Last edited 12 Dec 2017

Valuation of interim payments

The Housing Grants, Construction and Regeneration Act stipulates that interim or stage payments are due to any party to a construction contract that has a duration of more than 45 days. Therefore, almost all constructions contain provisions for interim payments.

Contracts should also include clauses that detail:

The valuation method.
Criteria under which interim payments will be made.
Payment timings.
Administrative rules to which those undertaking the valuation should adhere.

Interim valuation is a pre-cursor to the issue of an interim certificate, which in turn allows an interim payment to be made. It is a detailed breakdown, generally prepared by a contractor, that constitutes an application for part payment for work undertaken since the last valuation. It is checked and signed off by the client's contract administrator who often delegates the task to a cost consultant. This usually involves visiting the site and checking that the work has been carried out, either by measurement or by visual inspection.

Interim payments ease the contractor's cash flow, on the premise that project finance is cheaper for the client than it is for individual contractors.

The basis of the contractor's interim valuation (application for payment) will vary depending on the type of contract being used. Calculations can be based on:

Activity schedules assessed in terms of percentage achieved or completion of the activity.
Milestones reached on a pre-agreed programme.
Measurement against a bill of quantities.
Stage payments against calendar dates.

Or a combination of the above.

The detailed build up of the valuation will show all work and entitlement up to the date of the interim valuation and will comprise:

Works packages. That is, work executed by the contractor that is in full accordance with the contract.
Preliminaries. That is, set up and dismantling costs (only incurred once) and running costs such as insurance and electrical consumption (that will occur regularly), as well as staff and management costs, overhead and profit (which can amount to 50% of the overall cost of preliminaries).
Variations. These elements should only be paid after the work has been undertaken, based on the rules for valuing variations in the contract.
Extension of time (EOT) and / or loss and expense. Payment entitlement is only due upon delay that is solely caused by the client or items of risk that fall to the client (see relevant events for more information). Concurrent delay where the contractor has part liability may lead to an extension of time and relief of liquidated and ascertained damages but not entitle the contractor to additional payment.
Special payments for off-site goods and materials. Such payments might apply on large items of manufacture prior to site installation but only when such payment has been pre-agreed. Such items might include transformers, chillers, lifts, prefabricated units or expensive cladding systems. The application must be accompanied by evidential proof (sometimes photographic), or a factory visit by the client's representative, a certificate of client ownership and appropriate identification labelling on the items of completed manufacture, stored separately in the factory from other materials. See Off-site goods and materials for more information.
Acceleration costs. Sometimes acceleration agreements can be negotiated as an addendum to the contract in lieu of extensions of time caused by elements constituting client's risk. Such agreements will stipulate the payment provisions.
Provisional sums. These are the substitution of agreed costs for any items in the contract documents that were provisional and therefore subject to negotiation and resolution after further and better particulars were available upon which to fix a price.
Adjustment of prime cost sums.
Contractor's design fees.
Costs/expenses relating to contractor's right of suspension.
Specific adjustments (for advanced payments, work not properly executed, fluctuations, retention, and so on).

Certain deductions might be made by the contract administrator when certifying the contractor's application for payment, such as:

Retention. As set out in the contract. Half of this retention will be released on certification of practical completion and the other half upon issue of the certificate of making good defects.
Liquidated and ascertained damages. These can only be levied after the completion date has expired.
Set off costs. The client's right to deduct costs it has incurred through the contractor's negligence such as a successful claim by an adjacent property owner for subsidence due to failure of temporary bracing of a party wall.
Substandard or rejected work. Occasionally a client might agree a reduction in payment to reflect diminution of value rather than insisting on replacement.

The meaning of 'value', in the context of interim valuations, can be contested. According to the JCT Standard Building Contract with Quantities 2011, it refers to the 'total values of work properly executed by the Contractor'. Often the contractor's position is that they are entitled to payment for work done at the rates referenced in the bill of quantities, plus some of the preliminaries. This is the most common interpretation across the industry.

However, employers have argued that this is misrepresentative of the actual value of the work to them, which is the value of the whole contract less the cost of having to hire another contractor if the first contractor failed to complete the works. This is not a commonly accepted position.

The interim valuation is for all work completed, not for the work completed in that period. This means that the certified interim payment is calculated by subtracting the the previous valuation from the current valuation, less any deductions. The resulting total and retention figure are then included in the interim certificate issued to the client for payment by the contract administrator.

It is important to assess whether or not, within the terms and conditions of the contract, the anticipated final contract value will be sufficient to complete the remaining works. Low valuations will place unreasonable financial pressure on the contractor, whereas a high valuation will create a risk to the employer.

NB: The Housing Grants Construction and Regeneration Act sets out statutory procedures for making and withholding payments on construction contracts. See Pay less notice and Payment notice for more information.