Office Fit Out Payment Types
If you’re negotiating a contract for an office fit out with a design and build company, then you’ll know that payment terms are one of the most complex and important parts of the contract. A well-designed contract will align you with your fit out company, setting the project up for success. On the other hand, imbalanced or unsuitable terms will hugely increase the chances of project failure.
We’ve been designing and building workspaces in London and across the UK since 2008. During that time, we’ve worked on many different types of projects, under different contract structures and payment terms. Although we’re a design and build company, this article is not to tell you about our preferences. It’s designed to fairly educate you about the different payment terms in office fit out.
In this article, we’ll go through the most important contractual considerations for payment terms. By the end, you’ll have a good working knowledge of office fit out payment terms. You’ll be better placed to ensure your project contract is well-designed and balanced, setting your project up for success.
Construction Contract Types
Before getting into payment terms, it’s important to understand the main types of contracts used in office fit out. This will have a major impact on payment terms. While there are a lot of different contract structures, there are two commonly used for medium sized (5,000 – 50,000 sq/ft) office fit outs. These are Fixed Cost and Cost-Plus.
A fixed-cost contract is the most common contract type used in office design & build. This contract establishes a pre-agreed price for all the labour and materials required for the entire project. This is then paid in several (contractually stipulated) instalments throughout the project.
Often known as ‘open book’, fixed cost involves you reimbursing your contractor for all costs they incur, along with a pre-agreed markup percentage – typically between 10 and 30%. Billable costs include both direct costs (labour, materials, etc.) and indirect costs (overhead cost contributions for the contractor, e.g. staffing).
To learn more about these contracts and their advantages and disadvantages, read Fixed Cost vs Cost-Plus: Which Contract is Best for My Office Fit Out?
The schedule of payments is the biggest part of your payment terms. It's also a key part of the overall contract. The structure you use to pay your contractors will have a major impact on the cost of your overall project, the speed of completion, and the amount of your time it takes to manage the project. These are the 3 most common payment schedules used for office fit outs and refurbishments.
Time-Based Payment Schedule
A time-based payment schedule breaks up the total contract amount into instalments, payable at regular intervals. This is usually fortnightly or monthly. For a fixed-cost contract, a set percentage of the project value will be paid at the pre-agreed date. For a cost-plus contract, the fit out company will submit all their costs (plus margin) at the pre-agreed date. This is generally the best option for cost-plus contracts.
For fixed-cost contracts, a time-based contract is very clear and simple. You know exactly when you will be paying how much, which makes it much simpler to forecast cash flow. For a cost-plus contract, this is the most consistent method, and is the best way of ensuring the payments match project progress.
Under the fixed-cost contract model, you are committed to paying certain amounts at certain dates - regardless of project progress. This means that if the project is delayed, you still have to maintain the payments. Under a cost-plus structure, time-based payments can be very time-consuming to manage, especially if there are project delays.
Completion-Based Payment Schedule
When a contract uses completion-based payments, payments are due at pre-agreed intervals of the project’s progress. These intervals are normally between 10-25%, depending on the size of the project. This method is quite similar to manage for both fixed-cost and cost-plus contracts. If you are using a fixed-cost contract, this payment schedule will normally be the best option.
The main advantage of this payment schedule is that it accurately reflects the progress on site. This is fairer for both the contractor and the client. It also balances risk for both sides. Because payment is tied to project progress, it incentivises the contractor to complete the project as fast as possible.
However, defining project progress can sometimes be difficult. If some parts of the project are ahead of schedule and others are behind, it can be challenging to agree on an overall completion percentage.
Milestone-Based Payment Schedule
Contracts that use milestone-based instalments incur payments at pre-agreed stages of the project. This is usually after a certain stage of the project is complete. Like completion-based payment schedules, this is similar to administer regardless of the contract type. This type of payment schedule is best used for phased delivery programmes or projects where there are clear completion stages.
This progress-based payment schedule gives the contractor an incentive to complete the project as fast as possible. It also removes the ambiguity of percentage-based payments. Milsstone-based payments balance the clarity of time-based payments with the fairness of completion-based payments.
However, negotiating the milestones can be difficult, especially if the project is complex. If certain parts of the project are delayed, it could mean the payments lag behind the project's progress.
Once the payment schedule is agreed upon, you need to clarify what the process for those payments will be. This includes when the invoice will be issued, how many days credit you have, and how the payment will be made. It is also helpful to clarify all the details that need to be included with the documentation. While it may seem unnecessary to go into this level of detail, it will save a lot of time and potential conflict during the project.
You should also consider how disagreements over the payment process and instalments should be handled. This will look very different depending on what contract structure and payment schedule you use. It’s especially important to agree on any criteria for Pay Less Notices (PLNs) and how they will be handled and communicated by both parties.
Penalties & Incentives
Depending on the scope and situation of your project, you may want to consider including penalties and incentives in your contract. These are not always necessary or appropriate, but they can sometimes be helpful. For most medium-sized fit-outs, they are not suitable. However, it does depend on how collaborative your fit out company is. If they are very contractual, then penalties and incentives may be useful.
Penalties are normally in the form of Liquidated Ascertained Damages (LADs). LADs are a pre-agreed amount, payable for each week or month the project is late. This incentivises the contractor not to finish late, and adds a form of insurance for you as the client. The pre-agreed nature of the framework also saves a legal battle to ascertain the extent of damages or loss of business. However, they are difficult to negotiate. They also create a non-collaborative, contractual relationship between you and your contractor.
Incentives are much less common in contracts than penalties. When they are included, this is normally on a pre-agreed sliding scale - an extra payment for each week or month early that the project is completed. This means that the contractor is more engaged with the project and is more proactive about progressing the project. However, much like LADs, they can also be difficult to negotiate. they may also prioritise speed over the quality of delivery.
An important point to note is that if you want penalties in your project, you should also include incentives. Otherwise, your contractor will inflate their costs and timelines to mitigate against the risk of LADs. They will then have no incentive to deliver it within their normal timeframe. This guarantees you a slower and more expensive project, which is the exact opposite of what you were trying to avoid in the first place. However, apart from large projects of over 50,000 sq/ft, penalties and incentives often do more harm than good.
The final major payment term to consider is variations. Sometimes known as change orders, variations are works added to the original scope of the project at an additional cost. Common examples are unforeseen repair works that become necessary during the project, or client-requested changes to the finishes specification, such as upholstery. Variations occur in almost every project, so it’s important that you agree on a clear process and payment terms with your contractor.
You should also be aware of scope removals. Some fit out companies will remove parts of their design or service package from the quote before the contract is signed. They will then introduce these as a chargeable variation during the project. As a result, your project can come in significantly over budget. To avoid this situation, you should carefully compare the design package to the quote to ensure there are no discrepancies. You should also look at the assumptions and exclusions in the quote and contract.
At Zentura, we have a fixed-cost policy. This means any costs that we miss or miscalculate are our problem, not yours. Unless you request a variation, you will not be charged for it. This gives you no surprises and greater cost certainty – giving you peace of mind.
Negotiating Your Fit Out Payment Terms
Payment terms are one of the most important parts of your project. They will have a major impact on the cost of your overall project, the speed of completion, and the quality of the finished project. In addition, it will also affect the amount of your time it takes to manage the project. Designed well, they will align your goals with those of your contractors – ensuring a fast, cost-effective, and quality delivery. Poorly designed or imbalanced payment terms will make your project a lot more likely to be a failure. It may well also be a bad experience for you.
You now have a good working knowledge of the most important aspects of office fit out payments terms. You can ensure your payment terms are well-designed and balanced, meaning you’re much better positioned to ensure your project is the success you need it to be.
To learn more about office fit out contracts, read Fixed Cost vs Cost-Plus: Which Contract is Best for My Office Fit Out? It breaks down the advantages and disadvantages of different types of office fit out contracts, and gives you 4 key factors to help you choose the right contract for you.
To take the next step, download our office fit out costs guide. This guide will give you ranges of office fit out costs, as well as factors that affect it, how to choose your specification, and how to choose your fit out specification. Download your fit out costs guide here.