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Management of Construction Contracts
Check List No. 6 – Statement of Practical Completion
by Gursharan Singh
1.0 Introduction
1.1 The completion of any contract is generally signified by the issue of a Certificate of Practical Completion [‘CPC’] that would be issued by the Superintending Officer [‘S.O.’]. The prompt issue of a ‘CPC’ is a sign of efficient management of any construction contract as delays may adversely affect the correctness of its contents due to non-availability of key personnel who may have left the company or may have been assigned to other duties at other locations and/or inability to locate/identify all the relevant documents pertaining to the works. Thus it is important that the ‘CPC’ is issued within the shortest period of practical completion of the works.
1.2 It may be noted that the contract clauses generally refer to ‘practical completion’ for which there may be several differing interpretations. In some instances the words ‘practical completion’ refers to the completion stage where the contractual works can be used for its intended purposes. However, it must be understood that it has been held that the contract is ‘practically’ completed with some outstanding works that are deemed to be ‘minor’. The ownership of the works will then pass on to the client from the date of the ‘CPC’ and the ‘Defects Liability Period’ will commence. However, the client may not be able to occupy and use the completed works. Thus it is important that the technical professionals ensure that interpretation and implications of the words ‘practical completion’ is explained to the client to ensure that client has an option to prescribe other conditions and an opportunity to make an informed decision but this should be done during the tender invitation stage of the contract when. [Check List No.1 - Tender/Tender Table Documents refers]
2.0 Objective
2.1 It is important that the ‘SO’ ensure that all the relevant financial & legal contractual obligations have been complied by the main contractor including his sub-contractors/suppliers. This objective can be achieved by the preparation of a Statement of Practical Completion [‘SPC’] that would list all the important aspects pertaining to the contact and thus provide the necessary assurance.
3.0 Statement of Practical Completion - Relevant Documents
3.1 The more important of relevant documents that should be included in the ‘SPC’ and their importance are listed below.
[a] Certificate of Practical Completion
[aa] The issue of a ‘CPC’ is a contractual requirement and it should be issued promptly.
[b] Variation/Change Orders [‘VO’s]
[bb] It should be ensured that all the issued ‘VO’s are approved, computed on a correct basis and adjusted. All ‘VO’s should also be correctly accounted. Special attention should be paid to ‘VO’s pertaining to ‘Omissions’.
[c] ‘Prime Costs’ [‘PC’] ‘Provisional Sums’ [‘PS’] & ‘Prov. Quantities’ Valuations [‘PQ’V].
[cc] The financial quantum of ‘PC’, ‘PS’ and ‘PQ’S should be quantified by re-measurement and finalized. The valuations of ‘PC’ and ‘PS’ are generally subject to additional claims in respect of ‘Profit & Attendance’ [‘P&A’] that is payable to the main contractor as some of the works may be sub-contracted. Thus the claims for ‘P&A’ should be examined and scrutinized for justification, rate, basis and computation as prescribed in the Bills of Quantities.
[d] Statement of Outstanding Works [‘SOW’]
[dd] The ‘SOW’ should list items that are deemed to be ‘minor’ in nature that can be completed while the client prepares to takeover and utilize the works.
[e] ‘Contingency Sum’
[ee] It should be ensured that the ‘Contingency Sum’ is deleted from the final contract As a preferred good practice, there should not have been any provision for Contingencies in the original LOA contract.. However, it should have been OMITTED, at the Beginning if included in the LOA.
[f] Price Variance Claims
[ff] Most contract conditions provide for variance of rates for specified components of inputs that are subject to sudden price fluctuations that are beyond the control of clients and contractors. These components generally include fuels, building materials [cement & steel products - local & imported], labor, etc in the implementation of works. Such claims should be subject to documentary evidence and be examined for correct computation.
[g] Progress Payments & Advances if any and Provision of Materials/Services/Facilities
[gg] Full recovery and deductions should be made for any advances. In the case of any other assistance provided in any form it should be assured that all are correctly computed, accounted and adjusted. Similarly, settlement of dues to sub-contractors/suppliers should be ensured.
[h] All Extensions of Time/Cert. of Non-Completion
[hh] These should be approved by authorized officers only. Correct computation, recovery and accounting of any L & AD penalties that are imposed should be done.
[i] Mandatory Statutory Certificates by relevant Government Laws
[ii] The mandatory certificates that may be required will vary from country to country and local authority and type of works. It is important that these are identified and complied with. All the relevant certificates should be provided.
[j] Capital assets provided under the contract but not incorporated or are part of the works
[jj] Some mega infrastructure/buildings projects provide for procurement of some capital assets that are to be handed over to the client at the end of the completion of works. [Examples: Heavy Plant/Machinery [Rail locomotives & associated equipment], Vehicles, Survey Instruments, Loose Furniture, Office Equipment – Computers, Fax, Photostat, Drawings Machines,]. All these should be in good working order and taken over by the relevant authority who should account for it in its asset registers/accounts as appropriate.
[k] Working Manuals, As-Built Drawings, Warranties/Guarantee Documents & Cert. of Fitness
[kk] The relevant departments should receive the working manuals & as-built drawings. All should be indexed and provided both in hard & soft copies formats. Similarly it should be ensured that relevant departments should receive warranties/guarantees for works and installations that are subject to such warranties/guarantees.
[l] Approvals from Relevant Authorities
[ll] Statutory approvals in respect of occupation of the building or taking over of the works and in respect of the machineries subject to specific approvals are also received and retained by the relevant departments.
[m] Blank Spaces [mm] All Blank Spaces must be filled or deleted as appropriate.
4.0 Responsibilities of Client [Including his appointed S.O./Tech Professionals]
4.1 The client should ensure that
[a] Statement of Practical Completion is issued promptly and is comprehensive and relevant to the scope of works.
[b] The contents of the ‘SPC’ is in strict compliance with the provisions of the contract terms and conditions and by authorized persons only
[c] The ‘SOW’ are completed within the shortest possible period.
[d] Signatures should be of duly Authorized Officers only
[e] The relevant financial institutions [banks/insurance] and others as applicable, are informed in as required.
5.0 Responsibilities of Financial Professionals of Clients and Contractors/Suppliers
5.1 The financial/accounting professionals of both the clients and contractors/suppliers should not accept the contents of ‘SPC’ as recommended by the technical professionals. They should independently scrutinize the contents and the basis and methodology of computations of any financials aspects. They should seek the advice and clarifications from the technical professionals and also seek external advice if necessary where any aspect is not understood.
6.0 Fraudulent Opportunities - Implications of the Contents of the ‘SPC’
6.1 Some of the contents of the ‘SPC’ may have legal and financial implications. Further it may provide fraudulent opportunities/possibilities to those with authority. The contents that are susceptible to fraudulent opportunities/possibilities would include the following:
[a] Date of Issue of ‘CPC’ that may be issued before due that may result in shortened ‘Defects Liability Period’.
[b] The ‘SOW’ may include works that should not be categorized as ‘minor’ that may cause the client to be responsible for avoidable costs and other financial costs that may be the responsibility of the contractor..
[c] Non-issue of approvals in respect of Mechanical and other installations subject to prescribed tests to enable their being commissioned by relevant authorities.
6.2 It may be appropriate here to illustrate the above with an actual example that the writer observed during an audit of a 36-storey mega building project. The building project was divided into two contracts that involved the ‘Piling Works’ [USD12.0m] and the ‘Superstructure’ [USD140.0m]. The ‘Piling’ contract provided for the works to be completed within [180] days with an incentive of USD20K per day for early completion. The objective of the completion period and the incentive was that the superstructure works could commence within one week of the completion of the piling works. The technical professionals invited all the representatives of the involved parties on a public holiday [Saturday] to inspect the works. All the representatives signed the ‘CPC’ that stated that the works were completed within [122] days. The ‘CPC’ was accompanied by the ‘SOW’ that was six page long. The list included some works that should not have been categorized as ‘minor’ as the superstructure works could not be commenced within the one week period. The superstructure works commenced [58] days later. The early issue of the ‘CPC’ resulted in the client having to pay incentive amounting to USD1.16m. The matter was raised in audit but the incentive amount could not be recovered as all parties, including the client’s representatives were parties to the issue of the ‘CPC’. This was a clear case of ‘collusion’ but the client opted not to proceed with recovery action or reporting the matter to the relevant regulatory authorities as the payment was borne by others.
7.0 Accounting of the Capital Assets and Financial Claims
7.1 The accounting professionals should account the capital assets and quantum of the claims in the relevant accounts of their respective organizations and the auditors undertake an audit as planned or during in-depth audit of any selected contract. It is appropriate that the components with financial values be classified in the financial/other statements as appropriate. They should not be used to offset the contract costs and reflect the reduced amount unless specifically intended at the beginning. However some accounting professionals may have different views.
7.2 The audit professionals [internal/external] of the clients and contractors/suppliers should ensure that the technical and technical professionals comply with the prescribed procedures. In addition the auditors should also subject the components with financial implications to in-depth audit during audit of selected construction/procurement contracts.
8.0 Custody and Retention Period of Documents
8.1 All relevant documents pertaining to the works should be retained in safe custody and properly indexed and for period that should include the prescribed defects liability period or statutory period or until such time when all outstanding matters have been settled, whichever is longer. The format should be in printed form and computerized form. Clients/Contractors/Suppliers should obtain relevant expertise including legal advice in respect of documents maintained in computerized form.
9.0 CONCLUSION
9.1 The contents of the ‘SPC’ would have financial implications that generally include additional costs and are other aspects in the construction industry that is susceptible to fraudulent practices. The risks will increase with the quantum of contract values and perceived corruption, weak ethics and selective enforcement by regulatory authorities especially in the developing/under-developed countries. Thus it is emphasized again that the clients should give serious attention and commitment to the contents of the ‘SPC’. Finally the relevant documents should be in safe custody until such time when all outstanding issues have been settled and legal obligations satisfied.
9.2 It is in everyone’s interest if the technical professionals of all parties ensure that their efforts and recommendations are based on the objective that any weakness in the ‘SPC’ are avoided and where unavoidable, the differences of opinion are settled promptly and amicable.
9.3 The list of contents provided in this article may not be comprehensive as there could be other documents that are relevant and important in some countries and thus should be given due attention.
‘SPC’ Contents should be Comprehensive and Relevant to the Works
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Readers - Please note that the contents of this article are for general information. No reference is made to any specific contract terms and conditions in respect of any contents in the ‘Statement of Practical Completion’ and its financial/other implications as these would vary in the contract formats, from country to country, site and the scope of works. Reference should be made to the specific clauses of the signed contract documents.
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Note: It is important that Companies involved in the Construction Industry be aware of the various contract documents that would assist in the effective management of the contracts from the inception stage to the stage when the works are completed and used for their intended purpose. The documents relevant to the various aspects would vary but they may be summarized under the following headings:
1. Tender/Tender Table Documents 2. Contract Document Proper
3. Variation Orders 4. Extension of Time
5. Certificate of Non-Completion 6. Statement of Practical Completion
7. Statement of Final Account
Articles on following Check Lists have been published in the ‘AuditNet’ Newsletters.
[a] Check List No. 5 - Certificate of Non-Completion – November 2005
[b] Check List No. 4 - Extension of Time [Delays] - October 2005
[c] Check List No. 3 - Variation [Change] Order - June 2005
[d] Check List No. 2 - Contract Document Proper - July 2005
[e] Check List No. 1 - Tender/Tender Table Documents - September 2005
[f] Introductory Article – Construction Management Check Lists – July 2004
The writer welcomes comments from readers with the intention of mutual enhancement of knowledge. E-mail address: >gursharan38@gmail.com<, >sharwant38@yahoo.com
GSK/Nov 05
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- The opinions, beliefs and viewpoints expressed by the various authors and forum participants on this web site do not necessarily reflect the opinions, beliefs and viewpoints of AuditNet®
