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Construction Law/Advance payment Guarantee Charges

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Question
We are Main Contractor in one project in Dubai. Client nominated Suppliers/Subconrtactors for PS and PC Items and agreed a payment terms with Nominated Subcontractor/Supplier "NSC" . Client issued Letter of Nomination to us to enter into an Agreement with the Nominated Subcontractors. As per LON,NSC are entitled for an Advance Payment "AP" against Advance Payment Guarantee in favor of the Main Contractor.
Client refused to issue AP directly to the NSC instead instructed us to submit APG against the Advances to be paid to NSC.
Do we have right to claim costs and expenses in procurring the APG's.

Answer
Hi Catherine,

Thank you for your question.

Since you did not mention the Method of Measurement used in your contract, we will employ SMM7 (Standard Method of Measurement for Building Works) Seventh Edition - 1988 as reference.

1.   PROVISIONAL SUM (PS)

Under General Rule 10 of SMM7, the Provisional Sum could be identified as for either “defined” or “undefined” work:

General Rule 10.3 of SMM7: A Provisional Sum for “defined” work is a sum provided for work which is not completely designed but for which the following information are provided:

(a) The nature and construction of the work.
(b) A statement of how and where the work is fixed to the building and what other is to be fixed thereto.
(c) A quantity or quantities which indicate the scope and extent of the work.
(d) Any specified limitations and the like identified in Section A35 of SMM7

General Rule 10.5 of SMM7: A Provisional Sum for “undefined” work is a sum provided for work where the information required in accordance with rule 10.3 (listed above) are not given.

You may consider reviewing the Tender Documents if those items (a) to (d) above were provided during tender to determine whether the Provisional Sums priced within the BOQ are identified as defined or undefined works.

If those PS are defined works, the Contractor are deemed to have made due allowance for pricing preliminaries. Whereas, if those PS are undefined works, you are entitled to claim for overhead charges (including bank charges) and profit, calculated as a percentage of actual amounts by applying the relevant percentage rate (if any) stated in the appropriate Schedule. If there is no such rate, the percentage rate stated in the Appendix to Tender shall be applied.

2.   PRIME COST SUM (PC)

Prime Cost Sum normally contains list of materials and labor and does not include quantity. Thus, undefined work as described above shall apply.

Side Note: I find it unusual that the Client is interposing payment terms on your contract with the Nominated Subcontractors, especially that the said payment terms were introduced after the contract signing (main contract). However, considering that respective contracts (main contract and subcontracts) had been executed, the procedures of providing Advance Payment Guarantee (APG) by Subcontractor to Main Contractor and by Main Contractor to the Client are in accordance with standard practice.

Let us be positive that we could claim the fair and reasonable costs related to expenses in procuring APG, along with other overhead charges and profit.

I hope the above information clarifies and answers your question. Please do not hesitate to ask a follow-up question, if necessary. Mabuhay!

Kind regards,

Rofel

Construction Law

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Rofel Ningal

Expertise

Questions related to Construction Law, Conditions of Contract, Contract Terms & Conditions, Claims, Contract Administration, etc.

Experience

Having more than 10 years extensive experience in international companies, including working in the UAE, Qatar and Philippines, both for private and public sectors, such as, Government, Project Management, Consultancy and Construction provide a wider perspective in analyzing the issues related to Construction Law and the like to provide advice in a fair and reasonable manner, in accordance with the applicable Contract Terms and Conditions. The hands-on experience I had for preparing cost proposal for variations; daily correspondences protecting the rights of my organization under contract; preparation and finalization of contract/agreement; preparation, negotiation and finalization of claims for extension of time and associated cost, etc. will be useful to understand the details of every question asked. With experience working in a project administered by FIDIC Form of Contract (Red and Yellow), Public Works Authority (Qatar) Conditions of Contract, etc.

Organizations
Philippine Institute of Certified Quantity Surveyors Philippine Institute of Civil Engineers

Education/Credentials
BSc in Civil Engineering - West Negros University MBA in Construction (Units only) - Manchester Business School Worldwide

Awards and Honors
Licensed Civil Engineer at the age of 20

Past/Present Clients
Public Works Authority (Qatar), Roads & Transport Authority (UAE), Qatar Foundation (Qatar), Qatar Real Estate Investment Co., ALDAR Properties (UAE)

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