Advance Payments in Works

Advance payments made in construction contracts are discussed

1. ADVANCE PAYMENTS IN CASE OF WORKS CONTRACTS Dr K M Soni , ADG( Retd .), CPWD, New Delhi

2. ADVANCE PAYMENT Advance payment is the payment made to the contractor in advance of work done or goods supplied required for the work Advance payment may also be made for the services rendered in advance. For example, payment is made for testing of materials being used in a work in advance, it is advance payment for the services. Similarly, suppose payment is made to a consultant or institute for designated services required in a work in advance, it is advance payment. Advance payment is also known as down payment or ex gratia payment

3. ADVANCE PAYMENT TO CONTRACTOR Advance payment is made to help the contractor to meet significant start up cost/procurement costs/procurement expenses/mobilization required for the work before the work actually commences. Such payment includes; Mobilisation advance of materials Plants/T&P or Machinery advance

4. RISKS INVOLVED IN ADVANCE PAYMENTS Risks are always involved in making advance payments To mitigate the risks, various measures are required to be taken including one of the measures of taking guarantee bonds taken from the contractor like bank guarantees.

5. CONDITIONS OF ADVANCE PAYMENTS Materials/Equipment/T&P must be for bonafide use of the work The contractor must utilise the advance for the work The contractor must bring materials/Equipment/T&P at the site as per requirements and in reasonable time Advance payments should be recovered as early as feasible to mitigate the risks In case advances are interest bearing, recovery should be made along with the interest

6. MOBILIZATION ADVANCE Mobilization advance is paid before commencement of work, if not full, part as per instalment mentioned in the contract If a time limit is mentioned in the contract for release of advance payment, it should be adhered to Mobilization advance may be given in one or more instalments as per contract conditions. In case, proof is required to be submitted by the contractor for utilization of such advance for bonafide use of work, it should be asked for.

7. MOBILIZATION ADVANCE Mobilization advance is not for the materials already brought at site and as such no instalment can be released on completion of such work or items of work for which advance is sought or on completion of work The amount of advance will be as per contract clauses. In buildings, it may be 10% of the contract value Mobilization advance is to be given against valid, irrevocable guarantee/bond of required amount as per contract conditions to be submitted by the contractor. Such bank guarantee/bond has to be got verified independently from the bank

8. PLANT/MACHINERY/EQUIPMENT ADVANCE The advance shall be given only for the plant/machinery/Equipment required for bonafide use of work Since risk involved in such advance is higher as such advance is released when the contractor brings the plant/machinery/equipment at the site however in case of different condition in the contractor, it should be released accordingly, may be by taking guarantee. In case, advance is given for offsite delivery as per contract conditions, guarantee bond shall be obtained from the contractor.

9. PLANT/MACHINERY/EQUIPMENT ADVANCE The conditions of the plant/machinery/equipment has to be verified by the employer before release of advance The plant/machinery/equipment should be hypothecated to the employer by the contractor and also insured The amount of advance will be as per contract clauses. In buildings of large values, it may be 5% of the contract value

10. SECURED ADVANCE Secured advance is given on the materials brought at site but not measured on signing of indenture by the contractor The materials must be for bonafide use of work The requirement of materials should be for near use in the work, non perishable, non fragile and non combustible If the materials are perishable in nature, it has larger risks and to cover the risks, the materials should be insured in the name of the employer. Secured advance on high risk materials is not given

11. SECURED ADVANCE The Secured advance should not be advantageous to the contractor and as such given to the extent of 75% of the assessed value of the materials brought at site, not exceeding 75% of the value of materials if available in contract directly or derived. The advance on the materials used is recovered immediately on first payment when made for completed item involving those materials The materials are not allowed to be shifted from the site and as such a close watch is to be kept on materials and ensured that dual advance is not given on same materials

12. ADVANCE AGAINST WORK DONE Sometimes advance is released against the work which has been done but not measured and the measurements and payment may take time to ease out the financial condition of the contractor. In such case, it has to ensure that the advance does not exceed the payment admissible for the work done Such advance payment should be adjusted against measured and passed bill as early as possible

13. INTERIM/RUNNING ACCOUNT BILLS As per conditions of many contracts, all interim bills or Running Account bills are considered as advances but they do not require any guarantee as the payments are made against work done. They are considered as advances to recover over payments if any, during currency of work and all such bills are finalised in the final bill.

14. ADVANCE PAYMENT FOR OFF SITE MATERIALS/EQUIPMENT Sometimes, advances are released against materials/equipment available at factory or yard, sometimes against invoice or dispatch vouchers where contractor has made large advance payment and not delivered/brought at site. This involves high risk to the employer and as such all necessary precautions should be taken as per the contract conditions and Works Manual provisions.

15. Thanks for attending Dr K M Soni , ADG ( Retd .), CPWD, New Delhi Also available on Youtube : KRISHNA MURARI Soni at https://www.youtube.com/channel/UC_pPYxk0jI1ayqA5rO6fBOw