Streamline Your Progress Billing for Construction Sample for Engineering

Progress billing for construction sample for Engineering

hello guys and welcome i'm this is cost engineering professional in this video we will be discussing the terms of payment for construction projects if this is your first time visiting our channel please consider subscribing to the channel turning on notification like share show us love guys because we love you so much and with this let's get into the video [Music] all right what we are going to be explaining here is what are the terms of famine that can be agreed for purchases and subcontract works we'll talk about the advanced payment we'll talk about the payment upon delivery progress payments payment application payment certificate performance bond retention and delay penalty so these are all terms related to payment but before we start what are the terms of payment what is the definition of terms of payment payment terms are contractual provisions that establish rules for when and how payment for goods or services supplied under a contract or purchase order must be made when do we make the payment and how do we make the payment so these are the terms of payment so terms of payment outlines how when and by what method the buyer will provide payments to the seller and this is what we'll be seeing right now so payment terms first of all we have something that is called advance payment what is advance payment exactly advanced payment is a type of payment made ahead of its normal schedule and we will get into this in details but this is a payment that it is made ahead of its normal schedule progress payments are partial payments made after the completion of a predefined stage of work like when you complete a certain percentage of work or a predefined stage of work when you reach a specific milestone you deserve a progress payment for reaching that milestone or completing this much of works certification time is the time required to certify and approve the payment because when you like do some scope of work or reach some milestone as we discussed then you submit your payment and you want to get paid you need the money so whoever is going to give you the money wants to make sure that you have actually done the works that you were required to do in order to get these payments so this is what we call here the certification time he needs some time to certify and approve your payment then you will get paid okay now let's talk about these two things because these are very important terminologies when it comes to payment we have the cdc and we have the pdc a cdc stands for current dated check and it's a bank check all of you know that check but the thing is as soon as you hold the check in hand you can go and immediately deposit it into your bank account which means it's a check of today's date like you are getting a check today and the date on the check is for today also so immediately you can go to the bank and deposit the check and get your money but what is a pdc a pdc is a post dated check and this check it can be deposited only in the future drawn with a date which is after the date on which check was written so for example i am giving you a check today today i'm going to hand over the check to you in your hand but the date on the check will be 30 days from now like one month from now so that means that you can get this money or you can deposit this check and get the money in your bank account only after 30 days but i'm giving you the check today so you have the check but you cannot get the money until after 30 days from now if it's a 30 days pdc if it's 60 days pdc then again i'll give you the check today and after two months from now you can go and deposit that check in the bank and get the money so this is the difference between current data check and post data check both are checks but this check is current dated you can get the money immediately this is a post dated you can get the money in the future so what is a collateral a collateral is very important terminology when we talk about terms of payment and collateral is something pledged as a security for repayment of a loan to be forfeited in the event of a default so let's talk again let's go back here to the advanced payment let's say that i have awarded you a job of one hundred thousand dollars you will do for me some service that will cost me hundred thousand dollars and we have agreed that i'm going to be paying you 10 percent in advance so before you do anything before you start the work i'm just going to give you 10 percent and then once you receive that advanced payment you will start the work so now i am going to give you 10 000 dollars without you doing anything you haven't done anything yet and still i'm giving you money so what if you took this money and run away and i never see you again so in that case when i am going to give you a payment in advance or an advance payment i need a collateral which is something bleached as a security for this loan because the advance payment is a loan i am lending you money because until this moment that i am paying you the money you have not done anything yet but in some cases you need an advance to purchase some materials that you will use in my projects or whatever so you need an advanced payment and these are the terms that we have agreed that i am going to be giving you 10 percent of the amount in advance then the remaining 90 will be paid as a progress or whatever the terms of payment are but in case of advance payment a collateral will be required because i am giving you money and i didn't get any work or services or products from you yet so i need something that guarantees that the payment that i am giving to you you will not take it and run away you will do with it something in my project so what are the types of collateral that we have we have a security check like i can give you ten percent which is a ten thousand in the example that we have explained and you will give me again is the ten thousand cash that i am giving you you will give me a check of the same amount which means that if you took this ten percent and run away i just can go to the bank and deposit your check and get my money back so a security check is a type of guarantee in the form of undated check required by the buyer from the seller in case a payment is made in advance so if i am giving you money and you didn't do anything yet i'll tell i'll say to you okay i agree to give you advance payment but you have to give me a security check in return so that i can guarantee that i am giving you money and you are giving me a guarantee for it so i have nothing to worry about it means it's like i didn't do anything i didn't give you money and you didn't give me a check it's like we i have my money and you don't have anything and that's it so that's why we can use a security check but actually what if i gave you a 10 000 and you have given me a security check and your bank account has zero balance you don't have any money in the bank so in that case a security check will be useless because if i give you 10 000 and you run away and i just go to your bank and i try to deposit this security check i'll not find any money actually in that bank account and i can just like um i don't know fan my face with this security check or something so in many of the cases many companies are not accepting security checks as collateral because the security check is still it's a a collateral it's a guarantee for the payment that i am making to you in advance but still it's a weak security so what is a strong security we have something else that is called bank guarantee the bank guarantee is also akulatra but the bank guarantee is type of financial backstop offered by the bank the bank guarantee means that the lender will ensure that the liabilities of the debtor will be met why because what is a bank guarantee it's a letter issued by your bank to me and this letter the bank is guaranteeing to me that he can give me the 10 percent that i gave to you in case of your failure if you fail to meet whatever contractual terms we have agreed upon and you took this money and you run away i will go to your bank with the bank guarantee and i will tell them please that guy that you have guaranteed did not perform the contractual uh obligations and please i want my money back so your bank will give me the money and actually in that case i don't care you have money or not because it is not you who is guaranteeing to give me the 10 percent back by a security check no it's your bank is the one who is guaranteeing that in your failure he will give me the money back so the bank guarantee is a very powerful document so in case of let's say big advance payments a bank guarantee will be very much acceptable by any employer because it guarantees that the money paid in advance will not go as a waste and it is there and if you didn't perform i can just use it get my money back and that's it okay so here we have a sample of terms of payment let's say that i have placed a purchase order for you when i want to buy something from you first of all i'll place a purchase order to you after we agree the price and the terms of payment and all these things so i've just placed the purchase order and the terms of payment that we have agreed in this example is 25 advance payment against a security check so whatever i am going to buy from you i'll give you 25 of this value in advance against a security check and the remaining 75 will be paid upon delivery in 30 days pdc so let me explain this first what will happen or what we have agreed that now upon issuance of the purchase order i'll give you a 25 advance payment let's say in the form of cdc current dated check and as we said the current data check is a check that you will take it and as soon as you hold the check in your hand you will just go and deposit deposited so i'll give you the 25 percent as a cdc and you will give me a security check which we discussed here which is a weak collateral but this is the terms that we have agreed that i'm giving 25 percent and against a security check so i am guaranteeing that you will not take the 25 and run away by this security check and i will not give you the advance payment unless you give me the security check so it will be like a trade give and take then after you do the delivery when you deliver whatever product i require from you to the site i'll pay you 75 in the form of 30 days pdc so once the materials are delivered to the site you will come to my office and i'll give you a check and the date on this check will be 30 days from now and we understand what is a pdc it's a post dated it it's a check that you will take today but you cannot deposit it immediately you have to wait for 30 days more until you can deposit the check in the bank and get actually this money but here we have some conditions that check copy to be issued before delivery so like apart as a part of the terms of payment that we have agreed we have agreed that i am going to be giving you 25 advance against a security check and you will not deliver because you will get 75 percent amount in the form of 30 days pdc only after you deliver the materials but here you have put like a condition that you will not even after receiving the advance you will not supply the materials unless i give you a check copy this check here the 30 days pdc the check i'll prepare the check which is 30 days from now and i'll take a photocopy of that check and i'll send it to you by mail so that you know that your remaining 75 payment is ready all you have to do is to go and deliver the materials then come to my office collect your 30 days pdc check so such a condition can be written and can be agreed for as all these guys are the terms of payment how are we going to be paying how payments are going to be made so 25 percent advance against security check then you will not deliver you will tell me okay please the second check which is 30 days pdc which is 75 of the amount please prepare that check and send me the check copy as a proof that the check is ready and all i have to do is to just deliver the materials to the site and after that you will come to the office and collect your check which is already ready for you and waiting for you to deliver the materials and there is one more thing here when we made the advance payment 25 advance payment against a security check what will happen to this security check okay you have delivered and i've given you the 30 days pdc check but what about your check which you gave to me as a advanced payment security here security check to be released immediately after delivery so we are also agreeing that after you deliver you will come to the office and you will collect your 30 days pdc post data check plus you will also collect the security check that you have kept here to secure the 25 advance payment that i have made to you before you deliver so this is just an example of a purchase order and the agreed terms of payment and how these monies will be paid now there is one very important terminology here that i want to talk about which is letter of credit what is letter of credit it's a letter issued by a bank to another bank especially one in a different country to serve as a guarantee for payments made to a specified person under specified conditions now let's say that we are living for example in the middle east and we want to buy something from uh something and we got prices from let's say united states and we got prices from europe and we got prices from china and we got prices from india now i have four quotations that i'll be comparing and i'll choose whoever suits me in terms of specifications and the price and delivery time and all these selection criteria i'll select one of them and i'll buy the materials from this particular supplier let's say we choose the indian supplier so in that case what guarantees whatever the terms of payment that we agree with that supplier it can be 25 advanced then 75 percent upon delivery okay advance i can pay him the advance before he ships these products or goods to my city but what about the remaining 75 percent what guarantees that i'll be paying the remaining 75 percent after he delivers the material because he will chip it from india so it's it's a long way it's a hard process it's a costly process so he need some kind of guarantee that really i'm going to be paying him the remaining amount after he ships the materials or the goods to me so this is the case where a letter of credit will be very useful because because it will be a letter from my bank issued to his bank that he the bank is guaranteeing that there is a credit between me and this guy and i am going to be paying that guy upon delivery of these services these products or materials and if i didn't pay they can use the letter of credit to get these money from my bank because this letter is issued from my bank to their bank that uh to guarantee the payments will be made to a specified person under specified conditions the specified conditions here will be that materials are delivered to me and specified person is the seller the the supplier who is supplying these things from india so this letter of credit will guarantee that payments will be made to him after he delivers the materials from india to whatever country in the middle east for example this is just an example to explain to you guys the letter of credit so here we have important terminologies or actually let's say contractual terms related to payment that we need to be aware about we have something called performance bond if you see whatever we discussed so far these things are all related to purchases when you are selling something so it is just a material or a product that i'll just buy from you and that's it but in the cases where in like if you guys are working in construction and you want to award something as a supply and installation as well so installation part is included then in that case some performance bond should be there and what is a performance bond it's like a guarantee that you will actually perform the works that we have agreed that you will do so what is a performance bond it's a bond issued by the seller guaranteeing the fulfillment of a particular contract so me as a buyer and you as a seller have agreed that you will do the painting works in my project for example in my building and to guarantee that you will really do the painting works in my building successfully and you will hand over the works to me like in a very good condition as what we have agreed in the contract then in that case i'll ask you for a performance bond which is a bond that will guarantee that you will perform so a guarantee of performance during the project in the simplest way and the performance bond can also be in the in the form of security check or it can be in the form of bank guarantee so you can give me a 10 security check of the contract value as a performance bond or you can give me a bank guarantee as a performance bond i just need some kind of guarantee that you will actually perform so what is a dlp dlp is defects liability period and what is that it's a set period of time after the construction of project has been completed during which the contractor has the right and must return to the site to remedy any defects so let's agree that again i have given you a painting job your job is to go and paint my project and after you complete your works there is a period which you in which in this period you will be liable for the defects that will come any like problems or mistakes that you have done during your work and we have not seen it during the handing over time but still you are liable for the works and you will not get the full contract value until this defect liability period is finished but what is a defects liability period it's a set period of time after the construction of the project has been completed you have completed your works during which the contractor has the right and must return to the site to remedy any defects so this is the defect liability period and usually it's like 12 months let's say after that we have something else that is called retention and what is a retention a retention is an amount held back from a payment made under a construction contract so for example again i've given you a contract that is hundred thousand dollars and you have let's say made uh 50 000 worth of works i'll not be giving you the full 50 000 that you have really completed at site no i'll be retaining some of that money and it will be paid to you only after the end of the defects liability period and we will see an example now but just i am explaining the terminology so an amount held back from a payment made under a construction contract part of it can be released immediately after successful completion of works and we will explain and the remaining part should be released only after the dlp so let's say again that i have given you a hundred thousand contracts um whatever scope painting whatever and then you will go and you will spend three four months you will be painting the project and doing all the activities and the obligations that you need to do as per your contract and by the end of the works when you finish everything you should be receiving 100 000 dollars because you have finished all the works but no if we have agreed that there will be a retention of 10 so from each progress payment it's a what is a progress payment again it's a partial payment made after the completion of a predefined stage of work like every month you will come and you will submit the invoice of the works that you have done and i'll pay you this much i'll pay you this invoice but i'll deduct the retention because we have agreed let's say 10 percent retention so from each invoice that you will submit to me i'll deduct 10 percent so by the end of the works but when you finish all the works instead of finishing a hundred thousand uh dollars worth of work you will be getting only ninety thousand dollars in your hand and i still have ten thousand dollars with me and you deserve to take them but as per our contract they are to be retained with me and let's say five percent of the of the ten percent which is five thousand dollars will be released immediately after the successful completion so when you finish when you successfully complete the works i'll give you five thousand but the last five thousand i'll keep it with me after the end of the defect liability period and when the defect liability period is finished i'll give you the final five thousand and when you take it you will be getting from me hundred thousand total amount so during the works you will get paid ninety percent and upon successful completion you will get five percent and after the dlp you will get the remaining five percent so this is what we mean by retention there's something also that we call the delay penalty which is an amount of money or portion of the contract price to be paid to the owner by contractor when the contractor fails to fulfill an agreed completion or delivery date so we can say that for example for each that the duration is four months and for each one week that you will take more than the four month i'm going to be deducting one percent of the contract value which is a delay penalty this is very uh straightforward so let's have here another example or sample terms of payment but in this time it's attempts of payment of supply and contract so the scope is let's say supply and installation of joinery works like kitchens wardrobes vanity cabinets and so on by the way guys if you like the video so far this is the time that you subscribe you like the video you show us love because we love you so much and all this what we are explaining here is part of our procurement and construction uh management course i'll leave the link down in the description in case you want to check it out so again sample terms of payment for supply and the installation works we have here the scope which is supply and the installation of joinery kitchen cabinets wardrobes vanity cabinets and all these things and the terms of payment will be that 10 percent advanced payment will be again a security check we will pay advance 10 percent of the value against the security check and all other progress payments to be made in 30 days pdc so and the price the total amount of this contract is 500 000 and usually there is a like a common misunderstanding about the terms of payment because people will come to you and will say 10 percent advance against security check then 10 upon approval of shop drawing then let's say uh 50 upon supplying then 10 30 upon installation at site this is wrong guys because these percentages are the breakdown of this total price so if i have a contract of 500 000 then i have 50 000 for the shop drawings and i have 250 000 for supplying the materials and i have 30 of this one for the installation and then the remaining 50 000 will be paid upon final touch up and submission of warranties of the work so these percentages are actually the breakdown of that 500 000 but now let's say that the duration is two months so by the end of the first month you will submit an invoice for whatever works that you have done here then by the end of the second month again you will submit another invoice and that's it you will be getting this full amount but how the money will be paid when you submit your invoice after the end of the first month and by the end of the second month you will submit the invoice how you will get the money you will get the money in 30 days pdc but there is a 10 of the contract value as a retention and we have also here agreed 10 percent of total contract value in the form of bank guarantee and we have explained that so you know what is our retention what is a performance bond what is a bank guarantee what is a pdc you know all these things now so let's go to the example here i'm sorry it's a little bit blurry but it's uh it's okay we can explain on it so here i've just broken down the 500 000 as per these percentages so i have here four items let's say or four scopes that you will be doing and the first scope which is ten percent here fifty thousand then fifty percent two fifty thousand then thirty percent which is hundred fifty thousand then the touch up which is ten percent that is fifty thousand so the breakdown of the five hundred thousand is fifty two 250 150 50 so that's that the total contract value is 500 000. but how this 500 000 will be paid this is the question now so first of all we will be paying as we defined here 10 percent advance against security check so i'll pay you 50 percent here sorry 10 which is a 50 000 and it will be paid here then when you finish or when you complete the shop drawings the shop drawings is 50 000. so what will happen here from the 50 000 i've given you an advance and the advanced payment has to be recovered because you are taking the advance i am giving you i am making a payment ahead of its normal time because actually i should pay you for the shop drawings only after you make the shop drawings i should pay for the supply of material only after you supply the material i should pay for the installation only after you but we have agreed for 10 percent advance so in the beginning i am giving you a 50 000 which is a 10 advance before you do anything but i am guaranteeing this money via security check as we discussed so the start of the project will be me paying you 50 000 and after you finish the shop drawings now this is a certified amount now when you finish the shop drawings you really deserve 50 000 because you have finished this item which is costing 50 000 so i should pay you 50 000 after you finish the shop drawing but i have paid you already 50 000 in the beginning so i need to recover part of the money that i have paid you as advanced so now when you finish this item you are getting only 45 thousand why because you deserve fifty thousand but i have an advance of fifty thousand so i'm going to be recovering ten percent because the advanced value is ten percent of the contract value so from each payment or from each milestone or from each invoice that you submit to me i'll deduct 10 as a recovery of advanced payment this is how i recover the 50 000 that i have paid to you in the beginning so advance is 50 000 here so i'll just take 10 percent of this 50 000 so that's 5 000 so 50 000 minus 5 000 that's 45 000. so until that moment i'll pay you 45 but the thing is i have paid you already 50 before so 50 plus 45 that means that you have money with you 95 000 and you have finished works for me for 50 000 only so now the the retention that this is the retention that we talked that from each payment that i make to you i'll deduct 10 because the 10 percent we said what is the retention which a portion of the retention will be released upon successful completion and the remaining portion will be released only after completion of work so because there is a ten percent retention you have completed fifty thousand worth of works so i'm going to be retaining 10 percent from the 50 000 so i'll retain 5 000. so that means that you have 95 000 minus 5 000 so that means that you have 90. so and i have paid you previously 50 so i'll remove whatever i paid previously then you deserve this payment you deserve to get paid 40 000 why because you have finished worth of works 50 000 and from your 50 000 that you have completed i'll remove 10 percent to recover part of the advanced payment that i've made to you in the beginning and i'll remove another 10 from your certified amount as a retention so i'm paying you 50 minus 5 recovery minus another 5 retention so i'll pay you 40 000 so that means that you got in the beginning 50 000 and you will get now 40 000 so that means that you have with you until this moment 90 000. good after that you will go and you will supply the materials so you have supplied the materials that means that you deserve that i pay you another 250 000 okay very good so now from what i have paid you until this moment i have paid you the 50 okay or i have certified this and because there are conditions there are terms which are the recovery and the retention you have finished the 50 and i have paid you 40. but the work that you have done so far what is the earned value the earned value is 50 000 and you have finished you have supplied the materials so you have finished at 250 000 worth of works so that means that until this moment you have completed these two scopes which equal to 300 000 okay very good so from 300 000 i need to recover 10 percent as a recovery for the advanced payment so that's 30 000 and i need to recover another 10 percent as a retention so from the 300 000 that you should be getting now i should remove 30 and 30. so that's 60. so i should be paying you 240 000 but the funny part is that i've already paid you 40 000 before so i'll remove whatever i paid before so i should pay you only two hundred thousand again because this is confusing part now you have finished this scope which is fifty thousand and you have finished this scope which is two hundred fifty thousand so you have finished three hundred thousand worth of works okay so the three hundred thousand that you have finished as per our contract i'll not just go and give you a three hundred thousand no there is a recovery of the advance because i have paid you some money in advance before you do anything which i have to recover in each payment certificate that you will submit each payment application and there is also retention i'll be retaining from all the works that you will do i'll retain 10 until the end of the project so by the moment you finish 300 000 worth of works i need to recover 10 for advanced payments so i need to deduct from the works that you have done this is called work done the work done until this moment is three hundred thousand i need to remove ten percent from the work done and i why as a recovery for the advance and i also need to retain ten percent from the work done i'll not pay you the full work done no there is a retention so i am deducting from the 300 000 work done i am deducting 30 recovery and another 30 retention so 300 minus sixty thousand that's two hundred forty thousand i should be giving you after your work done is three hundred thousand i should give you two hundred forty thousand but in the previous payment i've already given you 40. so 240 minus 40 then that means that the money that i should pay this payment is 200 000 only so i'll go ahead and give you 200 000. so until this moment you understand that you took 50 and you took 40 and you took 200 these are the monies that you have received from me so far okay then when you finish the installation you finished another 150 here so your total work done is 450 so remove 45 recovery and remove 45 retention then you are removing 90 so 4 450 minus 90 that's about 460 and i have paid you until that moment 290 so the balance is 120 this will be paid to you and by the end of the touch up the same will happen so by the end of the project you will be getting the 50 40 200 120 then 40 then you have completed everything so you should be getting 500 000 as money in your hand but no you are getting only 450 why because i still have 50 with me which is the retention so by the completion of works now i have 50 half of that i can release immediately after successful completion of work and the remaining uh 25 000 or the remaining 5 percent will be released only after the dlp that's why here and yeah there is very important point all these payments here when i have certified 40 000 and i am paying them to you it says here all payments to be made in 30 days so yes i agree that you deserve 40 000 i'll give you the check but the check will be 30 days from now because this is the term that we have agreed so if you guys like this video please don't forget to like 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