Preparing Interim Payment Valuations For Construction Works - Wor PDF
Preparing Interim Payment Valuations For Construction Works - Wor PDF
Preparing Interim Payment Valuations For Construction Works - Wor PDF
ARROW@TU Dublin
2018-03-10
Recommended Citation
Cunningham, T. (2018) Preparing Interim Payment Valuations for Construction Works - Worked Examples
and Solutions. DIT, 2018. doi:10.21427/4rg2-8m81
Introduction
The effective administration of the payment clause of a building contract is one of the most
important tasks that the contract administrator and consultant quantity surveyor perform during
the contract period. The importance of cashflow within the construction supply chain is key to
the smooth running of a contract. The implementation of the Construction Contracts Act (2013)
in July 2016 now regulates payment practice on the vast majority of Irish construction contracts
with values in excess of €10,0001. The Act’s primary purpose is to ensure that contractors, and
more particularly subcontractors, are paid promptly, and in full, for work that they have carried
out. The Act requires construction contracts to provide an ‘adequate mechanism’ for calculating
both the timing of payments, and the amounts to be paid. If such a mechanism is not included in
the agreement; the procedures set out in the ‘Schedule’ to the Act are deemed to apply. The
default arrangements in the Schedule require contractors to be paid within 30 calendar days of
submitting a payment claim. The default provisions in the Schedule apply to all subcontract
payment agreements, unless more favourable terms than those set out in the Schedule can be
secured. The Act also outlaws previous widespread payment practices such as pay-when-paid
conditions. The primary impact of the Act, therefore, may be viewed as enshrining interim
payments as the standard means of paying for construction work in order to generate the vital
cashflow required by the supply chain.
This study examines the principles and procedures for calculating interim payments in
accordance with the terms of the Royal Institute of the Architects of Ireland (RIAI) ‘Yellow’
and ‘Blue’ Forms of Contract (2017) and the Public Works Contract PW-CF1 (version 2.2
09/01/2017). These contract forms have recently been amended to take account of the
Construction Contracts Act. Both the RIAI and PW-CF groups are considered to be ‘Tier 1’
contracts for the purposes of the Act and these, indeed, provide an ‘adequate mechanism’ for
calculating payment amounts and intervals. The payment provisions of the RIAI contracts
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Contracts below €10,000 in value, contracts relating to owner-occupier residences of less than 200m² in area,
material and plant supply contracts, employment contracts, and Public Private Partnership arrangements, are
exempt from the application of the Act.
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closely aligns with the Act’s payment ‘Schedule’ for the payment of subcontractors, the Public
Works Forms rather less so.
The Act is not specific as to what constitutes an ‘adequate mechanism’ for payment but it is
supposed that a number of common approaches would satisfy the Act’s requirements such as:
milestone or stage payments, which are predetermined payments made following the
completion of specific sections of the work;
Stage payments
This approach pays agreed amounts of money when certain stages of the work are finished. For
example, on completion of the substructure or when the building is weather-tight. This approach
is also simple to operate and does not overvalue the works. However it does not include for
further work in progress and materials on site. Non-completion of minor items of work within a
stage could also hold up the payment for the entire stage. (Hackett et al. 2007)
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that the approach requires a substantial, regular input from both the contractor and the
employer’s professional team in order to administer the arrangement effectively.
Under the Construction Contracts Act, particular attention must now be paid to contesting or
making cuts in contractors’ payment claims. In order to reduce the Contractor’s claim the
Employer must deliver a ‘response to the payment claim notice’. These are elsewhere referred to
as ‘withholding notices’, or ‘pay less notices’ and these must be delivered to the Contractor
within 21 days of the payment claim date, specifying the proposed payment amount, the reasons
for the differences, and the relevant calculations supporting the proposed payment. If a response
notice is not issued, the amount stated in the payment claim notice becomes payable, in full, (no
matter how outrageous) on the scheduled date for payment.
The Contractor initiates the payment process by submitting a detailed progress statement to the
Architect, valuing the work, including sub-contract work, completed at the payment claim date.
On most projects the task of checking the valuation will be carried out by the Employer’s
consultant quantity surveyor. This task must be attended to promptly, as the Contract requires
the Architect to issue a Certificate within the timescale set out in the Appendix to the Contract.
This default period for ‘turning around’ valuations is five working days.
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periods set out in the Schedule Part 1L. The default period for submitting interim payment, like
the RIAI contract, is monthly. The application procedure aligns with the requirements of the
Construction Contracts Acts requiring the Contractor to ‘give a payment claim notice to the
Employer’s Representative, in the form of an interim statement, [not later than 5 days after the
date agreed between the Parties to be the payment claim date]. The payment claim must
provide a fully detailed breakdown based on the Pricing Document specifically identifying
amounts included for each of the named Specialists. The claim must also include other
supporting details required by the Employer’s Representative.
Commentary
The consultant quantity surveyor’s role is to check the contractor’s valuation and issue a
certificate recommendation to the contract administrator in accordance with the terms of the
particular contract. The quantity surveyor must make a fair valuation of the work. While interim
valuations are not conclusive, they must be a fair and reasonable assessment of the value of
work done. Care must be taken not to over-value or under-value the work. Under-valuation
reduces vital cash-flow to which the Contractor is entitled. Over-valuation on the other hand
risks the Employer’s position in the event that the Contractor defaults and fails to complete the
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Works. In this event the Employer may have to pay a completion contractor for work and
materials, for which the original contractor has already been paid. – A disastrous outcome.
The QS must visit site to verify that the work claimed for has actually been carried out, and that
the contractor’s application for payment is arithmetically correct. A general appraisal should
also be made as to the overall level of the valuation - bearing in mind progress on site and the
projected cash flow. The certificate recommendation must also separately identify payments for
nominated / specialist sub-contractors.
It is common for the QS to disagree with the Contractor’s valuation and adjust it, and in these
instances, the Architect must explain the differences specifying the reason or reasons for the
difference and the basis on which the amount certified for payment is calculated (RIAI 2017). It
should be noted that the CCA requires the Employer to submit a written response to a payment
claim notice (a withholding notice or pay-less notice) in order to contest a contractor’s payment
claim.
Under the RIAI Contract, as soon as the Architect’s interim certificate is presented to the
Employer, the Employer must pay the Contractor within seven working days (unless another
period is stipulated in the Appendix). Failure by the Employer to pay on time entitles the
Contractor after seven working days to claim AA bank interest on overdrafts from the Employer
for the outstanding certified amount.
The corresponding arrangements in the Public Works Contract requires the Employer’s
Representative to issue a response to payment claim notice to the Contractor, within 14 days of
receipt of the Contractor’s payment claim notice. The response notice must be in the form of a
certificate and be copied to the Employer. The response notice to the Contractor must set out the
valuation calculations on which the Certificate is based. The Employer’s Representative is also
required to provide the individual named specialists with details of the gross and net amount
included within the Certificate for their respective works. The Contractor will then invoice the
Employer for the certified sum. The Employer shall pay the amount due on the invoice within
21 days after receiving the invoice.
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Figure 1 below sets out the periods for submitting, certifying/responding to and payment of
interim valuations under the Construction Contracts Act, RIAI and PW-CF1 contracts. Note that
subcontractors typically lodge payment claims notices to main contractors before they, in turn,
submit their applications to the contract administrator. Consequently, the period for the
Contractor to issue a response to a subcontractor’s payment claim notice is shorter than
indicated in the figure below. What is clear, nevertheless, is that main contractors may have to
pay subcontractors before being paid themselves, particularly on public works contracts.
Construction
RIAI 2017 PW-CF1
Contracts Act
Payment Claim
Day 30 Application 1 Application 1
Date 1
5 Working Days
Architect's 14 Days
Day 35
Certificate 1
21 Days Employer's
Day 44 7 Working Days Representatives
Certificate 1
Response to
Day 51 21 Days
Payment Claim
Final dates for paying
Date for
Day 65 Honouring
Certificate
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Failure by the Employer to pay on a certificate is a ground for the Contractor to threaten to
suspend work, and subsequently determine its employment under the building contract (subject
to notice). The Employer does not have the right to obstruct or interfere with the issue of any
Architect’s or Employer’s Representative’s certificates. The Architect / Employer’s
Representative should advise employers as to their responsibility regarding honouring
certificates before commencing construction. Where the project is funded in whole or in part by
grant aid, e.g. school contracts, the Architect should advise the Employer as to the obligations to
honour certificates whether grants have been paid or not.
Unfixed Materials
As noted above, the RIAI Contract entitles contractors to payment for materials ‘delivered upon
the site’ provided they are properly protected and not prematurely delivered, and, in the absence
of retention of title issues, once certified these become the Employer’s property. The Contractor,
however, remains entirely responsible for replacing them, should they become damaged or are
stolen.
Cartlidge (2017) comments that it may sometimes be inappropriate for large, delicate or
expensive items of plant to be stored on site. Clause 35(d) provides the Architect with the
discretion to include the cost of such materials in valuations before they are delivered to site,
provided a number of safeguards (eight) are satisfied. Such materials must be for the works, be
complete, be as specified, insured, and separately set aside in specific storage locations and, the
supply orders are in writing confirming the Contractor’s ownership of the materials.
A noteworthy difference between the RIAI and Public Works Contract is their differing
approach to paying for unfixed materials. Under the Public Works Contracts payment for all
unfixed work items, not just off-site materials, is at the Employers Representative’s discretion,
and only if this is provided for in Schedule part 1L. The Schedule part 1L also allows a
percentage ceiling of up to 90% to apply to the reimbursement of unfixed materials.
Similar vesting, protection and delivery conditions to those included in the RIAI contract apply
to the reimbursement of unfixed materials. Payment for unfixed materials which have been
delivered to site may be claimed provided they are complete, suitably stored, not prematurely
delivered, and that title of the materials have been vested in the Employer. Additional
safeguards are required to protect the Employer’s position in relation to the payment for off-site
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materials. These further requirements are that the materials are clearly identifiable at the
supplier’s premises, are insured and bonded.
Keane (2001) argues that payment for ‘off-site’ materials would only be made for unique
purpose-made end products such as fabricated structural steelwork, precast concrete products
and like components and special equipment that would not be stocked by typical builder’s
providers.
Retention
The most common option for dealing with retention is set out in Sub-clause 35 f (2). This sub-
clause provides that retention is held on ‘the value of the work and materials’ by the Employer
during the construction phase of the project. The retention is held on trust for the Contractor by
the Employer who is not obliged to invest this money. One moiety (half) of the retention is
released on Practical Completion of the Work. The other half of the retention is released on foot
of the Final Certificate.
Alternatively, under sub-clause 35(g), the retention may be deposited in a ‘Joint Account’ with
the interest accruing to the Contractor. As with Sub-clause 35 f (2), one half of the retention is
released on Practical Completion of the Work. The other half of the retention is released on foot
of the Final Certificate. This approach appears to be rarely used in practice.
In addition, sub-clause 35 (f) 1 sets out a further mechanism for dealing with the remaining
retention held after the issue of the Certificate of Practical Completion. Under this arrangement
the Contractor provides an approved retention bond which triggers the full release of the
remaining retention.
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It should be noted that a number of components of a valuation are not subject to retention. These
include: reimbursement of fluctuation claims, reimbursement of contractor’s loss and expense
claims, and payment for remedial work in connection with damage covered by the Contractor’s
all risks insurance (sub-clause 22, (c) (i)). Fees or charges legally demandable by local and other
authorities and similarly performance bonds where separately identified would not be subject to
retention.
It is common for the Contractor’s Surveyor and the Client’s Quantity Surveyor to discuss and
agree these interim valuations before they are forwarded to the Architect for certification. The
QS must separately identify the amounts included for named specialists or nominated
subcontractors work included within the interim certificate recommendations.
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Preliminaries
Preliminaries refers to the contractor’s costs in running the building site. The ‘prelims’ refer to
costs which are necessary but do not form part of the completed building. These represent the
contractor’s site overheads and temporary costs and include matters such as: site staff, security,
hoarding, temporary roads, site accommodation, insurance, plant, site cleaning and so on.
Items included in the preliminaries may be fixed costs or time related costs and several items
contain both fixed price and time related cost components. Some preliminaries items such as the
provision of a bond, drying out the work, cleaning site on completion for example, are fixed
costs. Other items, such as the cost of site staff are largely time-related and depend on the
estimated length of time the staff will spend on site. Other items, again, incur both fixed costs
and time related costs, for example scaffolding incurs erection costs (fixed cost), maintenance
(rental / time dependent costs) and final removal / striking costs.
In practice the preliminaries are often valued pro-rata to the percentage of the building work
which has been carried out. This approach may, however, be unsatisfactory for contractors,
particularly on contracts with substantial start-up costs. Ideally a itemised break-down of the
prelims can be agreed prior to the start of the works. This breakdown will ensure a greater
degree of accuracy in the valuation of the preliminaries and enable the contractor to promptly
pay for ‘point’ costs as they occur.
Measured work
This component involves valuing the completed works on site. The simplest method is to
visually assess the estimated percentage of the work completed within each element of the
pricing document. For example 50% of substructure and 30% of external walls and so on.
Although this produces a crude valuation it is a widely used technique. Where greater accuracy
is required the progress of the individual work items can be measured on site. On RIAI
contracts, provisionally measured work and the expenditure of provisional sums must also be
promptly remeasured, valued and kept fully up to date as part of the measured works category.
Ashworth, Hogg and Higgs (2013) comment regarding the need for accuracy, advising that ‘the
surveyor should appreciate that an interim valuation is merely a snapshot of the progress of the
works, which … change significantly within 24 hours of the assessment’. They add that ‘It
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should be remembered that detailed measurement for valuation purposes will likely have no
further bearing beyond the interim payment in hand and is therefore of passing value only.’
Value of dayworks
Occasionally, it may not be appropriate to use or adjust contract rates to value particular works
and it may be necessary to value these on a time and material basis. This approach is referred to
as dayworks. Dayworks involves the contractor recording the resources used to perform the
particular task; i.e. the hours worked by the various operatives, craftsmen, labourers etc. and the
plant and materials used. All daywork sheets, should be properly priced in accordance with the
contract provisions, and approved by the contract administrator before they are paid.
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Value of unfixed materials
As noted above, the RIAI contract, generally entitles the Contractor to be paid for unfixed work
materials delivered to the site. Payment for materials stored off site, however, is at the
architect’s discretion and may be included in the valuation provided the required safeguards
have been fully satisfied. Under the PWC forms of contract payment for all unfixed materials is
at the discretion of the employer’s representative and is subject to a cap of 90% maximum of the
value of the materials. Again, the PWC contracts set out strict conditions which must be
satisfied as prerequisites to the Employer’s Representative exercising a discretion to pay.
Loss and expense claims are not subject to retention on RIAI contracts.
Where fluctuation claims are admissible under the RIAI Form, the Contractor can apply for
payment of increases in the interim progress applications. The contract rates are deemed to be
set at the ‘designated date’ set out in the Appendix. If wages, or the rates of ‘other emoluments’
rise, the extra costs can be recovered. The prices of materials at the time of the tender are
deemed to be market prices and a list of such basic prices may be required. If prices increase
during the course of the contract the increases are recoverable. If there is a substantial increase
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in the price of any goods the Contractor shall give notice in writing to the Architect within a
reasonable time of becoming aware of the of an increase. A percentage addition of 7.5% is
applied to labour accounts and 12.5% is applied to material increases to cover the associated
irrecoverable items and the cost of preparing the account.
Fluctuation claims are not subject to retention under the RIAI contract.
Retention
The client normally retains a percentage of the gross valuation of the works, to cover the
rectification of defective work and ‘snags’. Guidance on retention levels are set out in the
Liaison Committee Code of Practice for Tendering and Contractual Matters 2006. Levels are
recommended on a sliding scale from 7½% for projects less than €500,000 to 2%, for projects
exceeding €5 million in value. One half of the retention is released at practical completion stage
and the balance is released in the final certificate.
General construction work is subject to VAT, which is currently 13½%. Certain elements of
furnishings and fittings are subject to the higher rate of VAT at 23%
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Exercise No 1
Using the information in the following tables, advise the Architect on the amount of the interim
valuation for month 4. – State any assumptions made.
Breakdown of PC Sums.
Structural Steelwork €15,000
Windows and External Doors €10,000
Engineering services €35,000
Ironmongery €4,000
Sanitary Fittings €2,500
Profit and Attendance on PC Sums €3,500
Total €70,000
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Progress at the end of month 4
Substructure Complete
Superstructure and Services 70% Complete
External Works 75% Complete.
Assessment of Architects Instructions Variations €13,500
Materials on site €5,000
Materials off site €2,000
Because the question contains an itemized breakdown of the preliminaries, an inference can be
drawn that these details are significant. Given this information it may be supposed that a detailed
valuation of the preliminaries is preferable to the more simplistic percentage of time elapsed or
proportion of work completed approaches.
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The valuation therefore is €200 + (67% of €1,800) = €1,400.
Employer’s liability and third party insurance (€3,000). This item covers €3,000
injuries to employees and the general public arising from work place accidents.
This is a fixed cost paid at the commencement of the works. It is included,
therefore, in full in the valuation
Insurance for the works (€1,000). This item provides insurance for damage to €1,000
the works and is also paid ‘up-front’. It is also included, therefore, in full in the
valuation
Water for the Works (€1,000) This is regarded as an installation charge and is €1,000
therefore included in full in the valuation.
Valuation of Preliminaries: €35,300
Build Up of Valuation No 4
Preliminaries. - As build up above. €35,300
Substructure. - Complete as Contract Sum €50,000
Superstructure. - €300,000 x 70% = €210,000 €210,000
External works. - €30,000 x 75% = €22,500 €22,500
PC sums – As build up above. €52,500
Variations – as brief €13,500
Materials on site – as brief €5,000
Materials off site – as brief €2,000
Gross Valuation €390,800
Less Retention 5% -€19,540.
€371,260
Less Valuation 3 previously paid (Say half the contract sum plus €10,000) -€260,000
Valuation at month 4 €111,260
Add VAT 13.5% €15,020
Amount due Valuation No. 4. €126,280
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Exercise No 2
Using the information in the Tables below, advise the main contractor on the amount of the
interim valuation due at the end of month 7. Make any necessary assumptions
There is no mention of preliminaries in the question. This is deliberate. Preliminaries are real
costs incurred in executing the work and an assessment of their value should be included in the
valuation unless an assumption has been specifically stated that they have been included in the
rates for the measured works. This valuation assumes preliminaries represent 10% of the Contract
Sum and the have been valued pro rata the value of the work in progress i.e. the total of the
measured works, PC Sums and unfixed materials.
Regarding PC Sums, it is assumed that the contractor has priced profit and attendance on these
accounts. In practice profit and ‘special’ attendances on PC sums are included as ‘Items’ rather
than percentages in bills of quantities measured in accordance with ARM4.
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Valuation of Preliminaries
Measured Work - as brief. €900,000
PC Sums - see next. €136,500
Unfixed materials €12,000
Sub-Total €1,048,500
Valuation of the Preliminaries assumed 10% of Sub-total €104,850
Valuation of PC Sums
Piling subcontract (work complete) €50,000
Mechanical installation €40,000
Electrical installation €32,000
Local Authority services Connections €8,000
Sub-Total €130,000
Profit and Attendance assumed 5% €6,500
Valuation of PC Sums €136,500
Build Up of Valuation No 7
Preliminaries – As above €104,850
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Exercise 3.
Using the information in the following tables, advise the Architect on the amount of the interim
valuation for month 16. The Client has taken possession of all the works except the car parks
and certain other external works are not yet finished.
Progress to date
Substructure complete 315,000
Superstructure complete 3,300,000
External Works 70% complete.
Drainage, Remeasured. 90,000
PC Sums
Kitchen equipment (supply only) invoice received 40,000
Electrical sub-contractor invoice received 120,000
Mechanical sub-contractor invoice received 160,000
Service connections invoice received 50,000
Materials on site 12,000
Materials off site 12,000
A claim for a six week extension of time and 18,000
associated loss and expense has been submitted.
Fluctuations: Sectoral Employment Order 11,000
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Commentary and Outline Solution
This question relates to a scenario where the contract has not been completed within original
period for completion. The question therefore raises valuation issues such as prolongation costs
and liability for liquidated damages. In the outline solution the assumption made is that the
Contractor is responsible for two weeks of the delay and that liquidated have been applied as a
result. The assumption made is that the other four weeks of the Contractor’s claim are valid and
€12.000 has been included in the valuation in respect of this claim. Regarding the application of
liquidated damages, this is at the discretion of the Employer who is the only person who may
deduct liquidated damages from an Architect’s certificate. In answering this question it is
assumed that the main contractor has been informed that liquidated will be applied in this
instance.
The question also raises issues relating to the valuation of the preliminaries and prime cost
work. These, again have been required certain assumptions to be made In this instance the
overall preliminaries costs have been broken down into set-up, running and removal costs.
Notional valuations have been entered against the running and removal costs.
Valuation of Preliminaries
Site set-up costs; assumed €50,000 – complete €50.000
Site running costs: assumed €230,000 - nearing completion - Say €220,000
Decommissioning and removal assumed €20,000 - 50% Complete €10,000
Preliminaries Valuation No 16 €280,000
PC Sums
Supply kitchen equipment invoice received €40,000
Electrical sub-contractor invoice received €120,000
Mechanical sub-contractor invoice received €160,000
Service connections invoice received €50,000
Total PC Sums €370,000
Profit 3% of €370,000 €11,100
Attendance assumed €10,000 in BQ – Say. €8,900
PC Sums Valuation 16 €390,000
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Valuation No 16
Preliminaries – see breakdown above. €280,000
Substructure – as remeasurement €315,000
Superstructure – complete €3,300,000
External Works – 70% of €300,000 €210,000
Drainage – remeasured to date. €90,000
PC Sums – as breakdown above €390,000
Materials on site – drainage and car parking €12,000
Materials off site – discretion to pay approved €12,000
Loss and expense – Allowance for four of the six weeks claim €12,000
Fluctuations: clause 36 applies €11,000
Gross Valuation €4,632,000
Less: Full retention on external works, drainage and unfixed -€9.720
materials - €210,000 plus €90,000 plus €24,000.
= €324,000 x 3%
Less: Half retention on works taken over by client – Gross -64,275
valuation €4,632,000 less outstanding works above €324,000 and
less sums not subject to retention the loss and expense and
fluctuation claims €23,000
= €4,285,000 x 1½%
Valuation €4,558,005
Less Previous Paid Valuation No 15 (Say) -€4,258,005
Less Liquidated Damages: Two weeks @ €15,000 -€30,000
Net Valuation €270,000
Add Value Added Tax @13½% €36,450
Certificate Recommendation No 16 €306,450
References
Ashworth, A. and Hogg, K. and Higgs, C. (2013) Willis’s Practice and Procedure for the
Quantity Surveyor, Blackwell Publishing, Oxford
Cartlidge, D, (2017) Quantity Surveyor’s Pocket Book 3rd ed. Butterworth Heinemann, Oxford.
Hackett, M. Robinson I and Statham.G (eds) (2007) The Aqua Group Guide to Procurement,
Tendering, and Contract Administration; Blackwell Publishing; Oxford.
Keane, D (2001) The RIAI Contracts: a Working Guide. Dublin: Royal Institute of the
Architects of Ireland, Dublin.
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Office of Government Procurement (2017) Public Works Contract for Building Works Designed
by the Employer, Department of Public Expenditure and Reform, Dublin.
Royal Institute of the Architects of Ireland (2017) RIAI Construction Contract, Royal Institute
of the Architect of Ireland. Dublin,
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