Inform Construction Industry Development Ractice Note
inform practice noteconstruction industry developmentDevelopment through partnershipconstruction procurement and deliveryIssued by the Construction Industry Development BoardPractice Note # 19STREAMLINING PAYMENTPROCESSESJune 2009(Version 1 – June 2009)Content1. Introduction. 22. Payment certification inaccordance with theprovisions of the contract . 33. Payment authorisation. 74. Payment processing. 85. Guiding principles forstreamlined payment whereimplementing agents areappointed. 86. Funds flow between the clientdepartment and theimplementing agent . 9cidb’s inform practice notes provideguidance and clarity in achieving clientobjectives in construction procurement anddelivery. Practice notes inform clients andpractitioners on how to embrace bestpractice and to deal with issues that mayarise. They are aligned with, but do notreplace regulation.Fair paymentSynopsis:The legislative framework for public administration requires thatorgans of state pay their contractors promptly and certainly withinthe period agreed to in contracts. Many organs of state are failingto do so.This practice note reviews the three phases of the payment cycle,namely certification, authorisation and processing, and examinesthe flow of funds between the client departments and theimplementing agents. It suggests how organs of state canstreamline their certification, authorisation and paymentprocesses to effect payment to contractors within the stipulatedtime as per the contract.Payment is remuneration for work orservices properly carried out. ‘FairPayment’ is concerned with whether thecontractual terms relating to the dischargeof the payment obligation and the paymentprocess are fair and adhered to.(Office of Government Commence (UK))The guiding principles for fair paymentinclude: Board: Prof Raymond Nkado (Chairperson) Cecil Rose (Deputy Chairperson) Nazir Alli Lwandile Kona Nyeleti Makhubele Cannon Noyana Gavin Strydom Lungile Mchunu Gregory Steele Sisa Ngebulana Shereen Tebogo Bogosing Mandla Mabuza Marten Govender Ronnie Khoza (CEO)Paymentprocessshouldbetransparent.Contractors should have access toprocedures for certification andpayment as well as the duration of theprocedures.Contractors have a right to receive fullpayment as and when due anddeliberate late payment is unethical.Fair payment should apply equallybetween the client and main contractorthroughout the supply chain.Contractors should be able to claiminterest on late payment in terms ofthe contract whenever payment is late.
Current infrastructure paymentchallenges long periods for the completionof payment cycle;double-handlingofcertainauthorisation actions;limited delegations to authorisepayments;financial systems are often offline;lack of systems integrationresulting in double capturing ofthe same information duringdifferent stages of payment orcontract management; andlack of capacity within thedelivery chain including thepayment cycle.The two parties to a contract are theemployer and the contractor i.e. thesignatories to the contract.1. IntroductionThe cidb through its partnership programme with the NationalTreasury, Development Bank of Southern Africa (DBSA), andNational Department of Public Works (NDPW) named theInfrastructure Delivery Improvement Programme (IDIP) hasidentified that delayed payment to contractors is one of the mainblockages to infrastructure delivery in the public sector.Failure by the employer to pay contractors within the periodstipulated in their contracts potentially results in: the slowing of service delivery poor quality of infrastructure built poor performance of contractors the potential demise of contractors due to severe negativecash flow, particularly emerging contractors who are themost vulnerable clients being exposed to the risk of unfinished or poorlyfinished projects interest charges being incurred, i.e. fruitless and wastefulexpenditurePublic Finance Management Act, 1999 (Act 1 of 1999)38(1) The accounting officer for a department .(a)(i) must ensure that department has and maintains effective, efficient and transparent systems of financial and riskmanagement and internal control.(f) must settle all contractual obligations and pay all money owing within the prescribed or agreed period.Treasury Regulations for departments, trading entities,constitutional institutions and public entities, issued in terms of the Public Finance Management Act, 19998.1.1 The accounting officer of an institution must ensure that internal procedures and internal control measures are inplace for payment approval and processing. These internal controls should provide reasonable assurance that all expenditureis necessary, appropriate, paid promptly and is adequately recorded and reported.Local Government Municipal Finance Management Act 56 of 200365(2) The accounting officer must take all reasonable steps to ensure(a) that the municipality has and maintains an effective system of expenditure control, including procedures for theapproval, authorisation, withdrawal and payment of funds;(d) that payments by the municipality are made(i) directly to the person to whom it is due unless agreed otherwise for reasons as may be prescribed; and(ii) either electronically or by way of non-transferable cheques, provided that cash payments and payments by way ofcash cheques may be made for exceptional reasons only, and only up to a prescribed limit;(e) that all money owing by the municipality be paid within 30 days of receiving the relevant invoice or statement, unlessprescribed otherwise for certain categories of expenditurePractice Note # 192 of 10
The payment cycle can be grouped into three broad phasesnamely: Payment certification (evaluation of works and preparationof certificate) normally undertaken by the employer’s agent(e.g. Services Manager, Engineer, Principal Agent. ProjectManager, Employer’s representative) or representative (e.g.works inspector, project manager etc) Payment authorisation by the employer’s project manageror contract administrator prior to payment processing Payment processing by the employer’s staff and finalrelease of payment into the contractor’s account.2. Payment certification in accordancewith the provisions of the contractService and supply contracts make provision for monthly paymentbased on the value of the services or goods provided.Engineering and construction works contracts make provision forinterim payments (commonly on a monthly basis) for worksexecuted in terms of the contract.Each form of contract contains specific provisions for theprocedures associated with the initiation and processing ofpayments. Interest is payable on overdue accounts.The standard provisions in the forms of contract endorsed by thecidb are as outlined below. The contract data associated with aparticular contract may amend these standard provisions.An interim payment is a paymentmade to a contractor prior to thecompletion of the works or theexpiry of the defects liability period.The sum of interim paymentsrepresents a fair and reasonableestimate of the value of works atthe time of assessment.Interim payments providecontractors with the necessary cashflow to complete the works.Interest payments on overdueaccounts is fruitless and wastefulexpenditure as it is “expenditurewhich was made in vain and wouldhave been avoided had reasonablecare been exercised”Form of contractWho initiates payment claimProcessing of claimcidb Generalconditions ofpurchase--cidb Contract forthe Supply andDelivery ofGoods-cidb Supply ofGoods (ShortContract)Supplier assesses the amount due andsubmits each an invoice at eachassessment daycidb SupplyContractSupplier assesses the amount due andsubmits an invoice together withsupporting informationIf the Purchaser disputes an amountin the invoice, the Supplier is givenreasons for the disputed amountbefore the due date for payment.The undisputed amount is paid tothe SupplierIf the Purchaser does not agree withan invoice submitted by theSupplier, payment is made for theagreed part of the invoiceIf the Purchaser does not agree withan invoice submitted by theSupplier, payment is made for theagreed part of the invoicePeriod within whichEmployer paysSupply contractsPractice note # 193 of 10within 28 days of receipt of aSupplier’s statement andwhere required, valid taxinvoice.within 42 days of receiving avalid tax invoicewithin three weeks ofreceivingtheSupplier’sinvoice.within 30 days of receivingthe Supplier’s invoice
Form of contractWho initiates payment claimProcessing of claimPeriod (calendar days)within which EmployerpaysService contractscidb GeneralConditions ofService--NEC3 TermServices ContractServices Manager assesses the amountdue at each assessment date andconsider an application for paymentsubmitted by the ContractorServices Manager gives theContractor details of how theamount has been assessed andcertifies the payment within oneweek of the each assessment dateFIDIC ShortcontractContractor submits a monthly statementto the EmployerFIDIC “RedBook”Contractor is required to makeapplication for a payment certificate tothe Engineer at the end of each month,setting out the amounts which theContractor believes that he is entitled toContractor is required to makeapplication for a payment certificate tothe Engineer at the end of each periodstated in the contract data, setting outthe amounts which the Contractorbelieves that he is entitled toContractor is required to deliver to theEmployer a monthly statement forpayment of the amounts that heconsiders due to himPrincipal Agent issues an interimmonthly certificate. Contractor cooperates and assists in the preparationof the valuation of the paymentcertificate.Principal Agent issues an interimmonthly certificate. Contractor assiststhe Principal Agent in the preparing theclaim information and assessing theamounts completedwithin 28 days of receipt of aservice provider’s statementand where required, valid taxinvoicewithin three weeks of theassessment dateConstruction works contracts (interim payments)FIDIC “Yellowbook”GCC 2004JBCC MinorWorks(Edition 4.0 ofAugsut 2007)JBCC PrincipalAgreement(Edition 5.0 ofJuly 2007)NEC Engineeringand ConstructionShort ContractContractor assesses amount due byassessment date provided for in thecontract and applies for payment.NEC Engineeringand ConstructionContractProject Manager assesses the amountdue at each assessment date and mayconsider an application for paymentsubmitted by the Contractor.NEC3ProfessionalServices ContractConsultant assesses the amount dueand submits an invoice at eachassessment date.cidb StandardProfessionalServices ContractIf no provisions are established in thePricing Data, the Service Provider isentitled to render interim monthlyaccounts.Employer is permitted to deduct anyamounts for which a reason fordisagreement is given.Engineer verifies statements andissues interim Payment Certificatewithin 28 days of receipt of theContractor’s statement andsupporting documentsEngineer verifies statements andissues interim Payment Certificatewithin 28 days of receipt of theContractor’s statement andsupporting documents28 days of the delivery of thestatementEngineer verifies statements andissues interim payment certificatewithin 7 days to the Employer.28 days after the Engineerissues the paymentcertificate to the EmployerPrincipal Agent issues an interimpayment certificate by not later thanthe day of the month stated in thecontract data, whether or not theContractor provided any informationPrincipal Agent issues an interimpayment certificate by not later thanthe day of the month stated in thecontract data, based on a valuationnot more than 7 days prior to thisday, whether or not the Contractorprovided information.Employer notifies contractor ofcorrections7 days after Principal Agentissues payment certificate toContractor and EmployerProject Manager gives theContractor details of how theamount has been assessed andcertifies the payment within oneweek of each assessment date56 days after the Engineerreceives the Contractor’sapplication for payment56 days after the Engineerreceives the Contractor’sapplication for payment7 days after Principal Agentissues payment certificate toContractor and Employer3 weeks after the nextassessment date whichfollows the receipt of anapplication for payment3 weeks from theassessment dateProfessional service contractsEmployer notifies the Consultant ofany part of the Consultant’sassessment which is not acceptedbefore the due date for payment,whereupon the Consultant eithercorrects the invoice to reflect theagreed amount or provides furtherinformation to justify the invoice.Service Provider is notified of anydisputed amounts prior to the duedate of payment. Payment is madeon the balance of the invoice.Practice Note # 19within three weeks ofreceiving the Consultant’sinvoicewithin thirty (30) Days ofreceipt of the relevantinvoices4 of 10
In construction contracts, different processes are provided towhen final payment is made. The standard provisions for finalpayment in the forms of contract endorsed by the cidb are asoutlined below.Form of contractFIDIC Short contractFIDIC “Red Book”andWho initiates a final paymentclaimContractor provides Employer withfinal account within 45 days of theexpiry of the notifying (defectsliability) periodContractor provides Engineer withdraft final statement within 56days of receiving the PerformanceCertificateFIDIC “Yellow book”GCC 2004JBCC Minor WorksContractor deliver final statementto the Engineer with 14 days afterthe issue of the Final ApprovalCertificatePrincipal Agent submits the finalaccount to the contractor within 45days of practical completionJBCC PrincipalAgreementPrincipal Agent issues the finalaccount to the contractor within 90days of practical completionNEC Engineering andConstruction ShortContractContractor assesses amount dueand applies for payment withinone month after defects date.NEC Engineering andConstructionContractProject Manager assesses theamount due within four weeks ofthe Supervisor issuing the defectscertificate and may consider anapplication for payment submittedby the Contractor.Final payment is the amount due whenthe works have been completed or afterthe expiry of the defects liabilityperiodProcessing of final claimPeriod within whichEmployer pays28 days of the delivery of thefinal statementEngineer verifies statement. Contractorissues to the Engineer Final Statementand the discharge within 28 days of theissuing of the draft final statement.Engineer issues Employer Finalpayment certificate within 56 days ofreceipt of draft final statementEngineer verifies final statement andissues Final Payment Certificate within14 days of receipt of the Contractor’sfinal statementContractor accepts or objects to the finalaccount within 10 days. ThereafterPrincipal Agent issues final paymentcertificate to Contractor and Employer.Contractor accepts or objects to the finalaccount with 45 days of receipt.Thereafter the Principal Agent issuesfinal payment certificate within 7 days toContractor and Employer.Employer notifies contractor ofcorrections56 days after the employerreceives the Final PaymentCertificateProject Manager gives the Contractordetails of how the amount has beenassessed and certifies the paymentwithin one week of the each assessmentdateThe procedures for processing of claims are similar for the cidbsupply contracts, the cidb service contracts, the FIDIC ShortContract and the NEC3 Engineering and Construction ShortContract. Payment invoices, accompanied by supportinginformation as necessary, are generated by the contractor, basedon the prices provided in the contract and the services or workscompleted or goods supplied. An official who is familiar with thecontract, typically the official who acts as the employer’srepresentative in terms of the contract, needs to review thereasonableness or correctness of the contractor’s claim forpayment, correct the amounts due if necessary, notify thecontractor accordingly and certify the payment claim.An agent of the employer (Service Manager, Engineer, PrincipalAgent or Project Manager, depending upon the text of the form ofcontract referred to) is appointed to administer the contract and tocertify payment to the contractor in all the other forms of contract.The employer should rely on the certification of payments by suchagent.It is usually not necessary to develop specific forms for paymentclaims made by the contractor where the employer’sPractice note # 195 of 1028 days after the Engineerissues the final paymentcertificate to the Employer7 days after the date of thefinal payment certificate issuedby the Principal Agent to theContractor and Employer7 days after Principal Agentissues final payment certificateto Contractor and Employer7 weeks after the nextassessment date which followsthe receipt of an application forpayment3 weeks of the assessmentdateAn agent of the employer should bea person registered with a builtenvironment profession council.Such a person is governed by acode of conduct and can be heldprofessionally accountable for thereasonableness of such claims
The Forecasted Final Cost is anestimate of the likely cost ofcompleting the contract. As such isincludesallowancesforscopechanges, price adjustment, currencyfluctuations, identified risks, andother contingencies.Typically,atenderevaluationcommittee develops the ForecastedFinal Cost. The decision to award acontract is based on this value.representative certifies payment except in the case of constructionworks contracts. (The FIDIC Short Contract and the NEC3Engineering and Construction Short Contract contain proceduresfor the adjustment of the contract price where scope changes andemployer’s risk occur.) A standard form for the employer’srepresentative should be developed to ensure that records arekept regarding the previous amount claimed, the current invoiceamount, the total amount claimed to date and the contract price orthe Forecasted Final Cost. (If the amount claimed exceeds thecontract price or the Forecasted Final Cost, authority should beobtained in terms of an organisation’s procurement policy). Suchforms should also indicate the due date for payment after whichinterest may be charged to enable the processing of paymentcertificates to be prioritised, and to avoid confusion where interestis to be calculated from due date to date of payment.It is essential that specific forms for payment claims / certificationbe developed for the NEC3 Term Service Contract and all theconstruction works contracts. Such forms, in addition to reflectingthe abovementioned information should, as relevant, indicate keycontractual dates (start, completion and end of defects liabilityperiod), the total of prices at the commencement of the contractand the revised amount, the amount for work done to date,adjustments for scope changes and employer’s risks, penalties,advance payments (see inform practice note #16), deductionsmade in terms of the contract, VAT etc. The forms should bedesigned to reflect the wording of the contract that is used andcross reference the clauses to which the items refer. Suitablesupporting documentation must be attached to the form tosubstantiate the amounts certified. This provides an audit trail andfacilitates the auditing of the certificates should this be required.A tax invoice is a document which isprovided for in the Value-Added TaxAct, 1991 (“the VAT Act”) to enablethe vendor to claim input tax.The VAT Act prescribes that a taxinvoice must contain certain detailsabout the taxable supply as well asthe parties to the tra
particular contract may amend these standard provisions. Goods Goods (Short Form of contract Who initiates payment claim Processing of claim Period within which Employer pays Supply contracts cidb General conditions of purchase - - within 28 days of receipt of a Supplier’s statement and where requir
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ASME Section IX, 2019 Edition As published in the Welding Journal, September, 2019 (with bonus material. . .) UPDATED 12-19 Prepared by Walter J. Sperko, P.E. Sperko Engineering Services, Inc 4803 Archwood Drive Greensboro, NC 27406 USA Voice: 336-674-0600 FAX: 336-674-0202 e-mail: sperko@asme.org www.sperkoengineering.com . Changes to ASME Section IX, 2019 Edition Walter J. Sperko, P.E. Page .