Construction Procurement Course 6/5/2017

Payment Methods
LECTURE 25

Payment Methods
Construction contracts are different from sales contracts.

Capital value of construction projects is usually too high to expect a contractor to finance the

project.

For this reason, construction uses method of interim-payments.

Payments can be made on monthly basis or attached to certain milestones.

The procurement routes we discussed can adopt various payment methods.

Choice of payment method is critical.

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Construction Procurement Course 6/5/2017

Payment Methods
Payment methods are either based on cost or price.

Price based payment methods
In this method, a contractor is required to tender a price for the completion of work before the actual
work commences.

This price includes all the costs that contractor will incur plus his profits.

Requires the contractor to estimate its future costs.

Typically used for buildings construction where contractor has sufficient information available to
accurately predict his costs.

Payment Methods
Payment methods are either based on cost or price.

Cost based payment methods
In this method, the contractor requests payments for the actual costs of the works as they are
completed plus a percentage added to those costs as contractors profit.

This is appropriate in situations where precise quantities are not available before the work
commences.

Payment method choice varies the risk exposure of contractor and client.

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