and welcome once again to these lectures on principles of construction management and
in this lecture we will talk about running account bills so in the last class in fact
we had talked about the fact that construction projects run for a [vocalized noise] long
period of time there is reason to make sure that the contractor is paid for the project
or parts of the project as they are completed so what we will do today is take an illustrative
example and we will see how these partial payments are made and the fact that these
partial payments are at the end of it just [vocalized noise] kind of advances which need
to be settled at the time of the final bill these partial payments are called running
account bills and that is what is the title of our discussion today
so now lets consider the following table showing the quantities and rates at which a contract
has been [vocalized noise] awarded [vocalized noise] so for example there are only four
items that we are considering here excavation pcc rcc and reinforcement being measured in
cubic meters for excavation pcc and rcc and reinforcement is measure lets say in metric
tons [vocalized noise] and the estimated quantities now these are the estimated quantities when
the project was conceived it was decided or it was worked out that these will be the approximate
quantities for these particular items of course the more rigorous the exercise in carrying
out the estimates the more accurate these estimates will be [vocalized noise] and thats
something which we have already done however as far as the rates are concerned these are
not the estimates but they are the actual contract rates that is these are the rates
which have been quoted by the contractor at which or to whom the contract has been given
[vocalized noise] so if we take this quantity and rate multiplication
and then try to add it up what we find is this number here [vocalized noise] so this
is the actual contract value that is lets say if we are talk of indian rupees we are
talk of fifteen point eight million or one point five eight crores so that is the value
or that is the amount at which this job has been awarded to the contractor [vocalized
noise] which estimated that the quantities of these four items will be here now moving
forward if the following conditions are made in the contract please remember that we are
not talking of the contract we have not circulated a detailed contract but we are trying to give
you bits and pieces of information that are normally contained in a contract document
[vocalized noise] lets say then the total contract value will be paid as four running
bills of course when we say four running bills we are talking of three running account bills
and a final bill so the payment is being made in four installments
for the project starting lets say on first january of two thousand sixteen mobilization
advance will be paid to the contractor at the rate of five percent of the contract value
and it is recoverable in two equal instalments beginning with the second ra bill [vocalized
noise] so mobilization advance as we have talked earlier is the certain amount of money
which is paid to the contractor to help him mobilize to buy some initial equipment to
buy some initial materials and so on and get the project started [vocalized noise] now
this of course is not a grant it is an advance which is given and therefore it is recoverable
in two equal instalments in this case there is a provision that the mobilization advance
will be lets say five percent of the contract value and it will be recovered in equal installments
beginning with the second ra bill in the first ra bill there is no recovery for mobilization
advance [vocalized noise] because it can be argued that in the first ra bill the amount
of work done will be not sufficient so as to be able to recover a mobilization advance
lets also assume that the steel is to be provided to the contractor by the client at a fixed
rate of seven thousand five hundred rupees per metric ton [vocalized noise] so this we
have talked about saying that critical items such as steel or sometimes even cement they
are supplied to the contractor by the client to ensure quality thats one part of it and
also protect the contractor against fluctuations in the cost of these critical items so in
this particular case let us assume that the steel is being provided to the contractor
by the client at a fixed rate of seven thousand five hundred per metric ton i would emphasize
once again that all these conditions have to be very clearly laid out in the contract
document so when the contractor is bidding for a particular item the contractor really
knows what are the conditions so for example in this case the steel is to
be made available to him he should know that the steel will be available to him at seven
thousand five hundred and he does not have to bother about any fluctuations in the market
price of steel [vocalized noise] payment of reinforcement work is to be made considering
the reinforcement work provided in the drawings however up to point five percent of wastage
is allowed at the time of final material reconciliation in case wastage exceeds this limit penal recovery
at the rate of fifteen thousand per metric ton is to be effected now this point five
percent of wastage being allowed is the percentage of what is it the amount of steel issue or
is it the amount of steel actually consumed at site obviously it has to be the amount
of steel which is actually consumed at site also it is very clearly stated in this condition
that the payment will be made for reinforcement provided in the drawings which means that
if there are any laps chairs and so on that will not be counted as separate payment
on similar lines there can be a condition in the contract that the excavation will be
paid for the amount which is really needed as per the drawings so in the example that
we were doing in the last class and we have been discussing in this course as a matter
of fact the boundary will we have talked of an excavation of this nature where we do the
excavation do the pcc and then either we do the brickwork or we do rcc footing on this
we can say that we will pay excavation only for this geometry in certain cases it might
become essential to do an excavation of this shape which means that this would be the the
additional amount of excavation that is done in order to be able to carry out this work
safely but in the contract it could be provided that the excavation will be paid only for
the excavation that is required as per drawing unless the slope is given in the drawing and
there is a provision in the contract to pay for this excavation this excavation shall
not be paid or shall not be payable these are the kind of fine points that one must
remember one must read the document very carefully in order that you are able to execute a document
continuing with the conditions in the contract performance guarantees to be retained at the
weight of ten percent and will be paid only after two years of completion of work so there
is a provision for a ten percent recovery or as ten percent retention of money to be
paid after two years of completion of the work so this brings me to a very interesting
point for a construction project what should be the defect liability period what we are
talking about in this particular clause here is basically saying that so long as the project
is within the defect liability period if there are some places observed where certain amount
of repair is required which can be attributed to the bad workmanship or whatever it is during
the construction work then the client can use these funds if the contractor does not
do it on its own now what should be the defect liability period
for a construction contract this i am leaving it to you as a food for thought and also ask
you to please go through some examples of construction contracts and find out what is
the defect liability period which is laid out in those contracts income tax is to be
deducted at source at the rate of ten percent of the gross amount payable so in several
countries india especially income tax is deducted at source or at least a part of the income
tax is deducted at source and finally the contractor makes a claim for these income
tax payments at the time of filing his income tax return at the end of the financial year
so a certificate to this effect that a ten percent reduction has been made and that amount
deposited with the income tax department is issued to the contractor by the client and
the contractor uses it at the time of his settlement of accounts for the financial year
we also give you the condition that five twenty fifteen and five metric tons of reinforcing
steel has been issued to the contractor on fourth february two thousand sixteen fourth
march two thousand sixteen first june two thousand sixteen and first september of two
thousand sixteen respectively so what we are giving in this information is that a total
of twenty and twenty forty and five forty five so basically the information being given
to you is forty five metric tons of steel is issued to the contractor at these dates
when it comes to a final reconciliation of materials this amount or these dates will
also become important as we will see so coming to the progress of the work and the partial
payments to be made the cumulative progress in respect of quantities of work is shown
below so what this table shows is that on thirty one three sixteen which is three months
after the commencement of the contract these are lets say the quantities of work that have
been completed now for the sake of reference these numbers
have also been included which are the estimated numbers now if these are the quantities of
work that have been completed we can always find out the value of the work but that is
something which we will do later lets try to see what happens in the next three months
at the end of june that is thirtieth june of two thousand sixteen lets see the cumulative
work so please remember that we are talking of cumulative work we are not talking of differential
work we are not talking of the work done between thirty first march and thirtieth june when
we say four thousand five hundred we basically say that three thousand had been done earlier
and four thousand five has been done now so if we really want to get involved with
the differential amount of work which has been done then we can obviously subtract these
items and get the numbers moving on this is the amount of work that has been done at the
end of september and this is the amount of work that is done at the end of december and
that is the closing of the project so at this point we are saying that the project is completed
so if we compare these numbers what should these be compared with they should be compared
with the original estimates to find out how accurate our estimates work so this is something
which we will discuss in the subsequent slides as well but just keep it at the back of your
mind now how do you prepare the running account
bills which is the partial payment to be made to the contractor on thirty first march or
thirtieth june or whatever it is so as far as the ra bill number one that is the bill
that is to be paid at the end of march is concerned we first calculate the gross amount
payable now what is the gross amount payable these were the quantities and i am leaving
it to you to verify that these are the quantities which were there in the table these are the
rates at which we have agreed to pay and these become the amounts for each of these quantities
so we come up with this number here which is the gross payable amount which is five
point six zero seven five million indian rupees or fifty six lakhs seven thousand and five
hundred rupees now lets look at the detail of this ra bill work done is this much this
is the number which we arrived at last time this is the gross payable thats fine
so this is the gross amount of money which is payable what should be the recoveries what
are the kind of deductions that have to be made first of all lets talk of income tax
which is as per our conditions ten percent of the gross amount payable which is this
value here mobilization advance is not being recovered in the first ra bill and therefore
we have a zero here is still only seven thousand five hundred is being recovered because we
are paying and recovering only for one metric ton of steel though twenty five has been issued
till date so if you go back to the information given to you you will realize that as on thirty
one three two thousand sixteen twenty five metric tons of steel has been issued to the
contractor because he is doing some bar bending keeping some reinforcement and so on which
is not yet completed so what we are paying the contractor is one
ton of reinforcement work and therefore we are recovering only for that amount of work
thats how we are recovering for one ton that is seven thousand five hundred and we are
talking for performance guarantee which is ten percent of the work which in this case
is the same as the income tax there are no additional recoveries and therefore there
is a total recovery of this much which is the sum of these numbers here what does this
tell us that the net payable at this stage is this amount minus this amount which turns
out to be this have you made any previous payments to the contractor no and therefore
the net payable amount as far as this ra bill is concerned is here that is we are talking
of a payment of what in indian systems would be called as forty four lakh seventy eight
thousand and five hundred which is four point four seven eight five million rupees
so moving on to the second ra bill we are looking at the gross quantities which have
been calculated on or up to thirtieth of june so if we do that again using the same rates
as we used this is the gross amount of work which has been done but when we are talking
of the second ra bill or a bill subsequent to the first one we must remember that these
quantities actually include the quantities for which some payment has already been made
and thats something which should be reflected when we are working out the details so the
gross amount payable is eleven point two three two five million rupees or one crore twelve
lakh thirty two thousand and five hundred rupees that is the gross payable amount at
the end of the second ra bill so now when we working out the details the work done is
this much the gross payable is so much the income tax is ten percent again its the same
thing as the previous one here we are recovering the mobilization advance
to the tune of two point five percent of the contract value we are assuming of course that
the five percent which was possible for the contractor to has been taken and it is being
recovered by the client in two installments in the second and the third ra bill so in
this case we are making the first installment recovery which is two point five percent of
the contract value again coming to steel here we are paying for nineteen metric tons we
are recovering for nineteen metric tons even though forty metric tons of steel has been
issued to the contract until date again performance guarantee that it is the same as income tax
its just ten percent of the work and therefore the total recoveries are this much which is
the sum of these numbers here so the net amount payable as far as the work is concerned is
given here it is eighty four lakhs forty eight thousand and five hundred out of which please
remember that this amount has already been paid to the contractor in the previous bill
therefore the net amount payable as far as this running bill is concerned or this running
account bill is concerned is the difference of these two which is this number here so
this is the principle of preparing a running account bill so we try to find out what is
the work done at a point in time then go forward what is the gross amount of work done that
has been done till this point in time find out the total payable amount here and just
deduct the amount here because at the end of it it does not matter whether one quantity
is one way or another but we must make sure that the payments have been properly accounted
for of course when we are recovering the income tax when you are recovering ten percent of
the income tax here which is lets say eleven lakhs twenty three thousand two hundred fifty
we must remember that we have already recovered a certain amount of income tax before
so when it comes to actually depositing the income tax in the income tax department or
in the government we do not have to deposit this amount now but the same principle that
applied here will be applied to this and we need to deposit the difference of this amount
and the amount which has already been deposited so thats something which is simple enough
to understand and i hope you now know how the running bills have to be calculated so
now lets move forward and go to the third running bill which is for work done till thirtieth
september remember that we are working with the schedule that every three months there
is a running bill which is being prepared it depends on the contract there could be
contracts where running bills are due every month there could be contracts where running
days are being made at the end of six months this is the gross quantities of work this
is the rates and we get to this gross amount payable which is one crore thirty nine lakhs
forty four thousand and five hundred which is thirteen point nine four four five million
rupees and we go through the same exercise as we have done earlier we try to find out
the cross amount payable right the different recoveries again for steel we are basically
recovering only the amount which is being paid for and we determine the money payable
in the third running account bill now as far as paid up to the previous running bill is
concerned i am leaving it to you to find out where we get this number from obviously this
number is the sum of the amounts paid in the second and the first running account bills
so coming to the final bill here is what we have the final quantities and we get this
value which is the value of the work completed so with these quantities the work has been
finalized so if we look at these numbers we find that the gross amount payable is fifteen
point six nine seven two five million which is one crore fifty six lakhs ninety seven
thousand and two hundred fifty rupees which is a little bit a deviation from the original
estimate which was one point five eight crores now looking at the recoveries as far as this
bill is concerned here is where we need to become careful and try to see total material
reconciliation in its proper form so for we had been paying for a certain amount of steel
work done and recovering for that amount of steel regardless of the fact that a different
amount of steel had been issued to the contractor so in this case now what we see is that the
quantity issued to the contractor is forty five metric tons the quantity used in the
project is forty metric tons so now with this we know that the contractor must return five
metric tons of steel at the end of the project however there is a permissible wastage of
point five percent of the steel used which is point two metric tons now if that happens
then apart from recovering point two metric tons at the rate of seven thousand five hundred
which is the normal rate at which steel is being recovered a penalty may have to be imposed
for four point eight metric tons at the penal rate of fifteen thousand for the wastage that
is in excess of point two metric tons now if that happens then we have a quantity added
here which says that ok this is the amount of work done income tax mobilization advance
there is no mobilization advance left we have already recovered it in two installments in
the second and the third bills the steel being recovered is for forty point two metric tons
issue is forty five tons and thats something which we will deal with later forty metric
tons used and paid as per drawings and allowed wastage of point two metric tons as we have
discussed a performance guarantee and a penal recovery for four point eight metric tons
of steel now this amount obviously does not have to
be for all the four point eight if the contractor has actually returned a certain amount of
steel so for example if the contractor returns to metric tons of steel then the penal recovery
will be only for four point eight minus two which is two point eight metric tons one thing
i would like to caution you is the fact that when the steel is being returned it cannot
be just bits and pieces of steel bars and therefore even though we did not write it
in this example here there will be a provision that whatever steel is being returned to the
client and the contractor wants to claim it as a proper return then it should have a certain
minimum length and it should be in good condition so that it can be used for some other work
at a later date if that doesnt happen what will be deemed is that some scrap is being
returned and that scrap may have to be treated differently and we have not discussed that
issue so i just wanted to raise it and draw your attention to the fact that all this four
point eight is the extreme case of recovery in certain cases there may be certain amount
of return and there may be a certain amount of scrap which is returned and so on which
will have to be dealt with in an appropriate manner
so as far as the extreme case is concerned if you are recovering all the four point eight
metric tons of steel at the penal rate of fifteen thousand then we are recovering seventy
two thousand for penal recovery of steel and we have this as the amount which is net payable
to the contractor at the final settlement now this is the amount which is already being
paid to the contractor this was the net amount which is payable and so on so when we make
a final settlement for this project by paying seventeen lakhs one thousand and two hundred
rupees to the contractor please remember that this performance guarantee what we are holding
back is also actually to be paid back to the contractor at the end of the defect liability
period and thats what we have already talked about
so with this lets now try to understand or look at some of the other issues that arise
when we have gone through this example comparison of estimated and actual quantities so this
table here lists the estimated quantities for the four items excavation pcc rcc and
the reinforcement work in cubic meters cubic meters cubic meters and metric ton and these
are the actual items for which the payment has been made we find that they are obviously
not exactly the same there is its very difficult to ensure that in a item rate contract where
we are talking about quantities being actually measured at site the actual quantities to
be exactly the same as estimated quantities so i am leaving it to you to complete this
table and find out what is the percentage deviations from the estimates obviously what
will happen is that here we are having a deviation in the plus site that is the actual quantity
is a little more than the estimated quantity and the same is the case here in the case
of reinforced concrete we are a little minus the difference has reason to a large extent
as far as reinforcement work is concerned with an estimated quantity of fifty tons the
actual quantity is only forty tons and that is something which could be a matter that
the engineers at the client side have to figure out or have to find out what went wrong as
to why that estimate was so high the reason for that would be that if an estimate of fifty
tons is made the client would have made arrangements to procure all the fifty tons especially in
a contract like this where the steel is to be supplied to the contractor by the client
whereas the actual quantity of steel used is forty tons
now what happens is that the client is possibly stuck with the excess supply of steel which
has been procured and not used so that is something which can be taken an objection
two so thats whats the reason why we must be very careful when we estimate our quantities
of course there is an obvious way of addressing this and see how the project is progressing
so there is an estimate for fifty tons the clients need not procure all this steel in
one go if you see from our own example only forty five metric tons was even issued to
the contractor so if we have not bought all the fifty tons as a client then we are not
doing to badly except that issues relating to the difference between these two quantities
will still need to be resolved so now continuing with our discussion as far as preparation
of running bills and so on is concerned let me also introduce to you the concept of front
loading now what is front loading let us consider
the rates of another contractor b as given below so this was our estimated quantities
and thats what we have been talking about this is the guy to whom we gave the contract
at these rates suppose there was another bid by a contractor b where the difference was
that in excavation the rate was quoted to be higher and obviously what has been done
as an illustrative example in order to keep these two numbers the same V these rates have
been reduced a little bit so what we find is that even though the value of the contract
as proposed in the two cases is the same the differences in the rates of excavation and
others now what is the implication of this as far as running bills is concerned or as
far as the cash flow is concerned if we look at the first running account bill in the case
of b where we are working with twenty one hundred and six thousand and so on and so
forth we find that the gross amount payable is sixty
four lakhs forty thousand and five hundred and if we go through this analysis which is
the details of the running account bill we find that the net amount payable is fifty
one lakhs forty four thousand and nine hundred i am leaving it to you to actually compare
this amount with the amount that was paid in the earlier case obviously this amount
will turn out to be higher now what this shows is that by increasing the cost of excavation
slightly the contractor has ensured that more additional money comes to the contractor early
in the project even though the total amount of money that will be received by the contractor
at the end of the project is the same now what is the difference in the two cases and
that is something which we will talk about in possibly the next classes where we are
talking of the time value of money if we have a certain amount of money today we are able
to invest it earn some interest on it and it grows into a certain other amount of money
over a period of time so therefore the net payable amount in the
first ra bill to the contractor b is higher than that to contractor a and this would help
the contractor b in this case to earn more time value of money after a few years so with
this we come to an end of our discussion today where we have gone through preparing running
account bills for a project over a period of one year three running bills and one final
bill and i hope you have a better understanding of how partial payments can be made and how
they have to be adjusted when making subsequent payments with these reference books you will
probably have a better idea you can see some more examples and related concepts i look
forward to seeing you again in the next class thank you