Back to Basics #14 - Don’t Let Your Cash Flow Suffer Due to Badly Drafted Activity Schedules - (Part 1)
In this commentary we will look at a common challenge encountered by Contractors and Subcontractors when working under Option A and C of the NEC 3 or NEC 4 contracts; How is it best to maintain cashflow whilst working with an Activity Schedule?
The NEC 3 and NEC 4 forms of contract require, under main Options A and C, the use of an Activity Schedule. This Schedule is a list of the activities for the works, each with a sum (the Price) stated next to it. Under the main Option A, when an activity is complete the Contractor will be entitled to apply for payment of that sum in the next payment application cycle.
Under an Option C contract, payment is not based on the Activity Schedule. The Activity Schedule serves mainly as a document to demonstrate the build-up to the contract sum (the total of the Prices) against which the eventual “pain” or “gain” is measured. Payment is based on the Defined Cost plus the Fee.
Under an Option A contract, when a party submits its Activity Schedule as part of the tender and this eventually gets incorporated into the contract, often it will include an activity such as “Preliminary costs” or “Prelims” or similar, i.e. an Activity that is never complete until the works are complete, or until a Section of them is. Even if the contract period was, for example 20 weeks, even 20 weeks of the programme elapsing may not be sufficient grounds to claim the amount as there may be delays to the programme. The criterion is that payment is due when the activity is complete under, and as required by, the contract. Arguably then, the preliminary costs will not be due until the contract works are complete.
One relatively straightforward way to protect your cashflow, whilst working under an Option A and Option C contract, is to ensure that the Activity Schedule is broken down into relatively small discrete activities. For example, rather than having one activity for a concrete floor slab, break the floor slab down into more detailed activities by referring to, for example, specific stages of the slab construction and specific gridlines. Ideally your programme should be similarly broken down as this will assist with project management, accurate recording of progress and assessing compensation events.
Next time we will look at how best to manage your cashflow under Option A and C and answer the question “What should you do with Preliminaries?”.
If you need assistance with preparing an activity schedule and linking it to a NEC compliant programme, pricing compensation events, training or any assistance associated with NEC, Ramskill Martin’s Team of Consultants can provide practical, commercial and risk avoidance focused assistance.
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