OGC fair payment practices for use with NEC

Contracts
The Ofce of Government Commerce (OGC) has published a guide to best fair
payment practices, which include recommendations for implementing these
practices.
The NEC Panel has prepared this document to allow users to implement the
OGC fair payment practices in NEC Contracts.
June 2008
NEC is a division of Thomas Telford Ltd, which is a wholly owned subsidiary of
the Institution of Civil Engineers (ICE), the owner and developer of the NEC.
The NEC is a family of standard contracts, each of which has these
characteristics:
.
Its use stimulates good management of the relationship between the two
parties to the contract and, hence, of the work included in the contract.
.
It can be used in a wide variety of commercial situations, for a wide
variety of types of work and in any location.
.
It is a clear and simple document using language and a structure
which are straightforward and easily understood.
# Copyright nec 2005
All rights, including translation, reserved. The owner of this document may
reproduce the Z clause, Contract Data, Trust Deed and Joining Deed for the
purpose of obtaining tenders, awarding and administering contracts. Except
as permitted by the Copyright, Designs and Patents Act 1988, no part of
this publication may be otherwise reproduced, stored in a retrieval system or
transmitted in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without the prior written permission of
the NEC Director, NEC, Thomas Telford Ltd, 1 Heron Quay, London E14 4JD.
Typeset by Academic + Technical, Bristol
Printed and bound in Great Britain by Printmates, UK
CONTENTS
1. Copy of the OGC Model Fair Payment Charter 1
2. Z clause for use with the NEC3 Engineering and Construction Contract (ECC) 3
3. Additional NEC3 ECC Contract Data entries 5
4. Trust Deed 6
5. Joining Deed 7
6. Guidance Notes 8
7. Flow Charts 11
OGC Model Fair Payment Charter
Acknowledgement
This page has been reproduced from the OGCs Guide to Best Fair Payment Practices.
Crown copyright material is reproduced with the permission of the Controller of HMSO and the
Queens Printer for Scotland.
# Crown Copyright 2007
Model Fair Payment Charter
1
Fair and transparent payment practices are an essential underpinning to achiev-
ing successful integrated working on construction projects. In working with each
other in good faith and in a spirit of mutual trust and respect, we agree that by
1st January 2008
2
we will meet the Fair Payment commitments set out below:
.
Companies have the right to receive correct full payment as and when due.
Deliberate late payment or unjustiable withholding of payment is ethically
not acceptable.
.
Fair Payment will apply equally between the client and lead contractor and
throughout the supply chain
3
.
.
The process will be transparent in order that members of the supply chain
have certainty of how much and when they will be paid.
.
Companies will consider, where appropriate, operating relevant contracts on
an open book basis.
.
The correct payment will represent the work properly carried out, or products
supplied, in accordance with the contract. Any client arrangements for
retention will be replicated on the same contract terms throughout the
supply chain. Any withholding of payment due to defects or non-delivery will
be proportionate and demonstrably justied in line with arrangements made
at the time of contract.
.
To ensure effective and equitable cash ow for all those involved, all con-
tracts will provide for regular payments and have payment periods not
exceeding 30 days.
.
In order to avoid payment delays, the client and all supply chain members
will agree payment procedures at the outset of their contracts. Payment will
be through electronic BACS transfer and will apply throughout the supply
chain.
.
Monitoring and auditing and problem resolution procedures will be agreed
between the parties.
We the undersigned agree that this Charter is not intended to be a legally bind-
ing document and not used in construing any contractual commitment.
1
The Charter sets out the values and arrangements relating to payment practices with
integrated working. The Model Charter is exible to allow for adaptation and can be
either a standalone document or part of a wider partnership charter. In either case it is
not intended to be legally binding.
2
An introduction period is to allow time for clients and contractor to modify their business
systems and procedures.
3
The client would sign the Charter at the outset. Contractors and suppliers subsequently
engaged would be expected to sign the Charter before appointment.
www.neccontracts.com # copyright nec 2005 1
OGC fair payment practices
Z3: Project Bank Account
Dened terms Z3.1 (1) The Authorisation is a document authorising the project bank to make
payments to the Contractor and Named Suppliers.
(2) Named Suppliers are named suppliers unless later changed in accordance
with this contract.
(3) Project Bank Account is the account used to receive payments from the
Employer and make payments to the Contractor and Named Suppliers.
(4) A Supplier is a person or organisation who has a contract to
.
construct or install part of the works,
.
provide a service necessary to Provide the Works or
.
supply Plant and Materials for the works.
(5) Trust Deed is an agreement between the Employer, the Contractor and
Named Suppliers which contains provisions for administering the Project Bank
Account.
Project Bank Account Z3.2 The Contractor establishes the Project Bank Account with the project bank
within one week of the Contract Date.
Z3.3 Unless stated otherwise in the Contract Data, the Contractor pays any charges
and is paid any interest made by the project bank.
Z3.4 The Contractor submits to the Project Manager for acceptance details of the
banking arrangements for the Project Bank Account. A reason for not accept-
ing the banking arrangements is that they do not provide for payments to be
made in accordance with this contract. The Contractor provides to the Project
Manager copies of communications with the project bank in connection with
the Project Bank Account.
Named Suppliers Z3.5 The Contractor includes in his contracts with Named Suppliers the
arrangements in this contract for the operation of the Project Bank Account
and Trust Deed. The Contractor noties the Named Suppliers of the details of
the Project Bank Account and the arrangements for payment of amounts due
under their contracts.
Z3.6 The Contractor submits proposals for adding a Supplier to the Named Suppli-
ers to the Project Manager for acceptance. A reason for not accepting is that
the addition of the Supplier does not comply with the Works Information.
Payments Z3.7 On or before each assessment date, the Contractor submits to the Project
Manager an application for payment, and shows in the application the
amounts due to Named Suppliers in accordance with their contracts.
Z3.8 No later than one week before the nal date for payment, the Employer makes
payment to the Project Bank Account of the amount which is due to be paid to
the Contractor.
Z3.9 The Contractor makes payment to the Project Bank Account of
.
any amount not paid by the Employer and
.
any amount required to make payment in full to Named Suppliers.
www.neccontract.com # copyright nec 2008 3
Z3.10 The Contractor prepares the Authorisation, setting out the sums due to
Named Suppliers as assessed by the Contractor and to the Contractor for
the balance of the certied payment. After signing the Authorisation, the
Contractor submits it to the Project Manager for signature by the Employer
and submission to the project bank.
Z3.11 The Contractor and Named Suppliers receive payment from the Project Bank
Account of the sums set out in the Authorisation as soon as practicable after
the Project Bank Account receives payment.
Z3.12 A payment which is due from the Contractor to the Employer is not made
through the Project Bank Account.
Effect of payment Z3.13 Payments made from the Project Bank Account are treated as payments from
the Employer to the Contractor in accordance with this contract or from the
Contractor or Subcontractor to Named Suppliers in accordance with their
contracts as applicable.
Trust Deed Z3.14 The Employer, the Contractor and named suppliers sign the Trust Deed before
the rst assessment date.
Termination Z3.15 If the Project Manager issues a termination certicate, no further payment are
made into the Project Bank Account.
OGC fair payment practices
4 # copyright nec 2008 www.neccontract.com
ADDITIONAL CONTRACT DATA ENTRIES
Contract Data part one Data provided by the Employer
If the Employer is to pay any charges and is paid interest made by the project
bank, add the following to the Contract Data part one.
.
The Employer is to pay any charges and is paid interest made by the
project bank.
Contract Data part two Data provided by the Contractor
Add the following to the Contract Data part two
.
The project bank is . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.
named suppliers are . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
www.neccontract.com # copyright nec 2008 5
TRUST DEED
This agreement is made between the Employer, the Contractor and the Named
Suppliers.
Terms in this deed have the meanings given to them in the contract between
. . . . . . . . . . . . . . . . . . . and . . . . . . . . . . . . . . . . . . . . . . for . . . . . . . . . . . . . . . . (the works).
Background The Employer and the Contractor have entered into a contract for the works.
The Named Suppliers have entered into contracts with the Contractor or a
Subcontractor in connection with the works.
The Employer and the Contractor have established a Project Bank Account to
make provision for payment to the Contractor and the Named Suppliers.
Agreement The parties to this deed agree that
.
sums due to the Contractor and Named Suppliers and set out in the
Authorisation are held in trust in the Project Bank Account for distribution
to the Named Suppliers in accordance with the banking arrangements
applicable to the Project Bank Account,
.
further Named Suppliers may be added as parties to this deed with the
agreement of the Employer and Contractor. The agreement of the Employer
and Contractor is treated as agreement by the Named Suppliers,
.
this deed is subject to the law of the contract for the works,
.
the benets under this deed may not be assigned.
Executed as a deed on . . . . . . . . . . . . . . . . . . . . . . . . . .
by
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Employer)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Contractor)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Named Suppliers)
6 # copyright nec 2008 www.neccontract.com
JOINING DEED
This agreement is made between the Employer, the Contractor and . . . . . . . . . . . .
(the Additional Supplier).
Terms in this deed have the meanings given to them in the contract between
. . . . . . . . . . . . . . . . . . . and . . . . . . . . . . . . . . . . . . . . . . for . . . . . . . . . . . . . . . . (the works).
Background The Employer and the Contractor have entered into a contract for the works.
The Named Suppliers have entered into contracts with the Contractor or a
Subcontractor in connection with the works.
The Employer and the Contractor have established a Project Bank Account to
make provision for payment to the Contractor and the Named Suppliers.
The Employer, the Contractor and the Named Suppliers have entered into a
deed as set out in Annex 1 (the Trust Deed), and have agreed that the
Additional Supplier may join that deed.
Agreement The Parties to this deed agree that
.
the Additional Supplier becomes a party to the Trust Deed from the date
set out below,
.
this deed is subject to the law of the contract for the works,
.
the benets under this deed may not be assigned.
Executed as a deed on . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
by
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Employer)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Contractor)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Additional Supplier)
www.neccontract.com # copyright nec 2008 7
GUIDANCE NOTES
The implementation of the OGC fair payment practice into the NEC contracts
is achieved through signing the fair payment charter, inserting additional con-
ditions of contract, and signing a separate Trust Deed.
Fair Payment Charter
As the charter is stated as not legally binding and not used in construing the
contract, it should not be included as a contract document. A copy of the char-
ter should be provided to Tenderers, and they should be advised that signing
the charter is a precondition of an award of a contract.
Project Bank Account (PBA)
A Z clause and associated Contract Data entries is provided for use with
the NEC3 Engineering and Construction Contract; it can be altered as appro-
priate for use with other NEC3 contracts where a Project Bank Account is
required. The clause deals with payments into and out of the account, and its
effect on other contract obligations.
Subcontractors at any level, known as Named Suppliers, can be included in
the PBA arrangements. The Contractor will initially identify those to be
included at tender (named suppliers), but subject to the acceptance of the
Project Manager, the Contractor can add further Suppliers during the contract.
The Employer should set out in the Works Information any stipulations or
restrictions on establishing the list of suppliers who can participate in pay-
ments from the PBA.
If Option Y(UK)3 is used, the rights of Named Suppliers needs to be listed in
the Contract Data.
The PBA is established and maintained by the Contractor, who pays any bank
charges and retains any interest earned on the account. At tender, the Con-
tractor must identify a suitable bank able to offer arrangements which comply
with the requirements for payment in this option.
The Contractor is required to submit an application for payment, showing the
amounts due to each Named Supplier, following which the Project Manager
issues a certicate as normal. The Employer pays to the PBA the amount certi-
ed, subject to any withheld sums notied to the Contractor. The Contractor
completes the Authorisation, conrming the payments to Named Suppliers,
and forwards it to the Project Manager for the Employers countersignature.
This is then forwarded to the bank it is envisaged that electronic means of
authorisation will be used to simplify this process.
The project bank makes payment to the Contractor and Named Suppliers from
the sums deposited. In the event the Project Bank Account has insufcient
funds to make all payments, the Contractor is required to add funds to the
account to make up the shortfall.
The payment arrangements, and how these t with other contract provisions,
is shown in the following chart.
Note: Y(UK)2 seven day periods could be longer than clause 51 week periods,
as former excludes Christmas Day, Good Friday and bank holidays from count
of days.
8 # copyright nec 2008 www.neccontract.com
Trust Deed
This is intended to allow payment to Named Suppliers to continue in the event
of the insolvency of the Contractor. The deed is executed by the Employer,
Contractor and initial named suppliers.
Where an Additional Supplier is to be joined into the deed, a Joining Deed
needs to be executed by the Employer, Contractor and the Additional Supplier.
A copy of the initial Trust Deed should be annexed to each Joining Deed.
Timescales for assessment and payment under Project Bank Account arrangements
Contractor may
submit application
for payment
Employer or
Contractor makes
certified payment
Project Manager
assesses amount
due and certifies
payment
Final date for
payment
date on which
payment becomes
due
Latest date for
withholding notice
Clause 51 dates Clause 51 actions Project Bank Account actions Y(UK)2 actions Y(UK)2 dates
assessment date
assessment date
+ 1 week
assessment date
+ 2 weeks
assessment date
+ 3 weeks
assessment date
+ 7 days
assessment date
+ 14 days
assessment date
+ 21 days
Contractor submits application for
payment showing amounts due to
Named Suppliers
Contractor prepares and signs
Authorisation, forwards to Project
Manager for Employer signature and
issue to project bank
Employer makes payment to
Project Bank Account
Payment made to Contractor and
Named Suppliers
Guidance Notes
www.neccontract.com # copyright nec 2008 9
ABBREVIATIONS USED IN THE FLOW CHART BOXES
FC 1.9 Flow chart for clause 1.9
CD Contract Data
C Contractor
E Employer
PM Project Manager
WI Works Information
www.neccontract.com # copyright nec 2008 11
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14 # copyright nec 2008 www.neccontract.com