Rudi Klein would be delighted to explain why retention is an out of date method of providing some security to the buyer. I still see retention included in many contracts. So, whilst I concur with Rudi, we still need to advise those using retention to make sure they are familiar with some unique provisions of (most) NEC3 contracts and how they deal with retention.
Considering the NEC3 Engineering and Construction Contract (ECC), secondary Option X16 provides for retention. So, point to note is that retention is not automatically included in the contract unless expressly stated in Contract Data part one (1st bullet). The second point is that the % figure to be held is determined by the buyer (the Employer in ECC) who states this at time of tender. Half of the retention held is released upon Completion of the whole of the works and the remainder upon the defects date. This is similar to most standard form contracts.
One difference is that Completion of any sections of the works does not result in a reduction or paying back of retention, this is linked to Completion of the whole of the works. The main feature I wanted to point out here is the retention free amount. If you think about it, on say a 2 year contract, why do we take retention each month from the Contractor when really we only want security at the back end of the contract to provide a stick to get the Contractor back to correct Defects? Who pays for the financing of such monies held? The buyer of course. Is this good value? Probably not. So, a key differentiator with retention on NEC3 contracts is that you can specify a retention free amount whereby retention is only held after the retention free amount is reached. This eases the Contractor's cash flow burden, must reduce the financing charges and therefore the price payable.
So, if one absolutely must have retention, then think both about the retention % but more importantly how much retention free amount can properly be included.
Any thoughts?
Tuesday 16 November 2010
Wednesday 10 November 2010
Postive cash flow anyone?
The UK construction industry in my experience is a terrible one for payment. Some of the records of payment terms are worse than archaic. Is there a worse industry around I wonder?
Why do we expect the next guy down the chain to basically fund the next guy up the chain? Can you imagine popping into your local supermarket, taking the goods and commenting you will probably pay some time in the next 100 days or so if they are lucky - unlikely (if you want to avoid arrest), but that is basically quite often how we operate.
The UK government is trying to address this and has a very noble aim (through the Fair Payment initiative) to get monies from clients all the way down to tier 3 all within 30 days of an assessment date. Of course it can be achieved, there is simply no reason at all why not. Cut through most beaurocratic processes and paying becomes straightforward. There is of course the facility of a project bank account on the right sized job, such a provision can be found on http://www.neccontract.com/.
Anyway, all of this still promotes a negative cash flow running through the supply chain. So why not conisder flipping this over and promoting positive cash flow contracts - guess what, these are usually quite a bit cheaper than the negative cash flow contract as the seller(s) no longer funds/charges the chain above.
In the NEC3 Engineering and Construction Contract (ECC) there is secondary Option X14 Advanced payment to the Contractor. Decide the amount of advance payment to be made (within 4 weeks of the Contract Date), get an advanced payment bond, decide over how many months the Contractor repays the amount and away you go.
In the private sector, ask tenderers at tender stage to price with/without the advanced payment (make it a very reasonable amount) - if you decide the saving is worth doing then go for it.
In the public sector there is some work to do. The rules are different, it appears, in that goods, works or services should not be paid for before receiving them - this surely is nonesense. This is one rule (as a UK taxpayer) I would love to change - why on earth should this rule exist, actually does anyone know precisely where it does exist?! If I can get things x% cheaper as a taxpayer with the slight risk associated, wouldn't this mean I get more bangs for my buck, isn't that best value? When Latham/Egan said we were inefficient, there was waste in the system, then surely the simple consideration of equitable payment terms can make a huge difference?
What do you think?
Rob
Why do we expect the next guy down the chain to basically fund the next guy up the chain? Can you imagine popping into your local supermarket, taking the goods and commenting you will probably pay some time in the next 100 days or so if they are lucky - unlikely (if you want to avoid arrest), but that is basically quite often how we operate.
The UK government is trying to address this and has a very noble aim (through the Fair Payment initiative) to get monies from clients all the way down to tier 3 all within 30 days of an assessment date. Of course it can be achieved, there is simply no reason at all why not. Cut through most beaurocratic processes and paying becomes straightforward. There is of course the facility of a project bank account on the right sized job, such a provision can be found on http://www.neccontract.com/.
Anyway, all of this still promotes a negative cash flow running through the supply chain. So why not conisder flipping this over and promoting positive cash flow contracts - guess what, these are usually quite a bit cheaper than the negative cash flow contract as the seller(s) no longer funds/charges the chain above.
In the NEC3 Engineering and Construction Contract (ECC) there is secondary Option X14 Advanced payment to the Contractor. Decide the amount of advance payment to be made (within 4 weeks of the Contract Date), get an advanced payment bond, decide over how many months the Contractor repays the amount and away you go.
In the private sector, ask tenderers at tender stage to price with/without the advanced payment (make it a very reasonable amount) - if you decide the saving is worth doing then go for it.
In the public sector there is some work to do. The rules are different, it appears, in that goods, works or services should not be paid for before receiving them - this surely is nonesense. This is one rule (as a UK taxpayer) I would love to change - why on earth should this rule exist, actually does anyone know precisely where it does exist?! If I can get things x% cheaper as a taxpayer with the slight risk associated, wouldn't this mean I get more bangs for my buck, isn't that best value? When Latham/Egan said we were inefficient, there was waste in the system, then surely the simple consideration of equitable payment terms can make a huge difference?
What do you think?
Rob
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