Adoptable banking rate over interest payment in construction industry a must | Daily News
As per standard bidding documents

Adoptable banking rate over interest payment in construction industry a must

The present trend in the Construction Industry is to make payments to the Contractors over delays encountered during the execution of Contracts in honoring the payments.

But still some of the Professional Engineers are interpreting the relevant documents in selecting the applicable interest of payment in such a way that it would be beneficial to him/his Client monetarily and the Employers also looking at such an event with Nelsonian Eye.

The Relevant Clause in the Conditions of Contract of CIDA stipulates “late payment is made at the prevailing rate of interest of 1% over the lending rate of the Central Bank to Commercial Banks”.

A Treasury’s reply states that “It is appropriate to use the Standing Lending Facility Rate [SLFR] given in the bulletin as the lending rate of the Central Bank to Commercial Banks.”

An important fact behind this scenario is that one shall not forget what was behind the scene when such Conditions of Contract were drafted and put in to use. Most of the Conditions of Contract published by ICTAD/CIDA were during the period of 2003 to 2007. Hence it shall be decided to adopt the meaning carried over by the relevant publication of the Central Bank to suit the “prevailing rate” as mentioned.

Several ways of interpretation are in existence made by the Professional Engineers as well as by the Employers to suit their whims and fancies.

FROM FIRST PRINCIPLE:

Let us adopt the Central Bank of Sri Lanka’s Bulletin published in 2007, the period during which the SBD’s of ICTAD/presently CIDA were re-edited lastly.

Reference shall be made to the table depicting the “Money Rates---The Central Bank & Commercial Banks”.

For easy reference and for the practical approach, let us adopt the similar table published in January 2019.

This table has several columns depicting rates of interest, but we are interested only in Columns (b),(c) & (e) because the word ”lending rate” similar to what was specified in the SBDs is defined under these Columns only.

First preference goes to Column (c) which furnishes rate under “Standing Lending Facility Rate”. In accordance with its definition, it is the “Interest rate applicable on reverse repurchase transactions of the Central Bank with Commercial banks on an overnight basis “

Repurchase rate is defined as the rate of transaction between the Central Bank and Commercial Banks, when the latter borrows money from the CB, by keeping government securities with the central bank as collateral. When Commercial Banks pay the money back to CB, they take the collateral back. That means, Reverse Repurchase rate is the rate of interest that banks get when they keep their surplus money with the CB.

By comparing the above with what is specified in SBDs, the Employer [CB] has not kept any surplus money with him given by the Contractor [Commercial Banks] and also there are no collateral transactions between the Employer and Contractor.

Hence our first priority taken for consideration fails and get disqualified.

The second choice is Column (b) which gives the rate of interest under the title “Bank Rate”. It is defined as” the rate at which the Central Bank grants advances to Commercial Banks as the lender of last resort.”

It means that” A lender of last resort (LoR) is an institution, usually a country’s central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse

An employer in a contract has no vested interest in the Contract/Contractor himself. This is an acceptable fact without any limitations. But the employer should worry about the performance of the contract that may face financial difficulty or high risk/near collapse, if payments are withheld or released very late to the Contractor.

Hence this choice appears to be more suitable as it contains the phrase “lending” and at the same time matches with the actual situation in a contract.

In an Arbitration Award made by the International Courts of Arbitration on a Sri Lanka’s dispute, FIDIC’s conditions were adopted using “Average Weighted Prime Lending Rate” as given in the Central Bank’s Bulletin which when compared with the above method of determination using CIDA’s conditions varies by only 1.6% when calculated for a period of 5 months.

Before winding up my report on this crucial topic which, in the present day of Construction Management, plays a vital role in making compensations in a contract, I would suggest that our Engineers are very intelligent with very logical minded mechanisms and would not hesitate to adopt what is correct in their purview.

The writer is a chartered civil Engineer by profession and presently practicing as a Consultant and Adjudicator in the Northern Province. He worked in Mahaweli Development Board in the 1970s and later led a Construction firm and a Consultant firm in the Northern Province. He has contributed more than 50 years of service in the Construction Industry and is the author of many articles related to the Construction Industry. Presently, he is a fellow member of the Institution of Engineers Sri Lanka and a member of the Executive Committee of the Ceylon Institute of Builders.


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