Milestone based contracts are much easier to control and payments are based on achieved results. Paying for quantities motivates contractors to do profitable jobs first delaying those that provide lower profit. It may create larger problems.
The success of such contracts lies in the wisdom of defining the milestones which should be justified to both client as well as contractor. In my case it’s very balanced, when I analysed the “Cash out” curve with ” Cash in” it gives me a reasonable and balanced situation.
An example to explain better: in a contract we had less than 20 payment milestone. 5 of them were for engineering stages, 5 for PO´s placement and about 10 for construction. PO´s were easy to achieve in short time. For instance in construction we had a big foundation of a turbogen and some transformers but not for the rest BOP equipments so we pointed our efforts to those milestones, that is why we had a good chash flow. But it was not a good contract for the client.
Milestone based contracts only actually make it easier to overpay for progress. Use them if your primary goal is to do less work administering the contract.
Better primary goals are bringing in the project at a lower cost and management of risk.
If you’ve ever had a situation where there is a disagreement over whether a milestone has been met, you won’t regard these contracts as more verifiable.
If you’ve ever had a situation where a contractor defaults on this type of contract, you won’t be a fan of milestone based contracts. Milestones can depend on differences of opinion, and contractors will often take a position that they have “essentially’ completed a milestone.
With a quantity survey based contract, it is easier to independently measure and agree on quantities of work completed. That involves inspection to quality/code requirements and counting arithmetic. The contractor is constantly motivated to avoid delay, as delay reduces the payments made to them per progress period. Often, contractors accelerate schedule to finish early, get paid early and reduce their internal costs. This is a win-win situation as the owner gets a project that is completed on schedule or before. Delays in closing a project increase the cost of finance of that project.
Every time you make a milestone based payment you have paid the contractor for their costs, and also paid their profit, not just their costs to date. As the job progresses you reach a point where you have already paid all of the contractor’s cost for completing the work. You are now at the mercy of the contractor. At that point, any control that you have is only an illusion. You accept what the contractor gives you or they default. If they default, you have paid the contractor more than the cost of performing the work and will pay a new contractor cost + profit to complete the work.
Why do you think contractors prefer the milestone payment contracts? If you do some analysis, you will find that you are not just keeping the contractor cash neutral, you are paying their costs and profit in advance. The contractor has no risk.
If you must use milestone based contracts, base the milestones on measured quantities that are percentages of the total project. Often, project completion percentages linked to milestones are not representative in terms of percentages of the total amount of work.
Milestones in our contracts mean finished and accepted construction elements. Accepted means that quality was checked and requirements were met. Milestones were estimated basing on quantities that were defined by drawings.
Usually there are much less disputes with milestone acceptance than with quantities that could be done out of sequence. And contractors are motivated to achieve milestones earlier. But in this case different works are not more or less profitable that may create problems when payments are based on quantities.
Paying for milestones we pay fixed price defined by the contract. And it is usual to use retention not only until project finish but for some period after everything was done.
We usually meet opposite problem – when contractors do profitable types of work and delay those that are less profitable. In this case if the contractor for some reason defaults it is hard or impossible to find another one who will do these not profitable jobs for the same price.
Milestone cost is always based on planned quantities. What percent of the milestone cost is paid depends on the contract.