Disruption of Payment: Why Project in Risk

The normalcy in the construction contract that the Employer hereby promises to pay the Contractor the Contract Price or such other sum as may become payable under the Contract at the times and in the manner prescribed by the Contract in consideration of the execution and completion of the Contract Works as per the Contract, However, in reality, sometimes it happens that the Engineer, the Employer’s representative, makes delay in the certification of the payment or the Employer causes delay in making payment following the Payment Certification was even done on time. As per FIDIC Sub-Clause 14.6 [Issue of Interim Payment Certificates], the payment can be withheld/delayed for or in connection with three cases where

1.     one of them is that if the Contractor do not submit the performance security as it states “No amount will be certified or paid until the Employer has received and approved the Performance Security.”

2.     The other case is that if any interim payment is less than the minimum amount of Interim Payment Certificates (if any) stated in the Contract Data as per FIDIC Sub-Clause 14.6 states “…. prior to issuing the Taking-Over Certificate for the Works, the Engineer shall not be bound to issue an Interim Payment Certificate in an amount which would (after retention and other deductions) be less than the minimum amount of Interim Payment Certificates (if any) stated in the Contract Data. In this event, the Engineer shall give notice to the Contractor accordingly.” 

3.      in case of final payment certificate, the Engineer can withheld the certification until agreement is reached for final statement as per FIDIC Sub-Clause 14.11 [Application for Final Payment Certificate] which states “If the Engineer disagrees with or cannot verify any part of the draft final statement, the Contractor shall submit such further information as the Engineer may reasonably require within 28 days from receipt of said draft and shall make such changes in the draft as may be agreed between them. The Contractor shall then prepare and submit to the Engineer the final statement as agreed. This agreed statement is referred to in these Conditions as the “Final Statement”.”

In many cases, it has been observed that the Engineer withheld a substantial amount of payment for executed works due to the absence of certain particulars such as Work Inspection report (WIR). Such kind of proposition is not reasonable and not supported by the Contract as the Engineer should be aware of the execution of the works due to its presence in the Site for the full time. The Engineer has no right to deduct/withheld the Contractor’s payment for the work done except the cost of rectification or replacement of any defective works and payment for unperformed works as per the FIDIC Sub-Clause 14.6 [Issue of Interim Payment Certificates] which provides “An Interim Payment Certificate shall not be withheld for any other reason, although:

1.     if anything supplied or work done by the Contractor is not in accordance with the Contract, the cost of rectification or replacement may be withheld until rectification or replacement has been completed; and

2.     if the Contractor was or is failing to perform any work or obligation in accordance with the Contract, and had been so notified by the Engineer, the value of this work or obligation may be withheld until the work or obligation has been performed.”

Therefore, such withheld of the payment for executed work is not legitimate which violates the principles of the Contract. On the other hand, it creates financial void for the Contractor to carry out the remaining works. Moreover, it cannot be denied that the Engineer has authority to make any correction or modification that should properly be made to any previous Payment Certificates as per the FIDIC Sub-Clause 14.6 [Issue of Interim Payment Certificates]. Such provision is to ensure that even absence of the WIR, the Engineer shall certify the Current payment which is permitted for any correction or modification in the next Payment Certificate upon official inspection of the works under WIR in case of the defective works found during the official inspection. The Clause also states that a Payment Certificate shall not be deemed to indicate the Engineer’s acceptance, approval, consent or satisfaction. FIDIC Sub-Clause 3.1 [Engineer’s Duties and Authority] is also available for further alleviation of the Engineer’s burden which states “…any approval, check, certificate, consent, examination, inspection, instruction, notice, proposal, request, test, or similar act by the Engineer (including absence of disapproval) shall not relieve the Contractor from any responsibility he has under the Contract, including responsibility for errors, omissions, discrepancies and non-compliances;”

However, in any case except absence of performance security and disagreement for final payment certificate, the Engineer cannot make delay in the payment certification. In this case, FIDIC Sub-Clause 1.3 [Communications] can be referred which states

“Approvals, certificates, consents and determinations shall not be unreasonably withheld or delayed.”

It is in the spirit that such delay in certification may make the situation unfavorable to perform the Contract in effective and efficient manner and may cause many difficulties in achieving the ultimate objective of the project but not limited to the disorder in the contract administration that submission of next interim payment application will be delayed which follows the approved data in the previous payment certificate. This materially and adversely affects the economic balance of the Contract and/or the ability of the Contractor to perform the Contract. The Engineer is aware that many subcontractors under the Contractor fails to perform the works as per the plan, to procure the materials from the suppliers in the harsh market, to pay the worker’s salary due to the disruption in cash flow. Therefore, with respect to the paragraph thereof of FIDIC Sub-Clause 1.3, FIDIC Guide states

 “The importance of this requirement, and the serious consequences of non-compliance, should not be under-estimated”. 

In this connection, the Contractor has the right to suspend work or reduce the rate of work as per the provision of FIDIC Sub-Clause 16.1 which states “If the Engineer fails to certify in accordance with FIDIC Sub-Clause 14.6 [Issue of Interim Payment Certificates] or the Employer fails to comply with FIDIC Sub-Clause 2.4 [Employer’s Financial Arrangements] or FIDIC Sub-Clause 14.7 [Payment], the Contractor may, after giving not less than 21 days’ notice to the Employer, suspend work (or reduce the rate of work) unless and until the Contractor has received the Payment Certificate, reasonable evidence or payment, as the case may be and as described in the notice.” It is also pertinent to inform as per the Sub-Clause 16.1 of Contract which states “The Contractor’s action shall not prejudice his entitlements to financing charges under Sub-Clause 14.8 [Delayed Payment] and to termination under Sub-Clause 16.2 [Termination by Contractor].”

As per FIDIC Sub-Clause 14.8 [Delayed Payment], The Contractor is entitled to financing charges if he does not receive payment in accordance with the appropriate sub-paragraph of Sub-Clause 14.7. The date on which the Interim Payment Certificate is issued is not relevant when calculating these financing charges. Financing charges are calculated for a period which is "deemed to commence on the date for payment specified in Sub-Clause 14.7", even if the Engineer had not issued an Interim Payment Certificate by such "date for payment". If the Certificate is late but the Employer accelerate his process and make the payment timely as per Sub-Clause 14.7, the Contractor will not be entitled to financing charges. The Contractor is entitled to these financing charges without being required to give notice and without a Payment Certificate as per the FIDIC Guide. Financing charges are to be calculated at the annual rate of three percentage points above the discount rate of the central bank in the country of the currency of payment. If this rate is considered inappropriate when tender document is being prepared, a new rate may be defined in the Particular Conditions of the Contract.

It is suggested at the first place that all the parties should abide by the ruling of the Contract to avoid any disruption in payment and dispute in future. There is no other option except maintaining good management of record to avoid the dispute. The Contractor has the major obligation for record keeping and should submit all the particulars on timely manner so that the Engineer can make evaluation in an efficient and effective manner. The Engineer should be punctual to make the inspection of executed works and issue WIR. The Employer should coordinate with financing institute (if funded by others) for timely release of the payment. It may benefit the Employer in case of currency exchange is required due to other currencies are used as per the Contract in addition to local currency to avoid variation in the payment which may warrant financing charges.