Deep Dive into Clause 14.5 Plant and Materials intended for the Works

In the intricate web of FIDIC Yellow Book 1999, Clause 14.5 – Plant and Materials intended for the Works unveils a nuanced mechanism for handling materials destined for incorporation into the Permanent Works. This clause introduces a structured process within the payment certification framework, ensuring transparency and accountability in managing these crucial elements.

Scope and Application:

This Sub-Clause comes into play if the conditions specified are met. Interim Payment Certificates under Sub-Clause 14.3 [Application for Interim Payment Certificates] should incorporate:

• An amount for Plant and Materials sent to the Site for incorporation into the Permanent Works.
• A reduction when the contract value of such Plant and Materials is included as part of the Permanent Works under Sub-Clause 14.3(a).

However, it’s important to note that if the lists referred to in Sub-Clause 14.5(b)(i) or (c)(i) are not included in the Appendix to Tender, this Sub-Clause does not apply.

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Conditions for Engineer’s Determination:

For the Engineer to determine and certify each addition, certain conditions must be satisfied:

1. The Contractor must maintain satisfactory records, including orders, receipts, costs, and usage of Plant and Materials, available for inspection.
2. The Contractor must submit a statement of the Cost of acquiring and delivering the Plant and Materials to the Site, supported by satisfactory evidence.

Two Scenarios for Plant and Materials:

The Engineer’s determination is contingent on either of the following scenarios:

Certification and Currency:

The additional amount to be certified is equivalent to eighty percent of the Engineer’s determination of the cost of the Plant and Materials, considering relevant documents and the contract value. The currencies for this additional amount align with those in which payment will become due when the contract value is included under Sub-Clause 14.3(a). Upon inclusion in the Payment Certificate, a reduction equivalent to the certified additional amount for the relevant Plant and Materials is applied in the same currencies and proportions.

Purpose and Implications

Clause 14.5 of the FIDIC Yellow Book 1999 addresses the inclusion of costs for Plant and Materials intended for the Works in Interim Payment Certificates. This clause is crucial for contractors as it allows for the recovery of costs incurred for Plant and Materials that are yet to be incorporated into the Permanent Works but have been shipped to or stored at the site.

Primary Aspects:

1. Inclusion in Interim Payment Certificates: The clause specifies that the Interim Payment Certificates shall include amounts for Plant and Materials sent to the site but not yet part of the Permanent Works.
2. Reduction in Value: Once these Plant and Materials are incorporated into the Permanent Works, their value is deducted from subsequent certificates.
3. Conditions for Certification: The Engineer’s certification of these costs depends on the Contractor’s maintenance of satisfactory records and submission of a detailed cost statement.
4. Bank Guarantee Requirement: For Plant and Materials listed for payment upon shipment, a bank guarantee is required until they are properly stored and protected on-site.
5. Storage and Protection: Plant and Materials must be properly stored and protected against loss, damage, or deterioration.

Expert Opinion

Experts emphasize the importance of meticulous record-keeping and documentation for contractors under this clause. The provision for early recovery of costs for Plant and Materials can significantly aid in cash flow management for contractors. However, the requirement for a bank guarantee and the condition that the materials be protected and stored properly on-site place a substantial responsibility on the contractor to manage these assets effectively.

Uses

• For Contractors: To claim early payment for Plant and Materials procured for the project.
• For Engineers: To assess and certify the costs claimed by the contractor for these materials.
• For Employers: To ensure that payments are made only for legitimate and verifiable costs

Key Points to Remember

• Accurate and detailed record-keeping is essential.
• The need for a bank guarantee for certain Plant and Materials.
• The importance of proper storage and protection of these materials on-site.
• The financial implications of early payment for these materials and the subsequent reduction in later certificates.

Interaction of [Clause 14.5] with other clauses

1. Interaction with Sub-Clause 14.3 [Application for Interim Payment Certificates]:

• Nature of Interaction: Direct and Integral. Clause 14.5 specifies that the costs for Plant and Materials, which are yet to be incorporated into the Permanent Works but are on-site, should be included in the Interim Payment Certificates as outlined in Sub-Clause 14.3.
• Shared Effects: This interaction ensures that the contractor can recover part of the investment in Plant and Materials early in the project, improving cash flow and financial management.

2. Interaction with Sub-Clause 14.2 [Advance Payment]:

• Nature of Interaction: Financial Security. The bank guarantee requirement in Clause 14.5 mirrors the financial security measures in Sub-Clause 14.2.
• Shared Effects: Both clauses collectively enhance the financial security and risk management aspects of the contract, ensuring that the employer’s interests are safeguarded while providing the contractor with necessary financial liquidity.

3. Interaction with Clause 11 [Defects Liability]:

• Nature of Interaction: Conditional and Protective. The proper storage and protection of Plant and Materials as required in Clause 14.5 are crucial for ensuring that these materials do not become defective or cause defects during the Defects Liability Period.
• Shared Effects: This interaction emphasizes the contractor’s responsibility for the quality and condition of materials, aligning with the broader quality assurance and defect management objectives of the contract.

4. Interaction with Sub-Clause 4.21 [Progress Reports]:

• Nature of Interaction: Reporting and Documentation. The record-keeping requirements in Clause 14.5 align with the contractor’s obligation to provide detailed progress reports as per Sub-Clause 4.21.
• Shared Effects: Both clauses work together to ensure transparency and accountability in project execution, particularly concerning the use and management of materials and resources.

5. Interaction with Clause 20 [Claims, Disputes and Arbitration]:

• Nature of Interaction: Dispute Resolution. Any disagreements or disputes arising from the application or interpretation of Clause 14.5, particularly regarding cost determination or material management, may be addressed under Clause 20.
• Shared Effects: This interaction provides a mechanism for resolving conflicts related to Plant and Materials, ensuring fair and equitable treatment of such issues within the contractual framework.

Main Points to Keep in Mind When Employing Clause 14.5

1. Eligibility and Scope:
   • Ensure that the Plant and Materials intended for inclusion under this clause are listed in the Appendix to Tender.
   • Understand that this clause applies only to Plant and Materials sent to the Site for incorporation in the Permanent Works.
2. Documentation and Record-Keeping:
   • Maintain meticulous records of orders, receipts, costs, and usage of Plant and Materials.
   • Prepare detailed statements of the cost of acquiring and delivering these items to the Site, supported by satisfactory evidence.
3. Financial Security:
   • Provide a bank guarantee in a form and amount approved by the Employer, valid until the Plant and Materials are properly stored on Site and protected against loss, damage, or deterioration.
4. Conditions for Certification:
   • Ensure that the Plant and Materials are either:
     • Listed for payment when shipped, shipped to the country, and en route to the Site, with all necessary shipping documents and evidence of payment for freight and insurance.
     • Listed for payment when delivered to the Site, delivered, properly stored, protected, and in accordance with the Contract.
5. Payment Terms:
   • Understand that the additional amount to be certified is 80% of the Engineer’s determination of the cost of the Plant and Materials (including delivery to Site).
   • Be aware of the currency requirements for this additional amount, which should align with the payment terms when the contract value is included under Sub-Clause 14.3.
6. Adjustment in Payment Certificates:
   • Prepare for the applicable reduction in the Payment Certificate when the contract value of these Plant and Materials is included under Sub-Clause 14.3.
7. Compliance with Contractual Obligations:
   • Ensure that all actions and submissions under this clause comply with the broader contractual obligations and standards set out in the FIDIC Yellow Book 1999.
8. Risk Management:
   • Proactively manage risks associated with the storage, protection, and quality of Plant and Materials to avoid future disputes or claims.

Flowchart

Detailed Explanation:

1. Start (Clause 14.5 Application): The process begins with the application of Clause 14.5, which pertains to Plant and Materials intended for the Works.
2. Check Appendix to Tender: The first step is to verify if the Plant and Materials are listed in the Appendix to Tender. This is crucial as the applicability of Clause 14.5 depends on this listing.
3. Are Plant and Materials Listed?:
   • If Yes, the process moves to ensuring proper documentation.
   • If No, Clause 14.5 is not applicable, and the process ends.
4. Ensure Proper Documentation: This involves keeping satisfactory records and submitting a statement of the cost of acquiring and delivering the Plant and Materials to the Site, supported by satisfactory evidence.
5. Submit Cost Statement & Evidence: The Contractor must submit detailed cost statements along with evidence to support the costs incurred.
6. Provide Bank Guarantee: A bank guarantee, in a form approved by the Employer, is required to ensure the security of the payment for Plant and Materials.
7. Engineer’s Certification: The Engineer determines and certifies each addition, ensuring that the Plant and Materials meet the contract requirements and are properly stored and protected on Site.
8. Payment of 80% of Determined Cost: The Engineer certifies the payment of 80% of the determined cost of the Plant and Materials, including delivery to the Site.
9. Inclusion in Permanent Works: Once the Plant and Materials are included in the Permanent Works, the process moves to the applicable reduction in the Payment Certificate.
10. Applicable Reduction in Payment Certificate: The Payment Certificate will include a reduction equivalent to the additional amount certified for the relevant Plant and Materials.
11. End: The process concludes either when Clause 14.5 is not applicable or after the applicable reduction in the Payment Certificate.

Detailed Explanation:

1. Contractor’s Submission: The Contractor submits a detailed cost statement and supporting evidence to the Engineer. This includes records of orders, receipts, costs, and use of Plant and Materials.
2. Engineer’s Request for Information: If necessary, the Engineer may request additional information from the Contractor to verify the details of the submission.
3. Bank Guarantee: The Contractor provides a bank guarantee to ensure the security of the payment for Plant and Materials. This guarantee is confirmed by the Bank to the Engineer.
4. Engineer’s Certification: Upon satisfactory submission and verification, the Engineer certifies 80% of the determined cost of the Plant and Materials to the Employer.
5. Employer’s Payment: The Employer then pays the certified amount (80% of the determined cost) to the Contractor.
6. Inclusion in Permanent Works: Once the Plant and Materials are included in the Permanent Works, the Contractor notifies the Engineer.
7. Adjustment in Payment Certificate: The Engineer issues a Payment Certificate with an applicable reduction, equivalent to the previously certified additional amount for the relevant Plant and Materials.
8. Final Adjustment by Employer: The Employer adjusts the payment based on the reduction in the Payment Certificate.

Structured Checklists:

Checklist 1: Proficient Execution and Deployment of Clause 14.5

Checklist 2: Applying and Overseeing Clause 14.5

Checklist 3: Monitoring Execution of Clause 14.5

Common misunderstandings associated with [Clause 14.5: – Plant and Materials Intended for the Works]

1. Misinterpretation of Applicability:
   • Misunderstanding: Assuming that Clause 14.5 applies to all projects, regardless of whether lists of Plant and Materials are included in the Appendix to Tender.
   • Clarification: Clause 14.5 only applies when specific lists are part of the contractual documentation.
2. Failure to Recognize Record-Keeping Importance:
   • Misunderstanding: Neglecting the significance of maintaining detailed and satisfactory records, including orders, receipts, costs, and usage of Plant and Materials.
   • Clarification: Robust record-keeping is essential for compliance with Clause 14.5, and the lack of proper records can lead to non-applicability.
3. Incomplete Compliance with Shipment Conditions:
   • Misunderstanding: Overlooking the detailed compliance requirements when Plant and Materials are shipped, leading to incomplete documentation.
   • Clarification: Compliance involves providing evidence of shipment, payment of freight and insurance, and a bank guarantee. Incomplete compliance may result in non-applicability.
4. Misapplication of Reduction in Contract Value:
   • Misunderstanding: Incorrectly applying the reduction in contract value when Plant and Materials are included in the Permanent Works, leading to potential double-counting in subsequent payment certificates.
   • Clarification: The reduction under Clause 14.5 aims to avoid double-counting, and its application must align with contractual requirements.
5. Currency Alignment Oversight:
   • Misunderstanding: Neglecting to ensure that currencies for the additional amount certified align with those in which payment will become due when the contract value is included.
   • Clarification: Currency alignment is crucial to maintain consistency throughout the certification process and prevent discrepancies in payment.
6. Incomplete Understanding of Engineer’s Role:
   • Misunderstanding: Failing to recognize the Engineer’s pivotal role in determining and certifying the additional amount for Plant and Materials.
   • Clarification: The Engineer’s involvement is critical for ensuring compliance and fairness in the valuation process, and communication with the Engineer is essential.
7. Failure to Regularly Monitor and Audit:
   • Misunderstanding: Assuming that monitoring activities, such as Engineer’s determination progress, compliance audits, and reviews of currency alignment, are one-time tasks.
   • Clarification: Regular and ongoing monitoring is necessary to ensure continued compliance with Clause 14.5 throughout the project.
8. Limited Awareness of Project-Specific Requirements:
   • Misunderstanding: Overlooking project-specific requirements related to Plant and Materials, including variations in shipment conditions, storage specifications, or specific contractual provisions.
   • Clarification: Awareness of and adherence to project-specific requirements is crucial for the accurate application of Clause 14.5.

Related posts:

Understanding Clause 17.1 Indemnities in FIDIC Yellow Book Understanding Clause 7.1 Manner of Execution in FIDIC Contracts: A Comprehensive Guide Best Practices for FIDIC Yellow Book 1999 Clause 14.7 Payment Unlocking Financial Transparency: Understanding FIDIC Yellow Book 1999 Clause 14.10 – Statement at Completion

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