FIDIC sub clause 14.2 – Advance payment.(explained)

Advance payment is an interest free mobilization loan from the Employer to the Contractor. Advance payment can either be paid in one installment or multiple installments to a Contractor. Where multiple installments are intended, it is mandatory to state it in the Appendix to Tender, and specifying the number of installments, and the time to pay the installment to the Contractor. Also the applicable currencies and proportions in case of multiple currencies must be stated in the Appendix to Tender.

For the Advance payment to be applicable to a contract, one of the following must be established;
1. The Employer must have received a guarantee covering the Advance payment from the Contractor, i.e. an APG (Advance Payment Guarantee) must be provided by the Contractor
2. The total Advance payment sum must be stated in the Appendix to Tender.

The Contractor cannot receive payment for Advance payment if he;
1. does not apply for the payment in accordance with sub –clause 14.3 (in six copies),
2. does not provide a performance security in accordance with sub-clause 4.2,
3. does not provide an APG,
These three criteria are mandatory before the Consultant Engineer can issue a payment certificate to cover the Advance payment.

The Advance payment can be recovered through percentage deductions in payment certificates due to the Contractor, or through other percentage forms as agreed and stated in the Appendix to Tender.

Advance payment recovery can only commence when the addition of all certified interim payments exceeds Ten percent (10%) of the Accepted Contract Amount (initial contract sum) less Provisional sums. The certified interim payments to be added together must be exclusive of the Advance payment, deductions and retention sums.

The rate of recovery or amortisation of Advance payment shall be 25% of each payment certificate sum less retention, deduction and Advance payment sums. The amortisation must be in applicable currencies or proportions (in case of multiple currencies) and continued to be carried out until the advance payment has been fully repaid.

Advance payment recovery or amortization is exclusive of retentions, statutory deductions and the Advance payment; hence they must be adjusted in valuations.

Where the advance payment has not been fully repaid and one of the following occurs;
A. The Employer terminates the contract,
B. The Contractor terminates the contract,
C. Force majeure,
D. Issuance of Taking over certificate,
the whole balance or outstanding advance payment must be paid by the Contractor to the Employer immediately.

It is important to note that the Contractor may gradually reduce the amount of APG as he repays the advance payment to the Employer, but must ensure that the APG is valid and enforceable until full repayment of the advance payment is carried out.

Where the APG has an expiry date, and the whole advance payment has not been fully recovered 28days to the expiration of the APG, the Contractor must extend the validity of the APG. The validity of the APG must always be maintained until the advance payment is fully amortised.

Note: There is no specific percentage or amount to be given to a Contractor as advance payment, but it is good practice not to give more than 40% of the contract sum. In Nigeria the Federal Government through the BPP act allows a maximum of 15% of contract sum as the amount to be given as advance payment on construction contracts.

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~ FIDIC form of contract for building and engineering works designed by the Employer.