During construction the contractor is paid in instalments against the work done so far. Each instalment starts as an application from the contractor, becomes a valuation by the surveyor and then a certificate, and the amount certified is what falls due for payment. For an investor the process looks administrative, but it is the mechanism through which most cost overruns on a development become visible, which is why it sits at the centre of delivery and cost control.
Two things are being established every month: what the work in place is worth, and what it will now cost to finish. The first decides the payment. The second decides whether the scheme is still fundable, and it is the one investors hear about too late.
What is actually being valued
The measured work completed on site, valued at the rates in the contract. Then any variations that have been properly instructed and valued. Then the time-related costs, the preliminaries, which are usually spread across the programme rather than claimed as spent. Then, if the contract allows it, materials on site and sometimes materials off site, subject to conditions.
Work in place means in place. Materials delivered are not work, and work that is started is valued at what has been done rather than at the full rate. On a small scheme the difference between measuring the work and accepting a percentage complete against a programme is the difference between a valuation and an estimate.
The dates matter as much as the amount. Payment under a construction contract runs on a timetable, with a due date, a final date for payment and notices that have to be served to withhold anything. Missing a notice can mean the sum applied for becomes payable whatever the valuation says, which is an expensive way to learn the procedure.
Fluctuations, if the contract has them, and any contractual adjustments follow. The detail varies with the form of contract, which is part of why the form matters, as set out in which JCT contract suits a small development.
Retention and what it is for
A proportion of the value is usually held back as retention, released in stages: part at practical completion and the balance once defects have been made good at the end of the rectification period. It exists to give the contractor a commercial reason to come back and finish properly.
For it to work, two things have to be right. The retention has to be applied to the correct value each month rather than forgotten, and the defects have to be recorded properly at completion so there is something to withhold against. A retention released against an unverified list is money gone.
On some schemes a retention bond is offered instead of cash retention, which improves the contractor’s cash flow and leaves you relying on the bond wording rather than on money you already hold. Whether that is an acceptable trade depends on the bond and on the covenant behind it, and it is a decision to take deliberately rather than as a concession late in the negotiation.
Retention is also a cash flow item on both sides. It sits in your facility until released, and it is the contractor’s money being held, which makes it a frequent point of friction at the end. Handling it well is part of final accounts and disputes.
Why overvaluation is the investor’s risk
If a monthly certificate values the work at more than has actually been done, the contractor has been paid ahead of the build. Nothing appears to be wrong: the payments are in order, the programme looks fine, the facility is drawing as expected. The money for the remaining work has simply gone out early.
The exposure arrives if the contractor then fails, or leaves, or the relationship breaks down. Whoever completes the work has to be paid for work that has already been paid for once, and the shortfall is the investor’s. Where the scheme is funded, the monitoring surveyor is testing precisely this on behalf of the lender, as described in what a development lender checks before releasing funds.
The protection is measurement rather than trust. Value what is there, each month, on site, against the contract. The mechanics are covered in certifying interim valuations.
The other half: cost to complete
A valuation tells you what has happened. It does not tell you how the scheme ends. The number that does is the forecast final cost, built from the committed cost, the value of change instructed but not yet valued, the known risks ahead and what remains of the contingency.
That figure can move while the monthly payments look entirely normal, and it is the one an investor should ask for every month. We set out how to read it in forecast final cost: the number investors should watch.
Together the two halves are a cost report rather than a payment schedule, and the report is what should arrive in your inbox, not just the certificate. What it ought to contain is the subject of investor reporting.
What an investor should insist on
A valuation measured on site rather than agreed over email. Variations valued in the month they are instructed. Retention applied correctly and reconciled. A forecast final cost updated every month with the reason for any movement. And one person accountable for the numbers, so the contractor’s application is not the only version of the truth in circulation.
That is ordinary surveying work, done on a routine, and it is cheap relative to what it protects. Run properly it also makes the end of the job quieter, because a final account assembled from twelve accurate valuations is a reconciliation rather than a dispute. The whole sequence belongs inside development management.
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We measure the work, value the change and report the forecast outcome, every month, in one document.