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Construction Law/Clause 14.2: FIDIC Yellow Book

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QUESTION: Dear Sir,

We are involved with an important infrastructure project in India. The contract is governed by General Conditions from FIDIC Yellow Book 1999.

In the 5th para of Clause 14.2 of FIDIC Yellow Book, does the word 'excluding' used in the phrase 'excluding the advance payment and deductions and repayments of retention' mean 'ignoring' or 'reducing'? For example, if the amount of a Payment Certificate is INR 100,000 and deduction for retention @ 10% is INR 10,000 (No repayment of retention is involved in the Payment Application), would the recovery of Advance be calculated at 25% of INR 100,000 (Gross amount) or 25% of INR 90,000 (Net amount after deducting retention)?

Thanks in advance.

Alok

ANSWER: Dear Alok,

The amortisation of the loan is tied to the work done, rather than the payment to the Contractor.  The word excluding has the sense of ignoring, rather than reducing, so the recovery of advance would be 25% of INR 100,000, not 25% of INR 90,000 (Net amount after deducting retention).  I suggest that you look at two scenarios, one without deduction retentions and one after deducting retentions and see how the amortisation of the loan progresses.

---------- FOLLOW-UP ----------

QUESTION: Dear Mr. Elliott,

I felt that if FIDIC had meant the calculation of recovery of advance payment to be on the gross amount, they would not have mentioned the phrase within brackets i.e. 'excluding the advance payment and deductions and repayments of retention'. It would have simply been the amortization rate of 25% of the amount of each Payment Certificate.

Subsequently, I have done some further Google search. I found some earlier answers in this forum. In your answer to Neville on 3rd September 2010, you have said that the amount should be based on value of works done to date less retentions and repayments. In your answer to Pete on 13th May 2013, you have said that 'Clause 14.2 b is relevant to the calculation of repayment of any advance payment. The repayment is based on the net value of the IPC, excluding retentions and repayments of retentions. In an answer on 30th Jan 2010, Alina Valentina Oprea, another expert on the site, has said that from the amount representing the works done in that month, some amounts are to be deducted, and from that net amount the recovery of advance payment is to be deducted.

I also found an 'Inform Practice Note #16' in respect of Advance Payments on the website of Construction Industry Development Board, the Building Industry regulator of South Africa. The Note is available at the following link:
http://cidb.org.za/publications/Documents/Practice%20Note%2016.pdf

The calculations of recovery of Advance payment at page 5 of the above Note are on net basis i.e. after reducing Retention amount from Work Done. Of course, the headings of columns pertaining to 'Retention' and 'Total repayment of advance' appear to have been inadvertently interchanged.

There is a book by Mr Coinloorke CE available at the following link:
https://plus.google.com/+CoinloorkeCE/posts/KBpTmM34sse
In FIDIC sub-clause 14.2 - Advance payment (explained), it states that 'The rate of recovery of amortization of Advance payment shall be 25% of each payment certificate sum less retention, deduction and Advance payment sums'.

I have sent an email to FIDIC also but have not received a reply.

Please advise.

Alok

Answer
Dear Alok,

I guess that you will have to find your own answer.  I stand by my current view that the amortisation is based on the value of work done, just as the advance is calculated on the Accepted Contract Amount.  I will ask some colleagues and send you their answers.  As I suggest above, I suggest that you do a couple of scenarios, because it could be that one scenario does not allow the advance payment to be repaid in time.  

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Peter M. Elliott

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First response to queries regarding extensions of time, variations orders, site instructions and payment using FIDIC and other forms of Conditions of Contract, based on English Law, and derivatives only. Anyone who needs advice about EoT should download and study the SCL Delay & Disruption Protocol www.eotprotocol.com before submitting a question.

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Value . . .
It's unwise to pay too much, but it's unwise to pay too little. When you pay too much you lose a little money, that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing you bought it to do.
The common law of business balance prohibits paying a little and getting a lot. It can't be done. If you deal with the lowest bidder, it's well to add something for the risk you run.
And if you do that, you will have enough to pay for something better.
. . . John Ruskin (1819 - 1900)
"We are too poor to buy something cheap"
.Romanian Proverb 2002
A lean compromise is better than a fat lawsuit. George Herbert (English poet 1593-1633)
I said it in Hebrew, I said it in Dutch,
I said it in German and Greek:
But I wholly forgot (and it vexes me much)
That English is what you speak!" Hunting of the Snark - Lewis Caroll
Match your presentation to the reader!
The joy of food lasts but an hour, of sleep but a day, of a woman, but a month, but the joy of a building lasts a lifetime. Syrian proverb.
Comments and observations leading to improvements in the translation of FIDIC Red & Yellow books into Romanian prior to approval by FIDIC (reference 'Preface to the Romanian edition')

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Institution of Civil Engineers, Association of Chartered and Certified Accountants, Society of Construction Law, Dispute Resolution Board Foundation

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B Sc(Hons) in Civil Engineering

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