FIDIC 1999 And NEC4 ECC: Comparison Of Payment Method

In this post, we are discussing the difference in payment methods between the FIDIC contract and the NEC4 contract.

Introduction

Payment is a core part of any project and it needs to be ensured that they are regulated on time, FIDIC  contract and NEC both of the contracts provide the details of payment which are including the time of payment, advance payment, retention money, and financial steps after taking over.

Comparison of Payment Between FIDIC Contract and NEC4 ECC

In FIDIC contract Clause 14.2 handles the process of advance payment; the advance payment is used for front-loading the contractor’s cash flow. The contractor raises the advance payment invoices and the consultant approves and prepares a certificate for the client, upon receiving the advance payment certificate the client releases the amount which will work as a front-loading for the cash flow of the contractor and can be utilized for mobilization or kick start the project.

However, the advance payment given to a contractor is always backed up by an Advance payment guarantee which should be equal to the amount of advance payment and shall remain valid till the full advance payment is recovered. If it is expired before the recovery of advance payment the contractor has to immediately renew the guarantee and in case the contractor will not renew the guarantee seven (7) days before the expiry the client has the right to claim the remaining which has not been recovered.

Clause 14.3 handles the process of interim payment since the construction projects are time-consuming projects and it is not possible to get all the payment of the project once the project is finished the construction contracts define a way in which the contractor can get the interim payment on a monthly basis.

The interim payment is prepared and submitted to the consultant by the contractor for their approval. The payment given to the consultant should be in such a way that it would be acceptable to the consultant and should be backed up by all the proper documents. The interim payment should include the estimated value of the works executed, the total contract value, retention amount (if any), the deduction for advance payments, provisional sum amount, payment on account, the material on site (if any), and deduction for previous payment certificate.

Clause 14.4 handles the process for a schedule of payment, If the client would like to pay the amount of the project in installment and the contractor would agree to it then this clause will be in action and a schedule of payment will be prepared by the consultant referring the progress of the work.

Clause 14.5 defines the process of adding payment for plants and materials when they are shipped or when they are delivered on-site. In order to claim against this clause, the contractor has to provide sufficient data that the order has been placed or the order has been shipped which needs to be with a bill of laden. In order to issue the payment to the contractor, there are some prerequisites defined in clause 14.6 which need to be covered by the contractor otherwise the client has the right to withhold the payment.

The client can withhold the payment of the contractor if the performance bond is not provided or the contractor representative is not appointed. It also clearly provides the time of payment that the contractor should receive the certificate and that the contractor should receive the amount. As per clause 14.7, the contractor has the right to receive its payment within a certain number of days which will be as agreed in the contract.

Clause 14.8 provides support to the contractor in case of any delay in the payment from the client it provides the contractor the right to claim for finance charges compounded monthly on the unpaid amount. There is a certain amount of payment that client withholds until all the obligations of the contractor are met, clause 14.9 covers the rights of the contractor for releasing the retention of the money. Once all the obligation of the contractor is met contractually, the contractor submits a statement of the completion within (84) days of the completion of works, and all the rights are reserved with clause 14.10. Clause14.11 provides the procedure to make a final statement of the account in which all the financial liabilities of the contractor and clients need to be discharged and the Final payment certificate needs to be prepared and approved by the consultant as per clause 14.13.

The payment process for NEC4 ECC contracts is almost similar to FIDIC however due to the collaborative nature of the NEC4 ECC contract the payment periods are shorter in NEC4. In the NEC4 ECC contract, the payment is prepared by the contractor and is submitted to the project manager in order to calculate the payment, and usually, the payment process is linked to the milestones of the project. As per clause 51.1, the project manager is obliged to assess the payment within one week, and usually, the contractors are paid within three weeks of the assessment by the project manager.

The payment of the contractor is linked with the program and if the contractor doesn’t submit the program the project manager has the right to withhold one-third of the payment. In NEC4 ECC interim payments are submitted as per clause 50.2 and the value of the works is determined by clause 50.3.

The payment procedure also depends on the type of option chosen for the purpose of the payment  For every payment to be assessed the most essential document is the Activity schedule. As per the activity schedule, the project manager will proceed with the payment. Likewise as FIDIC in NEC4 ECC also the advance payment option is available and the client can choose to pay the contractor advance payment for the front-loading of the contractor cash flow as per clause 14.1. However, unlike FIDIC in NEC4 ECC the submission of an advance payment bond is optional and it depends on the client as per clause 14.2.

The advance payment is deductible in interim payment as per clause 14.3. Due to the collaborative nature of the contract, retention is also a secondary option and if the client wishes to proceed with this option retention in the interim payment is deducted which creates a negative impact on the cash flow of the contractor. As per clause 53.1, the project manager is required to assess the final payment of the contractor and to issue a final payment certificate.

Once the assessment is finished contractor will be briefed on how the assessment has been done and if the project manager is unable to assess the final payment within due course of time the contractor has the right to prepare the final assessment and to submit it to the client without the approval of project manager. Once the assessment is accepted by the client it will become final and conclusive and the client will be required to pay for the contractor within the time limit set in the contract.

Conclusion

FIDIC contract is not collaborative in nature while NEC4 ECC allows the contractor to work in a more collaborative environment.