“The customer is always right”- quite a famous slogan in the business world. But then get this- in the construction industry, particularly when it comes to payment certificates in Kenya, the customer isn’t always right.
Failing to honour your contractor’s payment request on time, for instance, could attract interest on the amount due. (Read about Construction Labour Costs Here.)
That’s one of the many terms that come with the JBCC (Joint Building Construction Council) Standard Form of Contract.
Don’t get us wrong, though. The Standard Form of Contract isn’t intended to force you to pay your contractors. Rather, it spells out the legal terms of engagement between you and your construction contractor. In other words, the point of the contract agreement is to protect the interests of both parties during and after the construction period.
This article gets you started by exploring the basic terms surrounding the four main types of construction payment certificates in Kenya.
- Interim Certificate
- Certificate of Practical Completion
- Certificate of Making Good Defects
- Final Certificate
By the time you’re done, you’ll have gotten a good idea of how to pay your contractor if you choose to apply the JBCC Standard Form of Contract in your construction project.
Also, please note that if you happen to borrow a loan for construction, these are the certificates the bank will request at each milestone before releasing the funds.
The 4 Types of Construction Payment Certificates in Kenya
Contractor Payment Certificate #1: Interim Certificate
Interim certificates are normally issued in intervals during construction. You can think of their corresponding amounts as partial payments based on the terms of the contract agreement you sign with your contractor.
But, make no mistake about it. An Interim Certificate does not usually accompany an advance payment. Instead, contractors are expected to carry out the works before any payment is released.
The process itself is as follows:
1. The contractor completes part of the works and then raises a payment request, which should be submitted to the Quantity Surveyor, and copied to the Project Manager/Contract Administrator and Employer. Such an Interim payment request can include not just the works, but also the construction materials that have been delivered to the site.
2. Upon receipt of the contractor’s payment request, the Quantity Surveyor should appraise the value of the works and materials based on the priced Bill of Quantities attached to the contract agreement. Then using the info, the QS is required to prepare an Interim Valuation of the items within seven days, and subsequently, forward the document to the Project Manager, as well as send a copy to the Employer.
3. The Project Manager should then, within seven days, evaluate everything and confirm that all the listed items meet the required standards. If anything seems a bit off, the Project Manager has the right to omit it from the Interim application.
4. Eventually, the Project Manager can go ahead and issue the contractor an Interim Certificate that details the items approved, plus the payment amount due. This, again, should be copied to the Employer.
5. Once the contractor receives the Interim Certificate from the Project Manager, they should present it to the Employer, who’ll then be required to remit the payment within 14 days.
6. If the Employer fails to fully honour the Interim Certificate within the stipulated time, the amount due will start gaining simple interest from the moment the 14-day period lapses.
It’s worth noting, though, that you’re allowed to retain a certain percentage (usually 5%) as security against any defects that may arise along the way. Such retention funds, however, should not include payments for insurances, performance bonds, plus material tests.
In addition to that, Employers are allowed to withhold payment until the contractor has provided the following:
- A performance bond (usually a surety of about 10% of the contract price).
- Contractor’s liability insurance policy.
- A complete up to date programme of works.
Contractor Payment Certificate #2: Certificate of Practical Completion
While Interim Payment Certificates in Kenya are issued in intervals during construction, the Certificate of Practical Completion comes into play when construction is complete.
Ok, not entirely done per se. But rather, the Certificate of Practical Completion is issued when the works are “practically complete”. That basically means the contractor has completed much of their contractual obligations (to a point that the building is usable), and can proceed to hand over the development to the employer.
That said, here is the full procedure for paying your contractor through the Certificate of Practical Completion:
1. Usually, the constructor is required to apply for the Certificate of Practical Completion through a written notice addressed to the Project Manager.
2. Once the Project Manager receives the notice, he/she is expected to thoroughly assess the works within 14 days. This inspection procedure is popularly known as “Snagging”, and it’s intended to identify all the faults or defects that the contractor should rectify before Practical Completion is declared.
3. As such, the Project Manager should prepare a Snag List/Punch list that details all the pending issues.
4. It’s only after the contractor has finally rectified all the defects in the Snag List, that the Project Manager can proceed to issue the Certificate of Practical Completion.
5. At this point, the Certificate of Practical Completion states the amount due to the contractor, which should be half of the project’s retention fund.
6. The Contractor is then required to present the certificate to the Employer, who should proceed to pay the amount (half of the retention fund) within 14 days.
Now, here’s the thing about the Certificate of Practical Completion. It’s not just a construction payment certificate in Kenya. Rather, it basically means that the building site (and its liabilities) have been officially handed over to the employer.
Beyond this point, the Project Manager and the rest of the consultants cannot raise variations anymore without the contractor’s approval.
And while all the defects should be rectified by the time the certificate is issued, some contract agreements are open to proceeding to Practical Completion with minor defects. The contractors involved are basically required to attach a Defects Lists that states all the faults they intend to sort out after the project is handed over.
Another important point to note is, Practical Completion also signifies the beginning of the Defect Liability Period, within which the contractor remains liable for all the Patent and Latent defects that may arise after project handover. So, in case any issues develop, the contractor is expected to return to the construction site and sort everything out.
Now, for the sake of clarity, Patent Defects refer to the physical faults that are discovered upon reasonable inspection- like poor quality workmanship. Latent Defects, on the other hand, are those that cannot be discovered, and may remain concealed for even years after the construction period- like foundation settlement problems.
According to the National Construction Authority (Defects Liability) Regulations released in 2020 by The Cabinet Secretary Ministry of Transport, Infrastructure, Housing, Urban Development and Public Works, the Practical Completion of a commercial building applies when the area’s county government issues a Certificate of Occupation.
And once the certificate is issued, the Patent Defects Period should subsequently run for a minimum of 12 months- while the Latent Defects Period should apply for a minimum of 6 years after the lapse of the patent defects liability period.
Contractor Payment Certificate #3: Certificate of Making Good Defects
The Certificate of Making Good Defects is issued after the contractor has rectified all the defects identified during the Defects Liability Period.
1. On taking over a newly constructed building, the Employer should monitor it very keenly and then raise any developing issues with the Project Manager.
2. The Project Manager, on the other hand, should assess all the issues raised, and subsequently determine if they are indeed defects that the contractor is liable for, or whether they are just basic maintenance issues.
3. Then towards the end of the Defects Liability Period, the Project Manager should prepare a detailed Schedule of Defects, highlighting all the identified Patent and Latent defects.
4. On receiving the Schedule of Defects, the contractor is expected to return to the site and rectify the pending issues at their cost and within a reasonable timeframe.
5. It’s only after everything has been rectified accordingly, that the contractor can go ahead and apply for a Certificate of Making Good Defects. This notice should be addressed to the Project Manager and copied to the Employer.
6. After inspecting the works and confirming that all the items in the Schedule of Defects have been rectified, the Project Manager can proceed to issue the contractor a Certificate of Making Good Defects.
7. The certificate should then be presented to the Employer, who’ll subsequently be required to remit the other half of the retention fund within 14 days.
Please note, however, that for payment to be released at this stage, the main contractor and the subcontractors should provide insurance policies that cover the undiscovered Latent defects.
Contractor Payment Certificate #4: Final Certificate
Just as its name suggests, the Final Certificate is the last construction payment certificate in Kenya. It’s issued to the contractor by the Contract Administrator/Project Manager to signify that the works have been fully completed as defined in the contract agreement.
And yes- it comes right after the Defects Liability period, once the contractor has rectified all the issues, and the contract price has been adjusted according to its Final Account.
1. The contractor is required to compile all the project costing/accounts documents right after Practical Completion, and then forward them to the Quantity Surveyor. These should include even the calculations relating to the project’s nominated suppliers and nominated subcontractors.
2. The Quantity Surveyor subsequently reviews the project’s quantities, previous payment certificates, plus the contractor’s figures, and then computes the Final Account. This document is ultimately sent to not only the Project Manager and the Employer, but also the contractor himself.
3. Upon receipt of the Final Account, the contractor is expected to review it within 30 days, and then sign it along with the Project Manager and Quantity Surveyor.
4. The Project Manager should then proceed to issue the contractor a Final Certificate that states:
- The sum of all the amounts paid under the Interim Certificates+Certificate of Practical Completion+Certificate of Making Good Defects.
- The final contract price, as adjusted based on the Final Account prepared by the Quantity Surveyor.
- The difference (if any) between the certificates’ sum and the Final Account (Final Account minus the amounts that have already been paid out).
5. If the difference is positive, the contractor should submit the Final Certificate to the Employer for a payout within 14 days. But, if the difference is negative, the contractor owes the Employer, and is required to remit the amount due within 14 days.
Final Word – Construction Payment Certificates in Kenya
And there you have it. The four main construction payment certificates in Kenya, plus their respective payout procedure.
Please remember, though, that this is just a brief breakdown of the whole process. There are many other payment terms contained in your construction agreement’s fine text.
Thankfully, you don’t have to worry about all that. Our Project Managers will tactfully administrate your construction project’s contract. So, feel free to get in touch with us today.