Lec 7 - Financial Matters PDF

Lecture 7 Jawad Butt M.Eng. Civil (UOT), PMP [email protected] 1  Lecture Objectives To familiarize you with the start up document requirements for progress payments. To familiarize you with the Construction Lien Act. To enable you to succ...

Lecture 7 Jawad Butt M.Eng. Civil (UOT), PMP [email protected] 1  Lecture Objectives To familiarize you with the start up document requirements for progress payments. To familiarize you with the Construction Lien Act. To enable you to successfully handle progress payments on construction job sites.  Schematic For Construction Site Entities? Class Discussion Progress Payments - Start Up Document Requirements  Progress Payments - Start Up Document Requirements Before the General Contractor is allowed to start work on the site and get any progress payment, the following documents have to be prepared by the GC and submitted to the Contract Administrator for approval: 1. Project Schedule 2. Health and Safety Policy & Program 3. MOL form 1000 (Registration Of Constructors & Employers Engaged In Construction) 4. Certificate of Liability Insurance 5. Proof of WSIB Registration 6. Schedule of Values 7. Statutory Declaration 5  3) MOL Form 1000 In Ontario, the Ministry of Labor, Immigration, Training and Skills Development (formerly known as the Ministry of Labor) is responsible for labor-related matters, including employment standards, occupational health and safety, and workers' rights. As per this Ministry’s requirements, each constructor / employer engaged in a construction project in Ontario must complete this registration form known as MOL Form 1000 Registration of Constructors and Employers Engaged in Construction. This form must be present at the project site while the constructor / employer is working there. MOL Form 1000 – Registration Of Constructors & Employers Engaged In Construction 7 9  5) Proof of WSIB Registration WSIB stands for the Workplace Safety and Insurance Board. WSIB registration refers to the process by which employers in Ontario register with the WSIB, a government agency responsible for workers' compensation and workplace safety and insurance in the province.  5) Proof of WSIB Registration Important points about WSIB registration include: – Mandatory Requirement: In Ontario, most employers are required by law to register with the WSIB. This requirement is in place to ensure that workers are protected in case they are injured or become ill due to workplace-related incidents. – Protection for Workers: WSIB registration is crucial because it provides workplace insurance coverage for workers in the event of a workplace injury or illness. If an employee is injured on the job, WSIB provides compensation for lost wages, medical expenses, and other related costs.  5) Proof of WSIB Registration – Registration Process: Employers can register with the WSIB by completing an application through the WSIB website or by contacting the WSIB directly. The registration process typically involves providing information about your business, including the number of employees, the nature of the work, and payroll details. – Premiums: Once registered, employers are required to pay premiums to the WSIB based on their business type, industry, and the amount of payroll. The premiums help fund the workers' compensation system in Ontario.  5) Proof of WSIB Registration – Annual Reporting: Registered employers must also submit an annual reconciliation statement to the WSIB, which includes payroll information and other relevant details. This statement is used to determine the annual premium payments. – Compliance with Health and Safety Regulations: In addition to providing compensation to injured workers, the WSIB plays a role in promoting workplace safety. Employers are expected to comply with health and safety regulations to prevent workplace accidents and injuries.  5) Proof of WSIB Registration It's important for employers in Ontario to be aware of their obligations with regard to WSIB registration and compliance, as failure to do so can result in penalties and legal consequences.  WSIB Clearance Certificate ** A current WSIB clearance certificate has to provided by the contractor to the contract administrator with each progress payment. 15  6) Schedule of Values A Schedule of Values (SOV) is a detailed breakdown of the total contract amount into various line items or categories, each representing a portion of the work to be performed during the course of a construction project. Each line item is associated with a specific dollar amount, indicating the value or cost of that particular work or activity. The sum of all line items should equal the total contract amount.  6) Schedule of Values The purposes of SOV are: a) Billing and Payment: Once a schedule of values has been approved by the contract administrator, it becomes the benchmark for all progress payments. The SOV is used for billing purposes, especially in progress payments. During the project, as work is completed, the contractor submits invoices based on the percentage of completion for each line item. b) Budgeting and Cost Control: Contractors use the SOV as a budgeting tool to monitor and control project costs. By tracking the progress of individual line items, they can identify areas where costs may be over or under budget and make adjustments as necessary.  6) Schedule of Values c) Progress Tracking: The SOV is an essential tool for tracking the progress of the project. It allows project stakeholders (contract administrator & contractor) to see which components of the work are completed, in progress, or yet to begin. This information is valuable for scheduling and project management.  6) Schedule of Values d) Documentation: The Schedule of Values serves as a formal document that helps prevent disputes and misunderstandings. It provides a clear and transparent breakdown of costs and work elements, making it easier to resolve any payment or performance issues that may arise during the construction project.  6) Schedule of Values e) Change Orders: If changes are made to the scope of work during the project, the SOV can be updated to reflect these changes, and it may lead to adjustments in the contract amount. The SOV is thus an essential financial and management tool that helps the contract administrator as well as the contractors, owners, and other project stakeholders track and manage the progress of work, payments, and control costs.  Front Loading Front loading means to allocate, in the schedule of values, undue high costs to the work to be done in the initial stages of the project at the cost of the work to be done at the later stages of the project. Front loading leads to: – The contractor getting a much higher payment, in the initial stages of the project, as compared to the actual value of work done. – Indirect financing of the contractor’s work by the owner. – Possibility of subsequent work being abandoned by the contractor. 22  Front Loading Front loading gives undue advantage to the contractor. Thus the contract administrators are typically extremely vigilant against front loading while assessing the contractor’s schedule of values.  Example: Front Loading? Class Discussion  Unfair Bidding Practices - Vigilance Required By Owners Shrewd and experienced contractors, based on their previous experience, will likely know before hand which items of work are most likely expected to increase in quantity/scope during the project execution. On the basis of this assumption, they may allocate a higher value to these items in their schedule of values at the cost of other items of work that have the likelihood, in their opinion, of decreasing in scope during project execution. Example: Unfair Bidding Practices? Class discussion  Unit Prices / Unit Rates SOV may include some unit prices/unit rates also for certain items of work such as doors, windows, paving, etc. and indicates the total price to do that unit of work i.e. all costs for labor, material, equipment, overheads and contractor’s profit, etc.  Example: Unit Price For Pavement Construction? Class discussion  Benefit of Unit Prices / Unit Rates Unit prices are commonly used in the bidding process for construction contracts. At the time of seeking competitive bids, the Owner / Contract Administrator will typically request unit prices also from the contractors in addition to complete itemized pricing. This allows owners to compare bids more easily and select the contractor offering the best value.  Example: Use of Unit Prices in Bids? Class Discussion  Benefit of Unit Prices / Unit Rates Unit prices are used for progress payments as well. Contractors submit invoices based on the quantities of work completed, and payments are calculated using the unit rates specified in the contract. This aligns payments with actual progress on the project.  Benefit of Unit Prices / Unit Rates Unit prices are also invaluable when dealing with change orders. If changes or additional work are required during the course of the project, unit prices make it easy to calculate the cost of these changes based on the unit rates in the contract. This simplifies the process of negotiating and processing change orders.  7) Statutory Declaration Statutory Declaration: A statutory declaration is typically made by the contractor in the form of a written sworn affidavit. This means that the individual making the declaration, often referred to as the "deponent," solemnly affirms or declares that the information provided in the document is true and accurate to the best of their knowledge and belief. 33 34  Statutory Declaration To 'solemnly declare' is a serious thing in legal terms; and the making of a false or fraudulent declaration is a contravention of the Criminal Code of Canada, and could carry, upon conviction, penalties including fines or imprisonment.“ A statutory declaration has to be provided by the contractor to the contract administrator (owner) starting from the 2nd progress payment and onwards for each subsequent progress payment.  Statutory Declaration The purposes of a statutory declaration are: a) Protection of Owner: The contractor declares in the statutory declaration that they have distributed monies received from the owner to pay others (sub-contractors, trades, suppliers, laborers, etc.) doing work on the project. This protects the owner in the event of a lien claim from a 3rd party in case they were not paid by the general contractor.  7) Statutory Declaration b) Preservation of Lien Rights: Under the Construction Lien Act, a statutory declaration may be required from contractors, subcontractors, or suppliers as part of the process to preserve their lien rights. It may thus be used to assert that a particular party is owed money for work or materials on the project. c) Project Financing: Often, project financiers require a Contractor's Statutory Declaration before releasing further payments.  Lien Claim Scenarios? Class discussion Holdbacks  Holdbacks Holdback is the money held back by the owner from each progress payment submitted by the contractor. This holdback is returned to the contractor at a later stage, when certain conditions have been fulfilled. On any construction project, the holdback normally falls in two separate categories: a) Statutory holdback (10% mandatory requirement as per Construction Lien Act) b) Deficiency holdback (optional; negotiated between the owner and the contractor before signing of contract) Statutory Holdback (Construction Lien Act) As per the Construction Lien Act, the owner must holdback 10 % amount of each progress payment and keep it in a separate holdback account under the control of the owner. The purpose of statutory holdback is to safeguard the owner in case any lien claims arise against the contractor and the contractor fails to settle those claims. Getting a statutory declaration from the contractor for each progress payment is also a requirement under this act. 41 Statutory Holdback (Construction Lien Act) In case lien is filed on the property, the Lien Act allows the owner to settle the lien claims out of the statutory holdback account, if the contractor fails to clear the lien claim by himself.  Deficiency Holdback Deficiency holdback is optional and may be 5 % or more, as negotiated at the time of the contract agreement, between the owner and the contractor and is over and above the statutory hold back. Statutory holdback cannot be used as a deficiency holdback. 43 Return Of Holdback To The Contractor Holdback is actually the contractor’s money being held by the Owner. 10% Statutory holdback is released back to the contractor by the owner 45 days after the date of publication of certificate of substantial completion in a recognized newspaper, provided there are no lien claims pending on the property. Deficiency holdback is normally released back to the contractor by the owner at end of warranty period (typically 1 year from the date of publication of substantial completion). Substantial Completion/Performance of Work  Substantial Completion of Work (Construction Lien Act) (Reference Service Ontario eLaws) Substantial Performance (Construction Lien Act) “2. (1) For the purposes of this Act, a contract is substantially performed, (a) when the improvement to be made under that contract or a substantial part thereof is ready for use or is being used for the purposes intended; or 46 Calculation of Substantial Completion of Work (Construction Lien Act) (b) when the improvement to be made under that contract is capable of completion or, where there is a known defect, correction, at a cost of not more than, (i) 3 percent of the first $1,000,000 of the contract price, (ii) 2 percent of the next $1,000,000 of the contract price, and (iii) 1 percent of the balance of the contract price. R.S.O. 1990, c. C.30, s. 2 (1).” 47  Class Example of Substantial Completion Contract amount= $ 2,755,000 1. Calculate 3 % for first $ 1,000,000=0.03x1,000,000= $ 30,000 2. Calculate 2 % for second $ 1,000,000=0.02x1,000,000=$ 20,000 3. Calculate 1 % of balance contract amount (2,755,000- 1,000,000-1,000,000) = 0.01x755,000 =$ 7,550 Adding 1+2+3 = 30,000+20,000+7,550=$57,550 The above contract will be considered as substantially completed when amount of work remaining to be paid shall be equal to or less than $57,550 OR when the work that has been paid equals 2,755,000-57,550 =$2,697,450 48 Certificate Of Substantial Completion Certificate of substantial completion is issued by the contract administrator after the work has been substantially completed, as described in the Construction Lien Act. 50 Importance of Substantial Completion Certificate Substantial completion is extremely important because, the published date of substantial completion certificate: – Starts the 45 day period for release of statutory 10 % hold back. – Establishes contract warranty period. – Stops potential of liquidated damages. 51  Substantial Completion of Work (Class Exercises) Find out the amount of work required to be done for substantial completion for each of the following contract amounts: Contract Amount a) $ 0.475 Million b) $ 1.500 Million c) $ 10.00 Million d) A project waterline project of $ 3M in value, for which $ 2M has been paid to the contractor and which has successfully begun to supply water to the area for which it was laid. 52 Progress Payments Application For Progress Payments Applications for progress payments are typically made by the general contractor to the contract administrator on a monthly basis. The general contractor will consolidate invoices received from the trades & suppliers etc. at the end of each month and submit to the contract administrator for review and approval. 54  Application For Progress Payments Once the payment has been approved, the owner will issue the cheque in the name of the general contractor. The general contractor will then pay out the individual trades and suppliers directly upon receipt of the payment from the owner. Flow Chart For Progress Payments? Class Discussion Progress Payments – Processing Timeline The payment processing time by the contract administrator and issuance of cheque by the owner may take from 30-45 days (exact timeline for submission, review and approval of progress payments is detailed in the contract documents), so this processing time should be budgeted by the General Contractor / Trades to maintain adequate cash flow. Progress Payments - Concept of Gross Work Done? Class discussion  Progress Payment (Class Exercise) Find out the cheque amounts to be paid to the contractor by the owner for the first and second monthly progress payments for the following. Also what is the hold back amount with the owner after the 2nd progress payment? 1. Original contract price= $275,000 2. Gross work done for the 1st progress payment (excluding change orders) = $155,000 3. Approved change orders up to first progress payment (CO1) = $15,000 4. Gross work done on the site up to the 2nd progress payment = $235,000 5. Deficiency holdback = 5 % 6. HST =13% 59  Solution- Cheque Amount For 1st Progress Payment (PP1) Approved change orders since last progress payment = $15,000 Updated contract price= 275,000 + 15,000 = $ 290,000 Gross Work done for PP1= 155,000+15000 =170,000……. (A) Gross work up to previous progress payment = NIL……. (B) Net work to be paid for PP1 …… (A-B)= 170,000 Deduct 10 % statutory holdback on net work done = 17,000 Deduct 5 % deficiency holdback on net work done= 8,500 Net amount after deductions= 170,000-17,000-8,500 =144,500 Calculate HST to be added @ 13 % = 0.13x144,500=18,785 Cheque amount for PP1 = 144,500+18,785= 163,285  Solution- Cheque Amount For 2nd Progress Payment (PP2) Approved change orders since last progress payment = NIL Updated contract price= $ 290,000 Gross Work done for PP2= $235,000 ……. (A) Gross work up to previous progress payment = $170,000…….(B) Net work to be paid for PP2…… (A-B)= 235,000- 170,000=65,000 Deduct 10 % statutory holdback on net work done = 6,500 Deduct 5 % deficiency holdback on net work done = 3,250 Net amount after deductions= 65,000-6,500-3,250 =55,250 Calculate HST to be added @ 13 % = 0.13x55,250=7,183 Cheque amount for PP2= 55,250+7,183= 62,433  Holdback Amounts With the Owner After 2nd Progress Payment Total statutory hold back with the owner = 17,000+6,500 = 23,500 Total deficiency holdback with the owner =8,500+3,250= 11,750 Thank You 63