Project Management

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Topics: Construction, Consulting, Estimating, PMO
Do You Know the Entire Contract – Part 7
Critical Components in General Conditions - Milestone Payments

This is 7th in a series of discussions that is intended to prompt Project Teams to be aware of the entire contract document, including Information For Bidders (IFB), General Conditions/Terms and Conditions (GCs) and the Technical Requirements [Specifications and Drawings.]

It is important the Buyer’s Project Manager, Contracting Officer, technical representatives and PM support services (scheduler and estimator) verify content or provide input that ensures the contract is complete and executable within the Buyer’s organizational assets and business processes.

GC - Payments: The type of payment requirements in the contract are determined by the Buyer during the contract development process. The payment requirements are a function of the location where the work is performed and the availability for the Buyer or Construction Manager (CM) to monitor the work.

Progress payments are based on the Seller’s actual progress [on the Buyer’s property] against the contract schedule approved by the Buyer. Each billing period, the Seller submits an invoice for payment based on the earned value, which is a calculated on physical progress on scheduled activities. Payment processing consists of the Buyer and its CM validating progress and mutually agreeing with the Seller on the payment amount.

While progress payments may be the norm for contracts, certain project execution plans might be better suited to milestone payments. Milestone payments are appropriate for contract where a significant portion of the work occur on the Seller’s property. In addition to difficulties in monitoring the Seller’s progress, the Buyer realizes no value until the product of the Seller’s labor, materials and equipment is in the Buyer’s possession or on the Buyer’s property. In these cases, the Buyer defines the milestone/deliverable, schedule date and payment value as a percentage of the contract amount.

The milestone values should be based on the project/contract estimate. As necessary, the Buyer’s estimate should be reviewed by the Engineer-Of-Record to validate the metrics and assumptions for industry cost data, and to evaluate current actual and forecast trends over the contracts period, including costs for labor, material, and equipment, as well as premiums for availability.

For construction in the rail transit domain, milestones payments are commonly used for contracts involving locomotive and passenger car purchases, specialized work equipment vehicle/shop equipment procurement, and infrastructure systems for signals, supervisory controls, train movement controls, power substations, and signal power.

TIP: Milestone payments should be consistent with the milestones in the performance schedule requirements, and be correlated with the pricing format and content in the bid requirements.

TIP: Milestone payment value should be correlated with the Buyer’s contract estimate.

TIP: Milestones payment value is a contract requirement. The only way to change the values is for Buyer to negotiate different amounts during pre-award conference with lowest responsive and responsible Seller, or for the Seller request a post award change in accordance with the contract.

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