employer (Clause 14.7):
- The Employer makes the final payment to the Contractor based on the FPC.
Duration: Within 56 days (or as stated in the Contract Data) after receiving the FPC.
Checklists
Checklist for Proficient Execution of Clause 14
| Task Description | Responsible Party | Deadline | Status | Relevant Clause |
|---|---|---|---|---|
| Review Contract Data for payment periods | Contract Manager | Project Start | Pending/Completed | Clause 14.3 |
| Prepare and Submit Performance Security | Contractor | Within 7 days of Contract Award | Pending/Completed | Clause 14.6 |
| Appoint Contractor’s Representative | Contractor | Project Start | Pending/Completed | Clause 14.6 |
| Submit First Statement for Interim Payment | Contractor | End of First Payment Period | Pending/Completed | Clause 14.3 |
| Issue First Interim Payment Certificate (IPC) | Engineer | Within 28 days of receiving Statement | Pending/Completed | Clause 14.6.1 |
| Make First Payment | Employer | Within 56 days of receiving IPC | Pending/Completed | Clause 14.7 |
Checklist for Applying and Overseeing Clause 14
| Task Description | Responsible Party | Deadline | Notes | Relevant Clause |
|---|---|---|---|---|
| Verify Performance Security | Employer | Project Start | Ensure it’s in the correct form and from an approved entity | Clause 14.6 |
| Monitor Submission of Statements | Engineer | Ongoing | Ensure they are in the correct form and include all required details | Clause 14.3 |
| Issue IPCs | Engineer | Within 28 days of each Statement | Check for completeness and accuracy | Clause 14.6.1 |
| Make Payments | Employer | As per Contract Data | Ensure timely payments to avoid disputes | Clause 14.7 |
Checklist for Monitoring the Execution of Clause 14
| Task Description | Checkpoint | Verification Method | Status | Relevant Clause |
|---|---|---|---|---|
| Performance Security Submitted | Project Start | Document Review | Pending/Completed | Clause 14.6 |
| Statements Submitted Regularly | End of Each Payment Period | Document Review | Pending/Completed | Clause 14.3 |
| IPCs Issued Timely | Within 28 days of each Statement | Time-Tracking | Pending/Completed | Clause 14.6.1 |
| Payments Made | As per IPCs and Contract Data | Financial Audit | Pending/Completed | Clause 14.7 |
Checklist for Proficient Execution of Clause 14
Purpose
This checklist is designed to guide the initial setup and execution of the payment process as per Clause 14. It is particularly useful for the Contract Manager and the Contractor to ensure that all prerequisites for payment are in place.
Explanation
- Review Contract Data for payment periods: This is the first step to understand the frequency of payments. The Contract Manager should review this to set expectations and plan cash flows.
- Prepare and Submit Performance Security: The Contractor is required to submit Performance Security to ensure they fulfill the contract’s obligations. This is a prerequisite for any payment to be made.
- Appoint Contractor’s Representative: The Contractor must appoint a representative to liaise with the Engineer and Employer. This is essential for smooth communication, including matters related to payment.
- Submit First Statement for Interim Payment: The Contractor should prepare and submit the first Statement for Interim Payment at the end of the first payment period. This sets the ball rolling for the payment process.
- Issue First Interim Payment Certificate (IPC): The Engineer has the responsibility to issue the IPC within 28 days of receiving the Statement. This is crucial for maintaining the project’s financial health.
- Make First Payment: The Employer should make the first payment within the stipulated time to avoid any financial disputes and keep the project on track.
Checklist for Applying and Overseeing Clause 14
Purpose
This checklist is aimed at the Engineer and the Employer to ensure that they fulfill their roles in the payment process effectively and within the stipulated time.
Explanation
- Verify Performance Security: The Employer should verify that the Performance Security is in the correct form and from an approved entity. This is crucial for risk mitigation.
- Monitor Submission of Statements: The Engineer should keep track of the Statements submitted by the Contractor to ensure they are in the correct form and contain all required details.
- Issue IPCs: The Engineer should issue IPCs within 28 days of receiving each Statement. This is essential for maintaining the project’s cash flow and financial health.
- Make Payments: The Employer should make payments as per the IPCs and the Contract Data. Timely payments are crucial to avoid disputes and penalties.
Checklist for Monitoring the Execution of Clause 14
Purpose
This checklist is designed for internal and external auditors, compliance officers, and senior management to ensure that the payment process is being executed as per Clause 14.
Explanation
- Performance Security Submitted: Verify that the Contractor has submitted the Performance Security at the project’s start. This is a key risk mitigation measure.
- Statements Submitted Regularly: Ensure that the Contractor is submitting Statements at the end of each payment period. Irregularities here could indicate financial or operational issues.
- IPCs Issued Timely: Check that the Engineer is issuing IPCs within 28 days of each Statement. Delays could affect the project’s financial health and lead to disputes.
- Payments Made: Conduct a financial audit to ensure that payments are being made as per the IPCs and Contract Data. Delays or discrepancies could lead to financial and legal complications.
Frequently Asked Questions (FAQs) on FIDIC Clause 14: Payment Process
What is the purpose of Clause 14 in FIDIC contracts?
The primary purpose of Clause 14 is to outline the payment process between the Contractor and the Employer. It specifies how and when the Contractor should submit Statements for payment, the role of the Engineer in issuing Payment Certificates, and the Employer’s obligations for making payments.
What are the key components of Clause 14?
Clause 14 covers multiple sub-clauses, including Application for Interim Payment (14.3), Issue of Interim Payment Certificate (14.6), Draft Final Statement (14.11.1), Agreed Final Statement (14.11.2), and Payment (14.7), among others. Each sub-clause provides specific guidelines on various aspects of the payment process.
How does Clause 14 interact with other clauses?
Clause 14 often interacts with other clauses like Clause 3.7 (Agreement or Determination) and Clause 13 (Variations and Adjustments). For instance, any amounts to be added or deducted under Clause 3.7 will appear in the Interim Payment Certificate as per Clause 14.6.
What is an Interim Payment Certificate (IPC)?
An Interim Payment Certificate (IPC) is issued by the Engineer and states the amount due to the Contractor for a specific period. It is based on the Statement submitted by the Contractor and includes any additions or deductions as per the contract.
What is the significance of the Draft Final Statement and the Final Statement?
The Draft Final Statement is submitted by the Contractor within 56 days after the issue of the Performance Certificate. It outlines all amounts the Contractor considers to be due. The Final Statement is the agreed-upon version of the Draft Final Statement and represents the full and final settlement of all moneys due under the contract.
What happens if there is a disagreement over the Draft Final Statement?
If there is a disagreement, the Contractor will submit a Partially Agreed Final Statement, identifying the agreed amounts, estimated amounts, and disagreed amounts separately.
What are the timeframes for payment as per Clause 14?
The timeframes for payment vary depending on the specific sub-clause. For example, the Employer must pay the amount certified in each IPC within 56 days after the Engineer receives the Statement and supporting documents.
How does Clause 14 handle disputes?
If there is a dispute related to payment, it can be referred to the Dispute Adjudication/Avoidance Board (DAAB) as per Clause 21 of the FIDIC contract.
What should be included in the Statement for Interim Payment?
The Statement should include various items like the estimated contract value of the Works executed, any amounts to be added or deducted for changes in Laws or Costs, amounts for retention, advance payment, and repayments, among others.
What role does the Engineer play in the payment process?
The Engineer is responsible for issuing Interim Payment Certificates and the Final Payment Certificate based on the Statements submitted by the Contractor. The Engineer’s role is to ensure that the amounts are fair and in accordance with the contract.
How can I effectively manage and oversee the application of Clause 14?
Effective management of Clause 14 can be achieved through detailed planning, regular monitoring, and the use of structured checklists. These checklists can guide you through each step of the payment process, ensuring compliance and timely actions.
