Limit of Retention Money Clause 60.2

Retention Money

The contract clause 60.2 describes that an amount @7.5% will be deducted from every IPC in the head of retention money, however the limit of retention money will be 5% of contract price stated in the letter of acceptance.

But, later on, the contract amount increased due to variation in scope of work, by which revised contract costs differed from the original contract price stated in the letter of acceptance. Now, ambiguity has been raised about what will be the limit of retention money after the revised contract cost: 

1.    Of contract price = 5,704 x 5% = 285 million

2.    Or, of the revised contract price i-e variation order accumulative amount : 6,534 x 5% = 327 million.

In a FIDIC 1987-based contract, clause 60.2 specifies that retention money is deducted from each Interim Payment Certificate (IPC) at a rate of 7.5%, up to a limit of 5% of the contract price stated in the Letter of Acceptance. However, when there is a variation order that increases the contract amount, then "The question arises whether the limit for retention money should be based on the original contract price or the revised contract price after variations, this limit become unclear."

The key question here is whether the retention limit applies to the original contract price or the revised contract price after variations. Generally, this is determined by the specific terms in the contract and any relevant interpretations within FIDIC guidance. Here’s how each option might be analyzed:

1. If the retention limit is based on the original contract price: The retention money cap would remain at 5% of the original contract price stated in the Letter of Acceptance, or 285 million (5,704 x 5%).

2. If the retention limit is based on the revised contract price: With the increased contract price due to variation orders, the retention cap could increase to 327 million (6,534 x 5%).

Practical Considerations and FIDIC Interpretation

FIDIC does not explicitly clarify in the 1987 version whether retention money should be recalculated based on variations. In practice, however, the industry often interprets the retention limit to be based on the revised contract price, especially if the variation orders significantly impact the project scope and value. This aligns the retention amount with the actual risk exposure from the increased contract value.

This approach ensures that the retention reflects the total scope and financial commitment of the project, including all variations. 

It is advisable to:

• Review any specific contract clauses or amendments that might clarify this, especially in case there are addenda that modify the FIDIC terms.
• Consult the Engineer or Contract Administrator for their interpretation, as they typically have authority over how FIDIC terms apply in the specific context of the contract.

It would be prudent to check the specific language of contract or seek legal advice to confirm the interpretation.

The basic purpose of Retention Money withholding:

Retention money deduction serves several important purposes in construction contracts:

1. Quality Assurance: It acts as a financial incentive for contractors to complete the project to the specified quality and standards. By holding back a percentage of payments, clients ensure that any defects or unfinished work are addressed promptly.

2. Risk Mitigation: Retention money provides a safety net for clients, protecting them from financial risks associated with contractor defaults, poor workmanship, or project delays.

3. Compliance with Contract Terms: It ensures that the contractor complies with all terms and conditions of the contract, including post-completion obligations such as maintenance and correction of defects during the defect’s liability period.

4. Financial Stability: It promotes financial discipline among contractors, encouraging them to manage their resources efficiently and complete projects on time.

Overall, retention money provides the employer with some leverage over the contractor, promoting quality, completion, and compliance with the project specifications.

Retention money is typically released in stages, with a portion returned upon project completion and the remainder after a specified defects liability period, ensuring all issues are resolved to the client's satisfaction.

Rate Revision of Varied Quantities.

FIDIC Clause 52.2, Power of The Engineer to Fix the Rate

FIDIC 1987 clause 51 and 52 deals variations of quantites and costs. 
The Engineer shall instruct the varied work under Clause 51, shall valuate it under clause 52.1,
shall review the BOQ rates for the varied works under clause 52.2 and finally shall review the whole variations plus minus 15% on the original contract to add or subtract certain amounts.

Under clause 52.2 The Engineer shall review the rates of varied works are workable and appropriate. The Engineer shall re-rate as per provisions in the contract and if there is more variation in such the work after that revision The Engineer shall review again and can re-rate as many times as required. Then finally re-adjusted/corrected at substantial completion stage under the provision of cl.52.3. This is so as the effective contract price at substantial completion stage includes varied items valued under cl. 52.1 and 52.2.

Application of revised rate if any item rate revised:-
(1) The revised revised shall be applicable on whole quantity  (BOQ+Increased) or ?
(2) shall be applied on increased quantity from BOQ quantity (Beyond BOQ) or ?
(3) shall be applied on increased quantity from BOQ+30 percent quantity ?

(a)If the amount of individual item (based on varied quantity) accounts for less than 2 percent of the contract amount, no change in BOQ rates upto the limit of BOQ plus 30 percent of BOQ original  quantity .
(b)If the referred amount of the individual item is more than 2 percent and varied quantity is also more than BOQ+30 percent of  original BOQ quantity,the newly derived rate will be applicable on the quantity beyond original BOQ multiplied by 1.30  only as before this limit  it is covered by (a) above.
(c)As above.
Hence new derived rate shall apply to the additional quantities in excess of the specified in the BOQ + the 30% .

FIDIC

FIDIC : Federation Internationale des Ingenieurs-Counseils (International Federation of Consulting Engineers).
Established in 1913 by Swiss and French Engineers.
FIDIC BOOKS DIVISION BY COLOURS
FIDIC RED BOOK: This is very commonly in use and mainly designed by Employer by assigning authorities to The Engineer (consultant) hired by him.
FIDIC GREEN BOOK: This is short form contract in which normaly no sub contractors or engineers are invoved.
YELLOW BOOK: Contract is based for design, building and engineering works by the contractor but the employer may also involoved some part of design.
FIDIC SILVER BOOK: The contract is for EPC (engineering, procurement and construction) works.

MDB Harmonized Edition
FIDIC red book has been modifed for lenders to give some more protection them is called MDB Harmonized Edition. 
MDB stands for Multilateral Development Banks a group of lenders for development projects.

A FIDIC contract, consist of

1. Contract Agreement;
2. Letter of Tender;
3. Letter of Acceptance;
4. Conditions of Contract;
5. Particular Conditions of Contract (if required)
6. Specifications;
7. Drawings;
8. Schedules;
9. Dispute Adjudication Agreement.

Taxation on Price Adjustment

FIDIC 1999 Escalation Formula clause 13.8

"Pn" is an multiplier to the work done amount for adjustment of rise or fall in prices of the specified items from the base line mentioned in the contract already. The adjusted amount thus worked out excluding tax charge that is to be deducted in the form of fixed with-holding tax at source. To ensure full compensation add it first before tax charge deduction and in this manner full compensation could be ensured for the specified items. In other words the taxation on escalation amount should be borne by the Employer.

Interest Claim on Price Adjustment Bill

FIDIC 1987, clause 60.10 Time for Payment.
The clause 60.10 applies to any payments which are due and payable by the Employer to the Contractor. Price Adjustment Bill is also part of the payments which are due and payable. If the Bill is certified for payment and is then delayed by the Employer for his own internal reasons, then clause 60.10 applies. However, it is important that the payments should become due and payable, for this clause to come into effect.
Clause is applicable for delayed payments of all heads as an IPC is not confined to monthly payments only under clause 60.An IPC can well be issued by the Engineer under any other term of the contract such as delayed mob. advance.etc.In brief,Interest is payable on delay of all Engineer certified payments.

For Interim  Payment Certificate.
Question is that, on which amount of IPC calculate the interest claim,
1- On gross work done amount or
2- On net payable amount to contractor afetr all deductions, like mobilization advance 15%, retention money 5% and income tax 6%.
Answer :
The interest is to be calculated on the amount which is due and payable, but which has been delayed. So the interest will be on the net amount after all deductions, and not on gross work done amount.

Time for Payment clause 60.10 FIDIC 1987

The Engineer shall, within 28 days of recieving of such statement, certity to the Employer the amount of payment to the Contractor.
If The Engineer take the extra time above 28 days to certify and deliver to Employer the such statement, who shall compensate or responsible for these day's interest claim etc.
According to the clause 60.10 the Emplyer's time for payment shall start after the Engineer submition."

The responsibility for delaying the payments falls on the consultant because he is the one who did the delay. But we need to clarify that the agreement is between the contractor and the employer and the consultant is employed by the employer as an agent, then the employer has to bear the results of all his agent's actions.
When the payment is delayed beyond the 28 consultant's days, it is possible that employer can pay within the total allowed period otherwise and if the delay goes beyond such period, then the contractor will be entitled for the compensation. The employer will have to pay the compensation to the contractor and he can deal later on with his agent (consultant).

Please read this clause from FIDIC 2005. It explains the issue but on the other hand, the agreement between the Consultant and the Employer is very important and it is not usually based on FIDIC Conditions. I mean the following condition is only related to Contractor-Employer Responsibilities.

If the Contractor does not receive payment in accordance with Sub-Clause 14.7
[Payment], the Contractor shall be entitled to receive financing charges compounded
monthly on the amount unpaid during the period of delay. This period shall be deemed
to commence on the date for payment specified in Sub-Clause 14.7 [Payment],
irrespective (in the case of its sub-paragraph (b)) of the date on which any Interim
Payment Certificate is issued.
Unless otherwise stated in the Particular Conditions, these financing charges shall be
calculated at the annual rate of three percentage points above the discount rate of the
central bank in the country of the currency of payment, and shall be paid in such currency.
The Contractor shall be entitled to this payment without formal notice or certification,
and without prejudice to any other right or remedy.

Idle Charges Claim

The Contract is base on FIDIC 1987 4th, Re-printed 1992
Interim payment certificate Submitted to Employer.
Employer failed to make payment within stipulated time. therefore the contractor stopped the the working due to non payment. in this regard his resources like equipments and manpower became idle.
Refer to Default of Employer clause.
For the period that the project is suspended, contractor may request for any idle equipment cost which may certify with evidences that they were idle for this project. Refer to Default of Employer clause.

In case of non-payment of any due amount under Contract, your initial proceeding may be claim the interest as indicated in Sub-clause 60.10, Time for Payment, which stipulates that “ In the event of the failure of the Employer to make payment within the times stated, the Employer shall pay to the Contractor interest at the rate stated in the Appendix to Tender upon all sums unpaid from the date by which the same should have been paid…”

It is a common practice that contractor’s claim interest in scope of goodwill in case of late payment, however there are other options available if the Contractor would like to take harsh measures.

In accordance with Sub-Clause 69.1, Default of Employer, which stipulates that “In the event of the Employer:
(a) failing to pay to the Contractor the amount due under any certificate of the Engineer within 28 days after the expiry of the time stated in Sub-Clause 60.10, within which payment is to be made, subject to any deduction that the Employer is entitled to make under the Contract, the Contractor shall be entitled to terminate his employment under the Contract
by giving notice to the Employer, with a copy to the Engineer. Such termination shall take effect 14 days after the giving of the notice.” Then the Contractor may terminate the Contract if he feels that the Employer is not able to fund the project anymore. In case of such termination, Sub-Clause 69.3, Payment on Termination stipulates that, “ In the event of such termination the Employer shall be under the same obligations to the Contractor in regard to payment as if the Contract had been terminated under the provisions of Clause 65, but, in addition to the payments specified in Sub-Clause 65.8, the Employer shall pay to the Contractor the amount of any loss or damage to the Contractor arising out of or in connection with or by consequence of such termination.”

Therefore,in case of non payment of any certified amount within 28 days after expiry of the payment time as stated, it is the case of Default of Employer and the Contractor may terminate the Contract. In such case as contractor additional to payment under Sub Clause 65.8, you may claim compensation, loss of profit, etc.

The last option in case of late or non payment in accordance with Sub Clause 69.4, as you have taken in your case, (Contractor’s Entitlement to Suspend Work) is to slow down or suspend the Works which stipulates that”.. the Contractor may, if the Employer fails to pay the Contractor the amount due under any certificate of the Engineer within 28 days after the expiry of the time stated in Sub-Clause 60.10 within which payment is to be made, subject to any deduction that the Employer is entitled to make under the Contract, after giving 28 days prior notice to the Employer, with a copy to the Engineer, suspend work or reduce the rate of work.
If the Contractor suspends work or reduces the rate of work in accordance with the provisions of this Sub-Clause and thereby suffers delay or incurs costs the Engineer shall, after due consultation with the Employer and the Contractor, determine:
(a) any extension of time to which the Contractor is entitled under Clause 44, and
(b) the amount of such costs, which shall be added to the Contract Price, and shall notify the Contractor accordingly, with a copy to the Employer.”

As it can be seen above, you have a case of Extension of Time and additional cost incurred, which you can claim your prolongation costs including idle time of your plant and equipment..

KIBOR

Definition:
“KIBOR is the   average interest rate at which banks want to lend money to other banks”.
Purpose:
KIBOR as a benchmark, to encourage transparency, to promote consistency in market based pricing and improve management of the market risk undertaken by banks.

The banks do lending and borrowing taking KIBOR as benchmark with additional margin on it, which depends on, The tenure of the deal, The liquidity level, The credit quality.

History:

It was formed in 1997,by Financial Markets Association of Pakistan (FMA), It is a Non-commercial, Non-profit,  Self-financed and Professional  Association of Dealers of Financial Instruments.

Factors linked with KIBOR,

. Interest rate
. Rate of Inflation
.  Purchase Power
.  Discount Rate
.  Balance of Payments

Benefits:Kibor futures will allow banks to perform their lending function efficiently by taking the burden of interest rate risk away from the corporate and industrial sector.

MAIN SERVICES AND PRODUCTS OF REUTERS IN:
.Exchange Traded Instruments
.Commodities & Energy
. Fixed Income
. Hedge Funds
. Risk Management

Quantity Variaton Only. Clause 52.3

If some item's amount is exceeded than BOQ amounts, but whole contract amount is in limit. e.g earth work BOQ amount is 1000 Million and work done /paid amount is 1400 million and contract amount is 3000 against paid is 1900 million. That "quantity variation only" case is dealt with under clause 52.3 at substantial completion stage and hence payments can be released as long as conditions of performance bond are not infringed as given in clause 60.3.

Price Adjustment, about the Material is Not Used

The Formula for Price Adjustment is to determine a Pn factor for each IPC. The weightages or coefficients of different materials are given in the Appendix-C with a fixed portion also. As per Formula the sum of fixed portion and weightages of all materials (adjustable portions) shall always be one (01). Now the question is that if in any month we have not used a particular material say Bitumen then the Pn value will be calculated including the Bitumen or without Bitumen. If it is without Bitumen then the sum of weightages will not be one.
The best way to explain, is to have a look at the formula itself. The adjustment to the monthly statement in respect of changes in cost is determined from the following formula.
Pn = A + b Ln/Lo + c Mn/Mo + En/Eo + ………………
Where b, c, d etc. are coefficients representing the estimated proportion of each cost element in the works while a is a constant specified in Appendix C to bid representing the non adjustable portion in contractual payments. To study this we consider in above formula, c stands for bitumen and Mn & Mo stand for current cost indices and base cost indices respectively. You will note from here that there is no mention of bitumen quantity and only Mn shall vary with time. From here we can conclude that Pn value will be calculated including the bitumen.

The formula only works out a multiplying factor for the boq rate based amounts of IPCs to update them to today's value under consideration with the help of indices published by a nominated body in the country for specified items.The formula contain no reference to quantities and as such no linkage with it except at tender stage when their factors were calculated on basis of ratio of item cost that it bears to the tendered amount.This becomes reference point then for up-dation of ipc amounts with time on the basis of market trend so assessed with the help of indices.The adjustment formula is applicable to all specified items whether consumed or not.I hope this make it clear.

Reference of PEC Rules for adjustment of price but bidding document do not contain exact text of these Rules. Now It is customary but The best option would be to have a copy downloaded and then get its content certified from Registrar as this amendment is still not ratified by PEC officially..

FIDIC claim for delay payment

General contract clause (FIDIC 1987),

Time for Payment 60.10

The amount due to the Contractor under any Interim Payment Certificate issued by the Engineer pursuant to this Clause, or to any other term of the Contract, shall, subject to Clause 47, be paid by the Employer to the Contractor within 28 days after such Interim Payment Certificate has been delivered to the Employer, or, in the case of the Final Payment Certificate referred to in Sub-Clause 60.8, within 56 days, after such Final Payment Certificate has been delivered to the Employer. In the event of the failure of the Employer to make payment within the times stated, the Employer shall pay to the Contractor interest at the rate stated in the Appendix to Tender upon all sums unpaid from the date by which the same should have been paid. The provisions of this Sub-Clause are without prejudice to the Contractor's entitlement under Clause 69 or otherwise.

Particular Contract Clause 60.10

Time for Payment

The amount due to the contractor under any interim payment certificate issued by the engineer pursuant to this clause, or to any other terms of the contract within 28 days after such interim payment certificate has been delivered to the Employer, or in the case of final certificate referred to in sub clause 60.8, within 56 days after such final payment certificate has been delivered to the Employer. In the event of the failure of the Employer to make payment within the time stated, The Employer shall pay to the contractor compensation at the 28 days rate of KIBOR+2% per annum for local currency and LIBOR+2% for foreign currency, upon all sums unpaid from the date by which the same should have been paid. The provisions of sub-clause are without prejudice to the contractor's entitlement under clause 69.

Interpretation of FIDIC Contract Clause 60.10:

The phrase "the Employer shall pay to the Contractor compensation at the 28 days rate of KIBOR + 1% per annum" refers to the calculation of interest on delayed payments using the 28-day rate for the Karachi Interbank Offered Rate (KIBOR), plus an additional 1% as a penalty or compensation for the delay.

Here's how it works:

1. KIBOR 28-day Rate: KIBOR is a benchmark interest rate used in Pakistan, similar to LIBOR in international markets. The "28 days rate" refers to the rate applied for borrowing over a 28-day period. This rate fluctuates depending on the market, so you would use the KIBOR rate applicable on the date when the payment became overdue.

2. Plus 1%: The contract stipulates that the interest charged on delayed payments will be KIBOR + 1% per annum. This 1% is an additional penalty or compensation for the Contractor due to the Employer's failure to make timely payments.

3. Application:

   • Identify the 28-day KIBOR rate at the time when the payment became overdue.
   • Add 1% to this KIBOR rate.
   • The resulting interest rate is applied annually but needs to be prorated for the period the payment was delayed.

Example Calculation:

1. Suppose the 28-day KIBOR rate on the day the payment became overdue was 14%.

2. The contract adds 1%, so the interest rate becomes 15% per annum.

3. If the payment was delayed by 60 days, you would calculate the interest for those 60 days (a fraction of the year) using the formula:

   $$\text{Interest} = \left(\frac{15}{100} \times \text{Amount Due}\right) \times \left(\frac{60}{365}\right)$$

   This gives you the interest payable for the period of the delay.

In short, the clause requires the Employer to compensate the Contractor for any delays by paying interest based on the KIBOR rate for 28-day borrowings, plus 1%, prorated for the period of delay.

• If delay prolonged more than 28 days, then what, if the same rate will be applicable or the KIBOR rate will be applied after every 28 days?

In the context of your contract clause, the reference to the "28 days rate of KIBOR" typically means that the interest rate is based on the 28-day KIBOR at the time the payment became overdue. However, since the contract doesn't explicitly mention adjusting the KIBOR rate at intervals, the interpretation will depend on how the contract has been applied in practice and the specific legal interpretation.

Here are the two possible interpretations:

1. Fixed Rate Based on Initial KIBOR (Most Common Interpretation):

• The 28-day KIBOR rate applicable on the date when the payment first became overdue is used for the entire period of delay. This is the most common approach in contracts that reference an interest rate linked to KIBOR.
• Even if the delay exceeds 28 days, the same KIBOR rate (the one applicable at the time of default) would be used for the entire period until payment is made.

2. Adjusting KIBOR Every 28 Days (Less Common Interpretation):

• In this interpretation, the KIBOR rate would reset every 28 days, meaning that every 28 days, the interest rate would be adjusted to reflect the current KIBOR rate at that time.
• For example, if the delay extends beyond 28 days, and the KIBOR rate changes after 28 days, the new KIBOR rate would apply from day 29 onwards.
• This interpretation could be valid if the contract specifically stated that the KIBOR rate should be reviewed and adjusted after each 28-day period, but your contract doesn't specify this.

Which Interpretation is Likely?

• Fixed KIBOR Rate: In most FIDIC contracts and similar agreements, the initial KIBOR rate (set at the time of overdue payment) remains constant throughout the period of delay, even if the delay exceeds 28 days. This simplifies calculations and avoids disputes over changing rates.

• Adjustable Rate: If the parties want to apply an adjustable rate, this would need to be clearly stated in the contract. Terms like "the KIBOR rate in effect at the time of payment" or "adjustable every 28 days" would be required. Since your contract doesn't mention this, it's safer to assume that the rate remains fixed.

Conclusion:

If the delay prolongs beyond 28 days, the initial KIBOR rate (plus 1%) set when the payment became overdue will likely continue to apply for the entire period of delay, unless the contract explicitly states otherwise.