In these supply shortage, inflationary times, we order everything we can early, to secure the programme and the budget. But price and programme certainty come at a cost when materials are stored off site. Off Site Materials claims have become an increasingly important factor in the way we administer the supply chain for successful delivery of projects today. Are our payment terms covering the risks?
A History of Off Site Payment Terms
1949 through to 1984 – NZSS623 no mention of payment for materials off site. 1984 NZS623P allowed claims for “any advances for Temporary Works or Plant or for Materials not yet on site for which payment is provided in the Contract Documents”. But no special conditions or schedules relating to materials off site.
NZS3910:1987 followed the preceding terms of NZS623P:1984, yet practice history had already allowed materials off site to be paid for on ad-hoc terms, including home drafted bailment agreements. All the pragmatic issues to be addressed when making payment for off-site materials where well understood, but inconsistently practiced.
Before 1984, traditions had emerged from creating terms when needed. In part these followed the principals established for advances for Plant and Temporary Works and in the case of materials off site, a factor was applied. Such factors have also been applied to materials on site on some occasions, and represented an assessment of risk in laying out money for goods not yet subject to on site quality assessment by the architect, as they are installed. Materials on site may be factored by say 90% of the cost value as payable and materials off site may be factored by say 80% of the cost value as payable. When codification commenced in 1984, none of these factorial traditions survived in the express terms, but still factorial tradition held a firm influence on the thinking of those experienced practitioners of the day, when valuing the works. Some old hands are still thinking this way today.
Today’s Payment Problem
Nowhere in the modern standard form contracts NZIA or NZS3910 is there any rationale or term to permit an arbitrary factorisation of the value of materials off site. Yet right now Engineers to the contract are factoring materials off site values downwards by excluding (a) Off-site Overheads, (b) Profit, or (c) simply applying a factorial percentage citing the old tradition of "elevated risk".
21st Century Materials Off Site Payment Terms
NZIA SCC and NZS3910 both contain schedules of terms to be complied with for an advance payment to be made for materials off site. They each convey transfer of title from the Contractor to the Principal, when payment has been made in accordance with the terms of the contract.
NZIA SCC and NZS3910 each describe the Principal’s Cost or Contract Price, to be the net actual cost plus On Site Overheads, Off site Overheads, and Profit. The payment terms aggregate the full value of works complete, variations complete, materials on site, materials off site, amounts for fluctuations, amounts for bonus and then deduct, (a) retentions, (b) any other amounts which the Contract allows to be deducted, and (c) a deduction for amounts previous certified for payment.
The Risks of Bad Payment Practice Today
Interest. If under-certification of materials off site claims is endemic, note there is no time limit for claiming interest for unreasonable deduction. This contractual entitlement is not a variation subject to notice nor a matter subject to decision by the Engineer. It can be saved it up for your final account.
Liquidation. Title to the goods expressly transfers as a condition of payment being made, in accordance with the terms of the contract. Where any basis for a certified value, falls outside of the terms of the contract, title may not transfer. There are plenty of brave liquidators keen to discharge their duties to creditors.
Practical Risks to Manage
Materials often are procured for off-site manufacture, transform from purchased package units to fabricated components work in progress, move locations for preparatory or finishing processes, are assembled into contact works installation units and moved into storage awaiting delivery for site installation. Practical risks include identification of legal ownership as materials move and transform, access to a variety premises, protection from the elements, insurance, the cost of providing space for storage and inspection, etc.
The current market increase in demand for early ordering adds cost to the works and administration costs to projects. Current standard form contract schedules are inadequate to practically guide the team to cater for the full variety of challenges faced in protecting the principal’s interests. The solutions are not rocket science. We serve our client better if we focus on better managing practical risks instead of gambling with the client’s development margin for the sake of cheap chiselling some cashflow from the Contractor.
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