Back to Basics #15 - Don’t Let Your Cash Flow Suffer Due to Badly Drafted Activity Schedules - (Part 2)

Back to Basics #15 - Don’t Let Your Cash Flow Suffer Due to Badly Drafted Activity Schedules - (Part 2)

 

In our last commentary we looked at NEC Option A and C, how it can impact your cashflow and suggested a simple approach to improve your cashflow.

An issue that is often raised is that of preliminaries, and how to record these in an Activity Schedule in a way which avoids being paid for all the preliminaries at the end of the project.

An approach often used to get around this problem, is that the payee will apply for its preliminary costs on a proportional basis. This is usually done by reference to the duration of the contract programme that has elapsed as opposed to a proportion of the preliminary costs relative to the amount of work completed. Often, the payer will endorse this approach by certifying the preliminary costs (or the relevant activity) on a similar basis, even if the proportion certified differs to that applied. This itself can create problems as a party may end up certifying and paying prelims for a period of delay (without expressly stating so) when such assessment should form part of a compensation event, if at all. In doing so, such action could be argued as preventing any later argument by the Project Manager that no payment of preliminary costs is due to a certain delay.

As suggested in Part 1 of this series on Activity Schedules, you could split the preliminaries into individual months and whilst there can be resistance to this approach this certainly avoids some of the problems mentioned above.

However you breakdown the Activity schedule, it is important to make sure that the Activity Schedule is adequately costed and realistically reflects the timing and order of operations necessary to deliver the works. The Activity Schedule items do not need to directly map to those on the Accepted Programme. It is necessary, though, to provide information which shows how the Activity Schedule activities relate to operations on the Accepted Programme (Clause 31.4 - Option A).

Under Option A (Clause 54.1), if the Contractor’s planned method of working changes such that the relationship between the Activity Schedule and the Accepted Programme is no longer valid, then the Contractor can submit revisions to the Activity Schedule to the Project Manager for acceptance (who will only have a few valid reasons for not accepting it under Clause 54.3). If the Activity Schedule does contain an Activity which will affect cashflow, as it won’t be completed for some time, then there is no clear way out of this under the contract. In this instance, the best approach is likely to be upfront about it and request that the Project Manager allow a revision of the Activity Schedule to be submitted; although there is no contractual right to do so. An improvement to the payee’s cashflow may well be in the interest of the payer, particularly if they are on a target or cost reimbursable form of contract.

The only other way in which the Activity Schedule (in Option A contracts) is changed is through compensation events, where the changed contract sum (total of the Prices) is achieved through changes to the Activity Schedule.

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