The recovery clause decides when the advance comes back, and on an S-curve it comes back out of the contractor's busiest months.
On FIDIC-style default terms an advance payment is recovered by deducting 25 per cent of each interim payment certificate, starting with the certificate in which cumulative certified work passes 10 per cent of the contract amount less provisional sums, until the advance is repaid. On an illustrative 24.0 million contract with a 2.4 million advance, deductions start in month 4 and the advance is fully recovered in month 9, at 50.0 per cent complete, worth about 91,477 of financing to the contractor at 8 per cent.
Worked in full in Construction Cost Control by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The advance pays for mobilisation, plant and early orders, and the employer holds an advance payment guarantee until it is repaid. The recovery clause decides how quickly the money comes back, and so how much the advance is really worth to the contractor and how long the employer is exposed to it.
| Input | Value |
|---|---|
| Accepted contract amount | 24,000,000 |
| Provisional sums within it | 1,000,000 |
| Measured work to be certified | 23,000,000 |
| Advance payment, 10% of the contract amount | 2,400,000 |
| Recovery threshold, 10% of contract amount less provisional sums | 2,300,000 |
| Amortisation rate, of each certificate | 25% |
| Retention | 5% |
| Contractor's cost of funds | 8% |
Monthly certified work follows an S-curve over 18 months, peaking at 1,997,000 in months 9 and 10. The provisional sums are assumed to be omitted in full, which matters later. The way to build the curve is in how to forecast a construction cash flow with an S-curve.
Cumulative certified work reaches 1,541,000 at month 3, below the 2,300,000 threshold. Month 4 adds 1,150,000, taking it to 2,691,000, so the threshold is crossed in the month 4 certificate.
Deduction = MIN(25% × certificate amount, advance still outstanding)
Month 4: 25% × 1,150,000 = 287,500. Month 5: 25% × 1,417,000 = 354,250. And so on until month 9, where 25 per cent of 1,997,000 would be 499,250 but only 409,500 is left, so the deduction is 409,500.
The certificate amount for this purpose excludes the advance itself and retention deductions, so the 25 per cent is taken on the gross value of work, not on the net amount after retention.
Excel, with certificate amounts in B, cumulative in C, the threshold in H1 and the advance in H2: =IF(C5>$H$1,MIN(25%*B5,$H$2-SUM(D$4:D4)),0)
| Month | Certified work | Cumulative | % complete | Advance deducted | Advance outstanding | Net paid after retention |
|---|---|---|---|---|---|---|
| 1 | 175,000 | 175,000 | 0.8 | 0 | 2,400,000 | 166,250 |
| 2 | 519,000 | 694,000 | 3.0 | 0 | 2,400,000 | 493,050 |
| 3 | 847,000 | 1,541,000 | 6.7 | 0 | 2,400,000 | 804,650 |
| 4 | 1,150,000 | 2,691,000 | 11.7 | 287,500 | 2,112,500 | 805,000 |
| 5 | 1,417,000 | 4,108,000 | 17.9 | 354,250 | 1,758,250 | 991,900 |
| 6 | 1,642,000 | 5,750,000 | 25.0 | 410,500 | 1,347,750 | 1,149,400 |
| 7 | 1,817,000 | 7,567,000 | 32.9 | 454,250 | 893,500 | 1,271,900 |
| 8 | 1,936,000 | 9,503,000 | 41.3 | 484,000 | 409,500 | 1,355,200 |
| 9 | 1,997,000 | 11,500,000 | 50.0 | 409,500 | 0 | 1,487,650 |
| 10 | 1,997,000 | 13,497,000 | 58.7 | 0 | 0 | 1,897,150 |
| Total | 2,400,000 |
The whole 2,400,000 comes back over six certificates, months 4 to 9, and is gone by the time the job is half built. Two consequences follow.
For the employer. The advance payment guarantee should reduce as the advance is repaid, so the employer's protection falls from 2,400,000 to nothing between months 4 and 9. If the contract is terminated in month 6, the 1,347,750 still outstanding becomes due, and the guarantee is what secures it.
| Amortisation rate | Repaid in month | % complete when repaid | Financing benefit at 8% |
|---|---|---|---|
| 15.0% | 13 | 82.1 | 118,570 |
| 20.0% | 11 | 67.1 | 101,561 |
| 25.0% | 9 | 50.0 | 91,477 |
| 33.3% | 8 | 41.3 | 80,996 |
| 40.0% | 7 | 32.9 | 74,864 |
A contractor negotiating the Appendix to Tender should negotiate the amortisation rate, not only the size of the advance: dropping from 25 to 15 per cent adds 27,093 of financing benefit on the same 2,400,000 and smooths the mid-project dip. An employer worried about exposure should do the opposite.
Recovering the advance pro rata, 10 per cent of every certificate from month 1, on the reasoning that the advance was 10 per cent of the contract. Certified work only reaches 23,000,000 here because the provisional sums are omitted, so a pro rata deduction recovers 2,300,000 and leaves 100,000 outstanding at completion, with the guarantee still running. Variations that reduce the contract sum have the same effect. The percentage-of-certificate method with a cap at the outstanding balance always closes, which is why it is the default.
The second mistake is to forget the advance when reconciling retention: retention and advance recovery are separate deductions on separate bases, and the retention mechanics are in how to calculate retention on a construction contract.
Model the advance as a loan repaid out of the peak months of the S-curve, not as free money. Here 2,400,000 is back by the halfway point, the contractor's net receipts flatten while its costs climb, and the financing benefit is 91,477. The cost plan, the cash flow and the final account these deductions sit inside are in the free workbook for this case.
Under the default wording of the 1999 Red Book, deductions start in the payment certificate in which total certified interim payments, excluding the advance and retention, exceed 10 per cent of the accepted contract amount less provisional sums. On an illustrative 24,000,000 contract with 1,000,000 of provisional sums, the threshold is 2,300,000, crossed in month 4 when cumulative work reaches 2,691,000.
The outstanding balance generally becomes immediately due to the employer, and the advance payment guarantee secures it. In the illustrative schedule, a termination after the month 6 certificate leaves 1,347,750 of a 2,400,000 advance outstanding. Because the guarantee should reduce as the advance is repaid, its amount at any date should match that schedule.
Because certified work rarely equals the original contract amount. If provisional sums are omitted or variations reduce the sum, a 10 per cent deduction from each certificate under-recovers: on an illustrative contract where certified work totals 23,000,000, it recovers 2,300,000 of a 2,400,000 advance and leaves 100,000 outstanding at completion.
This article is one calculation from Construction Cost Control. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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