Contract Administration Payment

Contents

Aim

Learning outcomes

1. Introduction

2. Parties involved

3. Purpose of interim certificates

4. Contractor’s entitlement

5. Methods of payment 5.1 Generally 5.2 Payment provisions to comply with the Housing Grants, Construction and

Regeneration Act 1996

6. Interim valuations 6.1 Preliminaries 6.2 Measured work – ‘work properly executed’ 6.3 Variations 6.4 Nominated subcontractors 6.5 Materials on or off site 6.6 Profit and attendance on PC items 6.7 Fluctuations 6.8 Additional loss and expense 6.9 Other approaches 6.10 Retention

7. Final accounts 7.1 Deductions 7.2 Additions 7.3 Variations 7.4 Adjustment of prime cost sums 7.5 Provisional sums and quantities 7.6 Fluctuations 7.7 Loss and expense claims 7.8 Other forms

(Continued)

© The College of Estate Management 2006

Paper 0486V3-0

Contract administration: Payment

Contract administration: Payment Paper 0486 Page 2

8. Claims 8.1 The need for claims 8.2 Claims not the answer 8.3 Origination of a claim 8.4 Initiation of a claim 8.5 Admissible items under a claim 8.6 Assessing the value

9. Financial reports

Appendices:

A. Example QS valuation statements

Aim This paper aims to explain how and why payment is made on construction contracts. It covers not only payment for work done but also payments for additional loss and expense incurred by either party while carrying out a contract.

Learning outcomes After studying this paper you should be able to:

Explain in detail the procedure for payment using a standard contract form.

Explain and comment on the basic payment provisions contained in the UK Construction Act 1996.

Understand how interim and final payments are ascertained and why.

Discuss the factors to be considered prior to compiling a claim.

Explain how and why the various heads of claim are calculated.

Understand the significance of the final certificate.

Discuss the importance of monitoring payments and making regular financial reports.


1 Introduction This paper looks at the need for interim payments, how they are computed, and the final certificate and financial reports.

The most recent legislation in the UK to affect construction payment is the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act). If you live and/or work outside the UK this legislation may not be directly relevant to you, but you should understand the reasons for the legislation and be able to discuss whether similar legislation or contract amendments would be appropriate in your country.

The UK Construction Act requires all construction contracts to include payment provisions that are at least equal to the following:

1. Payment by instalments (or stage payments) for construction contracts of more than 45 days’ duration.

2. The contractor to be informed of the amount to be paid and when it is due for payment.

3. The contractor to be given notice if the employer intends to withhold any payment.

4. The contractor to have the right to suspend performance of the contract (ie to leave the site) if payment is not made within a specified period.

5. ‘Pay when paid’ clauses – eg where payments to subcontractors are dependent on the main contractor first being paid by the employer – are declared unenforceable.

All British standard forms of contract now incorporate provisions at least equal to the basic legal requirement. The Act is accompanied by a Scheme for Construction Contracts, which is deemed to be included in the contract if the basic contract either fails to include the necessary provisions or does not comply with the Act’s requirements.

The concept of interim payments for construction contracts is rooted in history. In some areas, however, the UK Construction Act provisions go much further than in the past – such as allowing the contractor to suspend contractual performance in the event of non-payment.

Modern construction projects require a lot of capital. Industry raises capital in various (sometimes expensive) ways and needs certain reserves of working capital to meet its current liabilities. Most companies try to keep close control over the flow of cash into and out of their reserves. If interim payments were not available in standard construction contracts, the cost of providing the much greater amount of capital that would be needed would be loaded into the tender sum.

Obviously, then, it is likely to be cheaper for the employer (client) to raise capital on the asset (building, bridges etc) that he is accumulating, and pay the contractor for the value completed (less a retention) as work progresses, than for the contractor to raise all the capital to complete the works before the employer is due to pay anything.


Interim/stage payments have therefore usually been arranged in all but the smallest construction contracts.

Traditionally valuations have been prepared by reference to the priced contract documentation, and have been based upon payment of some proportion of the contract sum. The amount due has been calculated either by measurement and valuation at fixed intervals, typically monthly, or alternatively by reference to a list of pre-agreed payments which become due as the contractor reaches predefined milestones in the project programme (ie stage payments). Some contractual arrangements provide for the contractor to be paid on the basis of his actual costs, usually on an ‘open book’ basis. Building work valuations, to establish the total value of work properly executed, can be readily prepared from bills of quantities – though the task is made more difficult if many variations are issued. Civil engineering valuations, however, are not so readily established, since the bills of quantities ‘are not to be taken as the actual and correct quantities of works to be executed by the contractor’. All work must be measured accurately as it progresses so that correct interim payments can be made.

Reasonable accuracy in interim valuation is essential from both the employer’s and the contractor’s viewpoints because:

1. Over-valuation may lose an employer the over-value if the contractor becomes insolvent during progress of the work.

2. Under-valuation may put a strain on a contractor’s limited capital reserves and prevent him from proceeding efficiently, leading to insolvency.

Remember, however, that in normal circumstances the valuation will become inaccurate within a very short time, certainly before the contractor is paid, and total accuracy is neither essential nor even attainable. The primary purpose is to maintain the contractor’s cash flow at a level which is reasonable for the contractor and fair to the employer.


2 Parties involved The employer The employer’s obligations are limited to paying the contractor the amount stated in an interim certificate within the conditions laid down in the form of contract, subject only to his rights of set-off.

If the employer fails in his duty, then under some forms of contract, including most JCT forms, the NEC3 suite and the FIDIC form, the contractor can terminate either the contract or his employment under the contract, provided he follows the appropriate procedures.

The contractor Under a JCT 05 Standard Building Contract, the contractor has no obligation to help in preparing interim valuations or certificates, although the contract does permit him to prepare an application for payment for checking by the QS should he so wish. In practice, however, if interim valuations are required they are prepared by the employer’s quantity surveyor in conjunction with the contractor’s surveyor. But note that many contracts specifically require the contractor’s participation in the valuation process.

In the ICE 7th edition and the FIDIC contract, payment is based on the contractor’s claim, vetted by the engineer.

In the GC/Works/1 form, payment is based on a graph of the expected progress.

The contract administrator The contract administrator must issue interim certificates at the periods stated in the contract, or when the work has reached certain stages previously agreed. Before certifying the amount of the valuation, he should deduct the value of any work improperly executed, or of any materials that have been prematurely brought on to the site or are not adequately protected. If he fails to do so he may incur liability for negligence (Sutcliffe v Thackrah (1974)). However, he must also remain independent in issuing certificates and act in an impartial manner (Hickman v Roberts (1913)).

The quantity surveyor Under many forms of contract, including the JCT 05 Standard Building Contract the quantity surveyor is responsible for preparing interim valuations and deciding the amount to be recommended to the contract administrator prior to issue of the interim certificate.

Some contracts also allow the contractor to submit a gross valuation in advance of the quantity surveyor’s valuation, and the quantity surveyor must take this into consideration. If deductions are made, they must be explained in writing to the contractor.

It is, however, normal practice for preparation of the valuation to be done in conjunction with the contractor’s surveyor, and this has the advantage of allowing any problems to be resolved early on. However, this does not relieve the quantity surveyor of his primary responsibility as the person named in the contract to carry out the task.


3 Purpose of interim certificates To help the contractor’s cash flow. This is the main purpose of paying the contractor by instalments.

To make sure that the client is paying no more than required by the contract.

To make sure that the contractor is paid the correct amount for the work he has carried out.

However, the issue of an interim certificate does not confirm acceptance of the quality of the workmanship or materials, and is not normally binding in the future. Sums included in one certificate may be omitted in the next.

It is customary for the valuation to be related to a likely market value. Sometimes, however, the value based on tender documentation exceeds that of a true market value. Two common circumstances where this may happen are:

The contract is substantially behind programme. If the delay is the sole responsibility of the contractor, it can be dealt with by adjusting the payment of the proportion of preliminary costs.

Some rates have been over-inflated. In this case the work could be valued at rates analogous to the general level of pricing in the project bills generally.


4 Contractor’s entitlement In general terms, in a contract where payments are based on interim valuations, the contractor is entitled to be paid the full value of all work properly completed at the date of the valuation, including the value of any subcontractor’s work, variations and any sums calculated under formula fluctuation rules. The employer may, however, where the contract so provides, retain a proportion of the money due as security against future failure of the contractor to properly make good any defects appearing before the end of the contract defects liability period. Not all of the sums which are included in the valuation may be subject to retention. Contracts vary in respect of the items subject to retention, but as an example the following is the position under the JCT 05 Standard Building Contract.

Items subject to retention

Value of work including variations, subcontractor’s work and formula adjustments where applicable.

Unfixed materials on site, provided that they are delivered at an appropriate time and are properly stored and protected. Note the requirements of clause 3.9.2 in respect of materials supplied under a domestic subcontract.

Materials off site, provided that they are itemised in a list attached to the bills of quantities and comply with the additional requirements of clause 4.17.

Items not subject to retention

Premiums, fees and charges (2.6.2). Inspections and tests (3.17). Royalties (2.21, 2.23). Insurances (6.5.3). Loss and expense payments (3.2.4, 4.23). Conventional fluctuations (Options A or B).

Miscellaneous deductions

Setting out (2.10). Defects (2.38). Conventional fluctuations – amounts allowable by contractor (Options A or B). Non-compliance with instructions (3.11). Work not in accordance with the contract (3.18.2).

The amount payable by the employer is the gross value, as calculated above, less retention and the total amount stated as due on previous certificates.


5 Methods of payment 5.1 Generally There are several methods of paying a building contractor for the work he carries out for a client. The arrangements will be clearly laid down in the form of contract used. The most common methods are:

1. After completion. Payment is made after the total contract works have been completed, where the estimated programme is less than 45 days. However, modern building contracts tend to be expensive. To obtain the necessary finance, the contractor must borrow large sums of money. The interest charges on these sums of money would be passed to the client, increasing his total costs.

2. Stage payments. Payments are made at certain stages, eg work up to damp course; work from damp course to roofing. These are more appropriate to housing contracts or similar, where each stage can be easily defined and valued. Table 1 shows the breakdown of the various stages and valuation of a house.

3. During progress. Payments are made to the contractor as the work proceeds. Forms of contract used for larger, more complex building and civil engineering contracts usually (but not always) state arrangements for payments to be made at regular intervals, usually monthly. The professional quantity surveyor and contractor’s representative will agree a date to meet and value the works carried out up to that date.

Note that some contracts, including the JCT 05 Standard Building Contract (clause 4.8) also provide for advance payment to the contractor if the employer so permits.

5.2 Payment provisions to comply with the Housing Grants, Construction and Regeneration Act 1996

All UK standard forms of building contract now incorporate payment provisions that comply with the Construction Act.

The provisions state that the final date for payment is not later than 14 days from the issue of each interim certificate. This means that the employer has 14 days, including weekends but not bank holidays, to pay the contractor after the date of the interim certificate.

TABLE 1 Breakdown of stage payments for typical house

Stages £

Work up to damp-proof course 4 600

External and internal walls, windows, doors, roof 22 540

Internal finishings, plumbing, electrics 13 800

External works 5 060

Total £46 000


Five days after the issue of the interim certificate, the employer must send a written notice to the contractor stating the amount he proposes to pay, what it is for, and how it has been calculated. The quantity surveyor must then provide the contractor with a detailed breakdown of how he has arrived at the amount.

No later than nine days after the issue of the interim certificate and five days before the final date for payment, the employer must notify the contractor of any deductions he is making from the certificate. If there is no notice within the stated time periods, the employer is in breach of contract and the contractor can start claiming interest. This is also grounds for suspending the works, giving the contractor an extension of time for the period of the suspension and an allowance for re-starting work, plus any direct loss and expense incurred.

To suspend the works, the contractor notifies the employer, with a copy to the architect, of his intention to suspend the works due to non-payment. If the default continues for seven days, the contractor can withdraw from site until payment is made.

In practice, it is probably better to start adjudication proceedings, as suspension causes considerable disruption to work. It does, however, give the employer the push to notify the contractor of his reasons for any deductions, and the contractor can then dispute them and call for the adjudicator to settle the dispute. He cannot suspend work unless the correct notices have been given in due time.

Note also that some UK contracts also make provision for the payment of interest to the contractor on amounts paid late by the employer. The JCT forms set the interest at 5% above the official dealing rate of the Bank of England at the date the payment becomes overdue. In the UK, the Late Payment of Commercial Debts (Interest) Act 1998 provides for the statutory recovery of interest at 8% above Bank Rate, but this legislation at present only applies to debts owed by large businesses to small subcontractors and suppliers. However, the Government has signalled its intention to expand the legislation to cover all commercial debts in due course.


6 Interim valuations The following items must be considered when valuing work executed:

1. preliminaries; 2. measured work (contained in the bills of quantities); 3. value of variations and extras; 4. value of nominated subcontractors’ and suppliers’ work; 5. materials on and off site where the contract permits; 6. fluctuations in costs of labour, and/or taxes; 7. loss or expense; 8. retention monies; 9. previous payments.

The following notes describe the method of arriving at the value of the main items.

6.1 Preliminaries The preliminaries section of the bill of quantities contains important financial matters relating to the contract as a whole, not to any specific item or section – eg water for works, lighting and power for the contract, temporary building, site supervision, insurances.

Preliminary items can be grouped into different categories:

1. Initial and final costs. Initial costs are generally lump sums related to site establishment, expended early in the contract period or in the early stages of an item. For example, the supply of a temporary road will be at the beginning of the contract but the transport and erection of scaffolding may not be until some months into the contract. Both, however, are lump sum initial costs and should be paid for when the cost is incurred.

Final costs are related to site clearance at the end of the project. They are lump sums expended at the end of the contract or towards the end of an item’s use.

2. Cost-related items. An example is water for the works. The cost will depend on the work content and is usually quoted as a percentage of the contract value.

3. Time-related items. Includes items such as site supervision, hire of site facilities etc, expended over the contract period and not necessarily related to the contract value.

4. Combination of types. Many preliminaries items include a mixture of types of cost. Table 2 shows an example of the work involved in supplying and operating a tower crane.


Valuation of the preliminaries section may be carried out in the following ways, according to the method adopted by the contractor for pricing this section:

Proportion per month. Obtained by dividing the total preliminaries by the number of months in the contract period, giving a constant amount for inclusion in each valuation. However, this does not take into account that the work may be behind programme, which could result in the total preliminaries being paid well before completion.

Percentage of value. Preliminaries are expressed as a percentage of the contract sum to be added to the monthly value of the contractor’s measured work. In both this and the previous method, any prime cost or provisional sums in the preliminaries should be deducted before proportioning.

Detailed breakdown of individual preliminaries items as described above.

6.2 Measured work – ‘work properly executed’ Where there is a priced bill of quantities, the process simply consists of going through the bill item by item and extracting the value of completed and partly completed items. Unless the items are particularly expensive, the proportions of those which are incomplete may be assessed by visual inspection rather than precise measurement.

Note that the quantity surveyor, in valuing the works, has no authority to decide whether or not work has been ‘properly executed’. This decision rests with the architect, who has the opportunity to revise the valuation to take account of work not properly executed before issuing the interim certificate.

TABLE 2 What’s in a price?

£Allow for supplying and operating 18 000a track-mounted crane This may cover: Base: put down labour and material: I take up and remove: F Track: lay: Crane: erect: I hire: hire: T remove: dismantle: F Transport: to site: I from site: F Fuel cost: electricity: T Operator: T Temporary electric supply: bring in: I remove: F I = Initial cost F = Final cost T = Time-related cost


6.3 Variations Very few projects have no variations, and virtually all standard forms of contract require effect to be given in interim certificates to the measurement and valuation of variations. Priority must therefore be given to the work of measuring and valuing these instructions before each valuation, so that the contractor is paid for this ‘work properly done’.

6.4 Nominated subcontractors Not all contracts provide for the use of nominated subcontractors and, where they are provided for, their rights in respect of issues like payment vary. Nonetheless they are entitled to have the total value of work executed under the contract included in the main contractor’s valuation, and the main contract and/or the nominated subcontract agreement will require that they be paid within a prescribed period. Failure by the contractor to pay within the prescribed period will often entitle the subcontractor to apply for payment directly by the employer, and in such a case the employer will usually be able to retain any discounts that would have been due to the main contractor.

The employer is also typically given the power to ask the contractor to provide proof of payment of all sums due to nominated subcontractors before including any further sums in subsequent certificates.

There is a difficulty in direct payment, where the main contractor deliberately does not pay the subcontractor because he is setting off amounts included in the previous valuation against a claim for loss and expense. Provided the contractor observes the correct procedure for set-off, the set-off is equivalent to a discharge of the payment.

6.5 Materials on or off site Many standard forms of contract require the value of materials and goods delivered to the site to be included in interim certificates.

The task of ascertaining the quantities of materials on site is made easier if the site agent and clerk of works produce an agreed list for checking. Again, attention will be concentrated on the more expensive items.

In order to be included in an interim certificate, materials on site must be:

in accordance with the specification; intended for use in the works; delivered at an appropriate time (ie not unreasonably early); properly stored and protected against damage, theft, deterioration etc; the property of the contractor.

The materials may be valued by reference to the basic price list, or at current market prices, or from invoices supplied by the contractor. A difficulty might arise where a bill item has been under-priced and the invoice price of the material is higher than the bill rate for both labour and materials. In such cases, a price for the material must be agreed which is consistent with the bill rate.


Caution is needed where there is doubt over the contractor’s title to unfixed materials on site. In the case of Dawber Williamson Roofing v Humberside County Council (1979), a domestic subcontractor was able to recover from the employer the value of roofing slates brought on to the site. The value had been included in an interim certificate and the amount had been paid to the contractor by the employer. Owing to the contractor’s liquidation, however, it was not passed on to the subcontractor. It was held that title to the goods remained with the subcontractor until the materials had been fixed, despite the provision in the standard form that the property in the materials should pass to the employer on payment.

To protect the employer from the possible effect of this decision, many standard forms now require the contractor, in all domestic subcontracts, to ensure that ownership of materials and goods passes to the employer on payment to the main contractor. Failure of the main contractor to implement this provision will constitute a breach of his contract with the employer. However, such a failure coupled with the main contractor’s insolvency could again place the employer in the Dawber Williamson position.

Various different arrangements apply to materials or goods that are to be paid for before delivery to site. The JCT 05 Standard Building Contract requires that such goods must be listed in an annexe to the contract bills, whereas other contracts either require the express approval of the contract administrator or prohibit payment altogether. Note that the procedures specified in the contract should be very carefully followed in order to protect the rights of the employer.

6.6 Profit and attendance on PC items This covers the contractor’s profit at the bill percentage on sums included for nominated subcontractors and suppliers, and an appropriate proportion of the amount for attendance on nominated subcontractors.

6.7 Fluctuations Formula method Many standard forms provide for the use of a formula to calculate fluctuations in costs on fluctuating price contracts. As an example, the operation of the formula rules developed for use with the JCT 05 Standard Building Contract is described below. The method is based upon a set of indices for various categories of work, published by the Government on a monthly basis.

Briefly, the value of work executed during the valuation period is allocated to the appropriate work categories, and an adjustment is made on the basis of the difference between the index for the base month and that for the mid-point of the valuation period in respect of each work category.

Initially the adjustment has to be based on the provisional index for the month in question, and a further adjustment made later as soon as the firm index becomes available.

Variations priced at bill rates are adjusted in the same way, However, where bill rates are not appropriate, the varied work is to be priced at current rates and excluded from the adjustment. Where the execution of the varied work extends over a prolonged period, work is priced in either of the following ways:

Rates for the varied work are agreed at current rates and then adjusted back to the base month using the indices. The variation is then treated in the same way as the original work.

A new base month is agreed for the work covered by the variation.


The amount of the price adjustment is included in the total value of work properly executed, and so is subject to retention.

If the contractor fails to complete by the completion date, the adjustment is made by reference to the index numbers that apply to the valuation period in which the completion date falls – that is, the so-called ‘freezing’ provision.

Conventional method An alternative approach is what has become known as the conventional method. Assuming the full conventional method is used, price variations of the following are found:

1 Labour This covers the following categories:

Workpeople on site.

Workpeople off site, provided they are producing goods for use in the works. It is advisable to agree a schedule of workpeople coming within this category at the start of the work.

Site staff – other than workpeople. Note the qualifying conditions: that they must spend not less than two whole days on the site each week, and that the contractor must submit a weekly certificate certifying the validity of the evidence submitted. Where the contractor employs craftsmen under two or more wage-fixing rules, agreement should be reached at the tender stage as to which craft rates will be used for site staff.

The contractor’s tender is assumed to be based on the rates of wage and other emoluments (including holiday credits) published by the National Joint Council for the Building Industry (or other wage-fixing body where appropriate) at the date of tender, which for this purpose is 10 days before the actual date for submission of tenders. So the contractor is assumed to have taken into account future increases announced before the date of tender even if not implemented at that time.

The calculations are based on the weekly statements submitted by the contractor and verified by the clerk of works, itemising the operatives employed in the above categories and the hours worked. Only increases in the published basic rate are allowable, together with complementary increases in bonus payments where the arrangements are strictly in accordance with the decisions of the relevant wage-fixing body (see Sindall v NW Thames Regional Health Authority (1976)).

The net amounts of any increases are added to or deducted from the contract sum: that is, there is no allowance for profit, though there is provision for the contractor to state a percentage addition to fluctuations payments in the Appendix.

Care should be taken to exclude time spent on daywork. This is normally charged at the full current rates applicable when the work was carried out.

Proportionate adjustments are also made for any changes in statutory contributions, levies and taxes imposed on the contractor in his capacity as an employer.


2 Transport charges There are two methods of ascertaining such fluctuations: by reference to –

where the contractor provides his own transport: a list of basic transport charges submitted by the contractor and attached to the contract bills; or

where public transport is used: the rules of the relevant wage-fixing body relating to reimbursement of fares by the contractor to his workpeople.

3 Materials, electricity and fuels The contractor must add a list of basic prices to the bill, stating the market prices, current at the date of tender, of materials, electricity and, where specifically stated in the contract bills, fuels. Usually the list is restricted to main materials to avoid spending too much time on trivia. (Minor materials are covered by the percentage addition referred to earlier.)

The market prices should be checked before accepting the tender to make sure they are correct. When calculating the adjustment, the invoices should be checked to ensure that the terms as to discounts, quantity etc are comparable with the terms applying to basic prices. Only changes due to market fluctuations qualify: for example, the higher cost of buying in small quantities would not be admissible. However, any change in the duty or tax (other than VAT) on the import, purchase, sale, processing or use of materials, electricity or fuels will be adjusted.

As in the formula method, provision is made for freezing fluctuations on work carried out after the completion date. However, unlike formula fluctuations, conventional fluctuations are not subject to retention.

The quantity surveyor is also required to check fluctuations in the price of subcontract work, as both domestic and nominated subcontractors are required to incorporate similar fluctuations provisions to those in the main contract.

6.8 Additional loss and expense Any additional loss and expense arising from disturbance of the regular progress of the works is to be assessed by the architect or, if he so instructs, the quantity surveyor, and added to the amount that would otherwise be due on interim certificates. The method of ascertainment is described later under Section 8.

6.9 Other approaches Under the ICE 7th edition, the FIDIC Red Book and other similar forms, the onus is on the contractor, if he thinks the amount involved justifies an interim certificate, to submit a statement at the end of each month showing:

estimated contract value of permanent works executed;

value of materials delivered to site;

value of materials, not delivered to site but listed in the Appendix to the Form of Tender, of which the property has vested in the employer;

estimated amounts to which the contractor considers himself entitled under the provisions of the contract.


Within 28 days of the date of delivery of the statement the engineer shall certify, and the employer shall pay, the amount which, on the basis of the statement, he considers is due to the contractor, less only retention and amounts previously paid. The engineer has power to omit the value of work or materials with which he is dissatisfied, but not amounts which the contractor has already paid to the nominated subcontractors. The amounts included in the certificate for nominated subcontractors are to be shown separately. If the contractor fails to pass on such sums to them, the employer is entitled to pay them direct and deduct the amount from any sums due to the contractor.

Under the GC/Works/1 form, the contractor may, at intervals of not less than one month, submit claims for payment of advances supported by a valuation of work done and materials delivered to site. Clause 40(3) specifically requires the valuation to be made on the basis of the rates in the bills of quantities or schedule of rates, and states that the amount is an approximate estimate only.

6.10 Retention The total value of the work and materials is subject to retention at the agreed rate. The objectives are to provide an incentive for the contractor to complete his obligations quickly, and to give the employer some financial security if the contractor defaults. Another way of achieving these objectives is to require the contractor to take out a bond for the due completion of the work. Bond-holders are sometimes banks but more usually insurance companies specialising in this work.

The retention percentage applied depends on whether work has reached practical completion (full percentage), with a statement showing the split of the retention between the contractor and each nominated subcontractor. This statement is copied to the contractor and each nominated subcontractor. The two parts of the retention are defined as ‘contractor’s retention’ and ‘nominated subcontractor’s retention’. Under some forms (eg the JCT 05) the employer holds the retention in trust for the contractor and, where appropriate, each nominated subcontractor, but is not bound to invest the trust money. He may also, if the contractor so requests, be required to set the money aside in a separate and appropriately identified bank account.

The case Wates Construction (London) v Franthom Property (1991), heard in the Court of Appeal, concerned the status of retention monies.

Is the client entitled to use retention monies for his own purposes until they become due to the contractor?

Was there really a trust requiring the employer to set aside the retention in a separate account?

Is the employer a beneficiary to such a fund?

What is effect of the deletion of clauses from a contract?

A simplified summary of the situation based on the JCT 05 Standard Building Contract indicates that:

For the client to use such money in his own business may be a breach of the trust for any trustee (re Davies (1902)).

It was argued that the beneficiaries’ interests were safeguarded by the right in equity to trace, but this is of course of no value to the contractors if it is not possible to identify such monies separately.

The employer claimed to be a beneficiary to the fund, as it was possible to use this money under certain circumstances to set off against other debts such as monies for liquidated damages. The Court held that the only beneficiaries to the fund were the main contractor and four nominated subcontractors.


However, in this case there was no ambiguity. It is necessary under the contract to create a trust status and this can be done successfully by separately identifying retention money in a separate fund.

7 Final accounts It is, of course, essential at the end of the contract to have a proper settlement of the final financial position between the employer and the main contractor, and this settlement document is usually termed the ‘final account’. Under contracts where a quantity surveyor is employed, the preparation of the final account document will be his responsibility. In other cases, the amount will usually be prepared by the contractor for checking and approval by the contract administrator.

For lump sum contracts such as those let on a bill of quantities, preparation of the final account will be on the basis of additions to and omissions from the original contract sum to take account of any variations which have arisen; whereas for contracts let on approximate quantities (eg most civil engineering works) the account will comprise a complete re-measurement of the work ‘as built’. Contracts will typically specify a fixed period following practical completion of the work within which the account must be prepared.

When preparing the final account, the provisions of the contact must be strictly observed. The contract sum must not be adjusted or altered in any way other than in strict accordance with the express provisions of the contract. What follows is a description of a typical final account process for a lump sum project prepared on an ‘add and omit’ basis.

Before beginning the measurement and valuation, it is necessary to collect and cross-reference all the source documents. In addition to those mentioned earlier for interim valuations, these include:

architect’s instructions;

copies of minutes of site meetings;

daywork sheets;

wages sheets;

materials invoices for conventional fluctuations and nominated subcontractors’ and suppliers’ accounts.

It is also helpful to establish the final format of the account, which will provide a framework within which to organise the measurements.


The following is a simplified version of a common form of presentation:

The full list of items which should be considered is given in clause 4.3, as follows:

7.1 Deductions All prime cost sums and all amounts in respect of named subcontractors, including contractor’s profit.

Amounts due to the employer in respect of insurance on default of contractor.

Provisional sums and quantities.

Variations – omissions.

Fluctuations – amounts allowable to employer.

Any other amount required by the contract to be deducted from the contract sum, eg direct payments to nominated subcontractors.

7.2 Additions Nominated subcontract sums as finally adjusted.

PC sum work carried out by contractor.

Nominated suppliers’ accounts.

Contractor’s profit on the above items.

Amounts payable to the contractor in respect of:

fees and charges; setting out; inspections and tests; royalties; defects etc; insurance.

Variations – additions.

FINAL ACCOUNTOffice block Main summary Omissions Additions £ £ Contract sum 200 000 Less Contingencies 5 000 195 000 Variations on contractor’s work 15 000 20 000 Adjustment of prime cost sums 65 000 70 000 Adjustment of provisional sums 5 000 3 000 Adjustment of provisional quantities 10 000 12 000 Dayworks 1 000 Fluctuations (contractor) 4 500 Fluctuations (nominated subcontractors) 500 95 000 306 000 Less Omissions 95 000 211 000 Less Amounts stated as due in interim certificates 1–18 200 000 Balance outstanding £ 11 000


Value of work executed in respect of provisional sums and quantities.

Loss and expense payments.

Fluctuations.

Any other amount which is required by this contract to be added to the contract sum.

The main elements of the final account are dealt with as follows:

7.3 Variations Variations may be the subject of contractor’s quotations, or those which need to be measured and valued according to the contract rules.

Some forms of contract require, and it is in any case considered good practice, for the quantity surveyor to give the contractor an opportunity to be present when he is measuring the work. Usually the prices to be charged are also discussed at the meeting. However, failing agreement, the quantity surveyor must use his own judgement in fixing prices. If the contractor is dissatisfied, he has a remedy in adjudication and arbitration.

Before valuing variations, the quantity surveyor should make sure that there is a written instruction for the work, or that the contractual procedures have been followed with regard to oral instructions. The only exceptions are changes which are, under the terms of the contract, ‘deemed to be variations’, such as errors in bills of quantities. These do not require any authorising instruction, although the contractor may be under an obligation to give notice before proceeding with the work. So if changes are necessary in order to comply with any regulation or by-law, the contractor must give notice of the change to the architect.

Difficulties sometimes arise in respect of the position of the clerk of works. Many contracts provide for the employment of a clerk of works or some similar person to act as an inspector on behalf of the contract administrator. Another example, which is in some ways different but which shares some of the same responsibilities, would be the supervisor under NEC 3. The role and function of such staff is usually clearly set out in the contract, and their ability to issue instructions to the contractor is closely circumscribed. Quantity surveyors therefore need to be very careful where contractors contend that additional costs have been incurred as a result of their actions.

The quantity surveyor should keep a file of variation orders, together with related correspondence, site notes and measurements of work that will be hidden when complete. Here it may be helpful to enlist the help of the clerk of works, though measuring the work is not strictly part of his duties. In some cases it is possible to pre-measure varied work from drawings; in other cases it is necessary to wait until the work has been completed so that it can be measured physically on site. The frequency of site visits for this purpose depends on the size and complexity of the works and the need to take vital measurements before the work is covered up.

It is plainly important that variations should be measured as soon as possible after execution so that there is an up-to-date picture of the financial state of the contract.

Generally it is advantageous to group related variations, especially where there are variations on variations. Each variation order or group of orders should be taken in turn, omitting the work contained in the contract bills and adding back the measurements for the new work. It is advisable to start the dimensions for each variation or group of variations on a fresh page under a heading giving the order number, date issued, date measured and a brief description for identification. To avoid confusion, some surveyors use red ink for omissions and black ink for additions.


Where the whole of a bill item is omitted, only the bill reference need be stated. Otherwise the measurements for the part omitted may be obtained from the original taking-off.

The method of valuing variations depends on whether the varied work is of a similar character and executed under similar conditions to the work in the contract bills, and whether it is capable of being measured, as illustrated in Figure 2.

In the case of daywork, the contractor is allowed the ‘prime cost’ calculated in accordance with the ‘definition of prime cost of daywork carried out under a building contract’ issued by the RICS and the BEC, together with percentage additions to each section – ie labour, materials and plant – at the rates set out by the contractor in the contract bills. The contractor must submit vouchers specifying workmen’s names, the time spent daily on the work, and the plant and materials used, not later than the end of the week following the one in which the work was carried out. These vouchers are then verified by the architect or clerk of works.

An alternative method which is sometimes adopted is to ask the contractor to quote all-in wage rates for craftsmen and labourers instead of a percentage addition to the basic rate.

When checking daywork accounts, consider the following:

Ensure that the work cannot in fact be properly measured and that there is no overlap with work covered in measured items. The mere submission of vouchers by the contractor is no guarantee that the work will eventually be charged on that basis.

Check that the operative times claimed tally with the voucher signed by the clerk of works, and that the wage rates are those current at the time the work was carried out. The hours worked should be deducted from those on which fluctuations are calculated for the period in question.

Check that the quantities of materials are reasonable in relation to the work carried out. Trade discounts should be deducted and the price adjusted, if necessary, to reflect the permitted cash discount. Where materials have been supplied from the contractor’s stock, the price should be the market price at the date of supply.

Check that plant was used solely for the daywork during the period claimed and that the hire charges are as agreed.

FIGURE 2 Valuation of variations

Measured valuations

Character Conditions Quantity Method

Similar Similar Similar Measure

× Bill rates

Similar Different and/or Different Measure

× Bill rates

+ Fair allowance

Different N/A N/A Measure

× Fair rates


7.4 Adjustment of prime cost sums The amounts paid by the contractor to nominated subcontractors and suppliers are set against the PC sums included in the bill, and the contractor’s profit is adjusted pro rata. Where sums have been paid direct to nominated subcontractors, the main contractor is still entitled to a pro-rata adjustment of his profit, but not, of course, cash discount.

Attendance by the main contractor or nominated subcontractors should be adjusted only if there has been some change in the amount or type of attendance required. So if the amount payable is more than the PC sum solely because of better quality materials, and no additional attendance is called for, there will be no grounds for adjustment. For this reason, the amount given in the bill for attendance should be expressed as a lump sum and not a percentage on the PC sum.

The invoices should be checked to ensure that any trade discounts have been deducted and that any cash discounts are as permitted by the contract.

7.5 Provisional sums and quantities These sums are included for work that cannot be entirely foreseen at the time of tendering. The architect is required to issue instructions regarding the expenditure of provisional sums. Where the work is carried out by the contractor, it is valued in accordance with the contract rules.

Alternatively, these sums may be converted into notional PC sums by the architect nominating firms from whom the work or materials are to be ordered.

Sometimes ‘provisional quantities’ are given for sections of the work or individual items where only the quantity is in doubt, and it is desired to obtain competitive rates for valuing the work on re-measurement. Provisional quantities differ from provisional sums, in that there is no contractual power for the architect to nominate a subcontractor to undertake the work except by agreement with the contractor. However, the practice is not entirely satisfactory. If the actual quantity is radically different from the provisional quantity, the rate may be inappropriate.

Note that under the ICE form all the quantities are provisional and subject to re-measurement. However, there is provision for adjusting the rates if there is a substantial difference between the actual and estimated quantities.

7.6 Fluctuations The method of determining the amount of fluctuations has been dealt with earlier under ‘interim certificates’, in order to emphasise the need to attend to these adjustments during the progress of the contract and not leave them till completion. Where the formula method is used, the adjustment will be made automatically each month.

The residual amounts included in the adjustment of the contract sum under 30.6 are adjusted for fluctuations according to the ratio between the total fluctuations and the total value of the work.


7.7 Loss and expense claims The assessment of loss and expense claims is dealt with in detail in Section 8.

7.8 Other forms Under forms such as the ICE 7th edition and FIDIC Red Book the contractor must submit a statement of final account, together with supporting documentation, not later than three months after the date of the maintenance certificate. Within three months of receipt of the final statement and all the information reasonably necessary for its verification, the engineer must issue a final certificate stating the balance due to the contractor. This balance shall be paid to (or by) the contractor within 20 days of the date of the certificate.

Under the GC/Works/1 form, the quantity surveyor must forward a copy of the final account to the contractor as soon as possible after completion of the works to the satisfaction of the project manager. Failing agreement on the final sum due, the contractor may refer the dispute to arbitration.


8 Claims 8.1 The need for claims The area of claims always arouses a great deal of interest, but can seem shrouded in an aura of mystery.

Claims are becoming an increasingly important part of the industry (but note that in the JCT 05 Standard Building Contract, the word ‘claim’ does not appear). In specified circumstances, the contractor is entitled to reimbursement of proven loss and expense. In most cases the loss is ascertained by the contract administrator (or the QS) and the contractor’s obligation is limited to providing the information necessary to allow the assessment to be made.

Contracts can be both large and complex, involving a number of separate organisations carrying out work over a long time. Often the design has not been completed at the tender stage. The tender is prepared based on material prices which are not firm, plant and labour outputs which may not be achieved, waste allowances based on past records, and a figure added for overheads based on last year’s cost. A figure is then added to cover for an anticipated profit; with the whole of the work often being carried out in the open and subject to the vagaries of the weather.

The ideal contract would be where all information was complete in every detail before the start, no variations were issued, the project was completed on time, and the contractor made his anticipated profit. If this situation does not happen and changes are made to the contract, or the conditions under which the contract is carried out, then the contractor is likely to try to make good his financial position by means of a claim.

Even today in some circles it is considered undignified or even sharp practice to submit claims. However, this is not the case. ‘Claim’ is defined as:

‘The demand of a right or supposed right’ (New British Dictionary).

‘Demand for something due, an assertion of a right to something’ (Oxford English Dictionary).

The main point is the word ‘right’: it is an entitlement. However, it must not be imaginary. For claims to be successful they must be based on fact and have their origins in the contract.

It follows, therefore, that the conditions of contract and contract documents used must be looked at when judging whether a claim is permissible. Any ambiguity or conflict in the documents will make the claim more difficult to decide.

The word ‘claim’, therefore, should be used to denote a request by a contractor for some additional payment arising from carrying out new work, dealing with maintenance work, or providing a service under contract, whether the value of the work is large or small. In fact, any work carried out by means of a contract can give rise to claims.


Claims can be grouped under the following headings:

Contractual – where the matter is covered within the terms of the contract but the contractor and client representative cannot reach agreement.

Extra-contractual – a claim of right which would be enforceable at law but is not covered within the contract.

Ex gratia – a claim having no legal foundation but which warrants consideration on grounds of hardship or perhaps on moral grounds. Ex gratia payments were made on many contracts some years ago when British industry was working a three-day week. Such payments are not an assumption of liability by the employer.

8.2 Claims not the answer Bankruptcies or liquidations of businesses, particularly in the construction industry, are rarely caused by failures in the standard of work. They are more likely to be due to poor management, deficiencies in the financial control systems, and failure to explore every avenue of recompense for financial recovery, including submitting legitimate claims where necessary.

However, claims are not the answer to all financial worries and are not meant to reimburse the contractor for bad management or items for which the contractor has assumed the contractual risk. They do not cover for:

Wrong decisions at tender:

incorrect tender value; uneconomic schedule rates; underestimating difficulties of the project; incorrect assessment of contract period.

Poor management:

poor control; poor utilisation of plant.

Poor financial control in:

obtaining all variations; dayworks; start/agreed rates; submitting payment and fluctuation requests.

It is not the employer’s responsibility to reimburse a contractor for his own deficiencies. Nor does it follow that if a contractor has made a loss on a project he must therefore have a claim, although many contractors seem to follow this thought process.

All legitimate claims must be based on contractual right and therefore attributable to specific contract clauses.


8.3 Origination of a claim Claims occur for a variety of reasons, the main ones being:

late issue of instructions; late issue of material; failure of employer to carry out work; divergence between contract documents; variations*; postponement of work.

* (Note, however, that contractual valuation rules may mean that payment for variations is not necessarily related directly to the contractor’s costs. The JCT 05 Standard Building Contract, for example, relates the valuation of variations to decisions made by the contractor at tender stage, not to the actual costs involved.)

8.4 Initiation of a claim Almost invariably the initiative for a claim comes from the contractor. Under the articles, the contractor should make a claim if he considers or should reasonably have considered that something has taken place for which he is entitled to receive recompense.

This places the onus on the contractor to request payment if necessary, which of course includes occurrences dealing with delay and loss.

The situation is clear. As in most forms of contract, it is incumbent on the contractor to advise as soon as he knows the contract has been delayed or even is likely to be delayed.

It is important that this procedure is followed. Early warning of problems allows steps to be taken to mitigate the effects of the delay, and the contract supervisor can make sure that adequate records are kept. An accurate assessment of the effect of the delay can form the basis of calculation of any loss incurred. A number of small claims may then be received throughout the duration of the contract rather than one large, all-embracing one at the end, when the contractor suddenly finds he has made a loss.

It follows, therefore, that for claims to be successful they should relate directly to a contract clause and be backed by adequate documentation.

It has been said that you need three things in order to achieve a satisfactory settlement:

1. records; 2. records; 3. records.

Many a claim has fallen through inadequate documentation.


8.5 Admissible items under a claim Sometimes referred to as the ‘heads of claim’, these are the items which will be considered for payment:

1. Cost of running the site during an extension period.

2. Disruption, where there is no delay to the work but additional cost, eg uneconomic working of labour or plant.

3. Head office overheads.

4. Loss of profit.

5. Fluctuations.

6. Finance charges.

8.6 Assessing the value If it is assumed that the work will not go according to plan, it is possible to ease the problem of assessing the value of some areas of claims by anticipating them in the tender documentation.

Schedules of prices for plant and labour can be included that will facilitate assessment and, if necessary, form the basis of calculating additional work items.

In the absence of such prices, it will be necessary to look at each submission in detail.

We shall look at each of the above six items, though in practice these costs would not be dealt with in isolation and many claims will include more than one heading of cost. However, if the procedures described are followed, the problems of trying to unravel global claims covering all areas of cost should be overcome.

1 Standing time for plant In calculating the cost for an item of plant, the contractor will consider:

1. Cost of purchase 2. Loss of interest on capital 3. Depreciation 4. Scrap value 5. Grants/tax relief allowances 6. Utilisation 7. Maintenance and repairs 8. Fuel 9. Setting-up costs/delivery

10. Removal 11. Operator.

Even if the contractor owns the plant, it is common practice to cost it in a contract as a weekly/hourly hire charge.

It is also not unusual, on large contracts, for some items of plant to be written off over that contract only. Items (1) to (7) can be included in the hire charge. Sometimes items (9) and (10) are also incorporated into the hire cost, and the running cost (fuel etc) can be expressed as a weekly cost.


A claim for standing/idle time should therefore allow for (1)–(7) and (11), but not for running costs or costs under (9) and (10), which have already been covered in full in the tender price.

If the plant were written off on this one contract, there would be no increase in cost except under item (11). It is important, therefore, to identify which type of plant is being paid for under any claim for standing time.

To illustrate this, consider a contract for the supply of a lorry complete with driver to be used over a two-year period with an estimated 1 500 hours of lorry time per annum.

A tender sum of £116 000 is obtained from the contractor, who plans to purchase a new lorry and write it off over the contract period.

The original tender was calculated as shown in Figure 3 column 1.

FIGURE 3

(1) Cost of purchase = £50 000 (2) Loss of interest @ 12% pa = 6 000

(3) Depreciation = Initial cost – Scrap value Utilisation period

Per annum (1) £50 000 – 5 000

=2 £22 500

22 500

6 000 6 000 (5) No grants/tax relief available (7) Maintenance/repairs (obtained from records of

similar plant) = 10% of purchase cost/annum possibly slightly more on scheme (1) 12%

5 000 6 000

£33 500 £34 500 (9) ÷ 2 000 (6) Used 1 500 hours: Cost per hour 22.33 17.25 (8) Fuel from previous records 3.50 3.50 (11) Driver 7.00 8.50 * £32.83 £29.25 Overheads 10% Profit 8% 5.91 5.27 £38.74 £34.52 Tender = £38.74 × 1 500 × 2 × 4 000 = £115 220 £138 080 * Overtime payments may be necessary


Consider now the effect on the hourly cost of the following:

1. Increasing the hours to 2 000 per annum. It is not realistic merely to take the hourly rate and multiply by 4 000 (2 000 × 2 years). A suggested approach is shown in the second column of figures. This is for illustrative purposes only.

Likely total value £138 080, not £154 960 on straight proportion.

This is a good illustration of the benefit derived in obtaining lump sum tenders in lieu of cost reimbursement based on hourly costs, particularly if a breakdown of tender is requested.

2. Decreasing the contract period to 18 months. In this case, assuming that no further work is possible, the standing costs will need to be taken over 18 months, not two years. Assuming hours per annum to remain the same, this gives a total of £100 439 rather than £87 165 on straight proportion.

This indicates that considerable detail is necessary if an accurate assessment is to be made. Any resistance from contractors to supply such detail should therefore be treated with suspicion.

2 Standing time for labour Labour can be costed per day/hour/week and the rate should be what is normally referred to as the ‘all-in’ labour rate. This is the cost to the contractor of employing the labour force. It includes the basic wage rate plus the various other costs of employing labour, such as National Insurance contributions, training levies etc. If labour is reallocated to other tasks, they should not be paid under this heading, though there may be a separate claim for uneconomic use of labour.

For both these items it is important to maintain adequate site records to allow any claim to be checked. Records should include daily registers of plant and labour employed on site and specific records of actual items affected by the stoppage.

3 Uneconomic working Together with disruption costs, this is the most difficult area to evaluate.

The contractor is allowed to recover any extra costs incurred due to the disruptive effect of instructions issued to some area of work. This cost should not necessarily be based on the original pricing of the documents but on the situation before the disruption compared with the actual costs incurred during the disruption.

Suppose an instruction has been issued varying a section of work, and that this has affected the erection of a steel-framed support gantry. The effect has been predicted well before the steelwork has started and output records have been kept on this work. The following data applies:

1. Output prior to varied work – 3 bays/week 2. Output during disrupted section – 2 bays/week 3. Cost of erecting team, including plant – £6 000/week

Therefore cost per bay prior to variation = £2 000; cost during disruption = £3 000/bay.

The loss due to uneconomic working is therefore £1 000 per bay × number of bays carried out during this period.


The contractor might have priced the project based on 5 bays/week or 1 bay/week. This should make no difference to his entitlement for uneconomic working due to the issue of this instruction. It should be a comparison between the outputs before, during and after the occurrence. This is the true effect of the issue of the instruction.

4 Contract overheads Contractors incur expense for certain items the cost of which is not necessarily related to the cost of the permanent works or services, or not incorporated into the finished project. These types of costs are usually referred to as contract overheads or preliminaries. They include:

Site staff Some items of plant Temporary works such as roads, hoardings and hutting.

A true cost of this work would incorporate the following areas of cost:

Initial or set-up costs Recurring or running costs Final or removal costs.

All items within the contract overheads can be priced on the basis of the above pricing structure. For example, site office accommodation incurs:

Initial costs, such as formation of a base, delivery to site and setting up, including cost of providing water, drainage, electricity etc.

Recurring costs, including hire charge, cleaning, fuel costs.

Final costs, including removal, transport and making good.

The cost of site staff, however, is a recurring cost.

Some items of contract overheads may be expressed as a percentage of the value of the works or service, and some contractors price all or part of their contract overhead costs as a percentage of the total value. It is important, therefore, to know the pricing structure of these items, and the best time to deal with this is before signing the contract.

If an accurate breakdown of the pricing of the contract overheads is available, this simplifies the task of assessing any claim for additional costs.

If an extension of time is issued, then obviously the only additional costs involved are those that are ‘time-related’.

Without a detailed cost breakdown, an assessment of the extra cost entitlement involves detailed negotiation with the contractor on his entitlement.

Note too that only those recurring costs that are actually being used during the extended period are payable.


5 Disruption of work Claims submitted under this section include costs involving uneconomic use, lower output of plant and labour, and/or additional contract overhead costs for any time delay on the contract.

It is worth repeating that records should be kept at all times on site, covering plant delivered, labour employed and material delivered, together with a diary recording the work done and any unforeseen situations.

6 Additional overhead costs/profit There has been a great deal of discussion on whether this is an acceptable heading of claim. A number of legal cases, however, appear to establish that loss of recovery of head office overheads is in principle admissible, although the calculation may be difficult.

A common approach to pricing this item is by calculating it as a percentage of the turnover of the company and then applying the percentage to each tender.

A method of claiming this loss due to extended contract period is known as the ‘Hudson Formula’, as it appears in Hudson’s Building Engineering Contracts. It is shown as follows:

Head office costs/profit % × contract sum × delay (weeks) ÷ contract period (weeks).

Applying this formula indiscriminately would result in many unsound claims. For example, was the profit realistic at the time of tender? Had circumstances changed so that the original percentage was no longer appropriate?

It is better, therefore, to try to assess the true effect of any delay.

Take the following situation. Contractor’s tender for a three-year contract was £10m plus 8% overheads and 6% profit. Variations were issued with a net value of £1m and these resulted in an extension of time of six months. What is the effect on the overhead recovery?

This figure would be reduced by any costs which were not time related and by any possible redeployment of resources.

Perhaps it can be seen from this that it is important to keep the contractor informed of any likely changes so that he has time to minimise their effect.

Note that claims for delay under the article entitled Variations can include additional overheads but not profit.

Overheads in tender = £800 000 Equivalent to £266 667/annum Overheads in final account £880 000 (8% of £11m) Equivalent to £251 429/annum Overhead recovery necessary for 3½ years = £933 335 Actual recovery £880 000 Under-recovery £ 53 335


7 Capital tie-up Financing charges are generally taken as head office costs and, as such, any change affecting their amount will be a valid claim. Items coming under this heading include late payment for work, and late recovery of retention money by contractor owing to extension of time extending the contract period.

8 Carrying out work later than anticipated Cost headings include increased rates generally due to inflation, and enhanced labour/plant costs due to lack of continuity of work. Occasionally there might be claims for disruption to other work planned to be carried out at the same time.

9 Different conditions Claims generally apply where enhanced rates for the work are appropriate, or where there has been a lower output than planned, such as carrying out excavation work in the winter when originally planned for the summer.

10 Acceleration of the works Types of cost sometimes covered under this heading are:

Additional plant: usually working at a lower output. Additional labour: as last, due to over-manning. Overtime/weekend working. Night working: special teams including additional lighting and services. Additional supervision.

This list is not exhaustive but it does show that considerable extra costs may arise. It is best to agree a value before starting the work.

In conclusion:

The more detailed the tender information and the better the contract documentation, the less likelihood there is of contractual claims.

The more detailed the pricing of the documents and the more comprehensive the pricing information, the easier will be the assessment of any extra costs.

If a dispute arises, the more comprehensive the contract records and documentation, the easier will be the resolution.

Not all contracts permit acceleration of the works. The JCT 05 Standard Building Contract for example, has no such specific provision. In this case acceleration will require a separate agreement between the employer and the contractor. This agreement will probably be reached on the basis of an additional price quoted by the contractor, rendering a claim unnecessary.


9 Financial reports The importance of cost control services, both pre- and post-contract, has increased greatly in recent years, owing partly to financial conditions and partly to clients’ demands to start projects quickly without adequate preparation. It is generally accepted that, where time permits, a fully pre-planned contract with accurate bills of quantities allows much greater control over expenditure than can be obtained with other methods. On the other hand, there is little point in trying to produce an accurate bill of quantities if the design is not complete at the time of tendering. In such cases an approximate bill of quantities is more appropriate and more truly reflects the position.

The essence of cost control is the frequent and regular reporting by the quantity surveyor of the financial state of the contract to the employer. Although the quantity surveyor has no direct control over the ordering of variations, he can predict their cost consequences and so make the employer aware of the financial commitment before the work is put in hand. This demands a close working relationship between the architect and the quantity surveyor and is really a continuation of the initial cost planning process.

The quantity surveyor should arrange for the architect and the other consultants to inform him about proposed instructions and other matters that affect the contract financially as soon as they become known – preferably before the instructions are issued to the contractor. The quantity surveyor should also keep in touch with the contractor to receive early warning of any changes that he might originate.

Many disputes that arise on building contracts could be avoided by better communication and regular, formalised reporting on the physical and financial state of the work. The quantity surveyor’s contribution to this is the preparation of financial statements. These form a running total of the estimated final cost, taking into account predicted variations, fluctuations and possible claims for extra loss and expense, so that the employer and the architect can have an up-to-date picture of the financial state of the contract at any time.

It is recommended that financial statements are sent to the architect for comment before forwarding to the client. A covering letter can explain any items that are in doubt, such as the amount of future claims from the contractor.


The post-contract services provided by the quantity surveyor vary according to the type of contract – lump sum, measurement, or cost reimbursement.

Before starting his post-contract duties, the quantity surveyor should make sure that he has:

an up-to-date copy of the Conditions, with any amendments noted, including details of the entries in the Appendix;

a true copy of the priced bills of quantities, and the drawings and dimensions from which the bills were prepared.

A copy of the contractor’s construction programme is also useful if he is required to assess loss and expense claims.

Financial statement

No....................................................................as.....................................................................

For ...........................................................................................................................................

Contract period............................................weeks. Extension.....................................weeks.

Date for completion ................................................................................................................

AUTHORISED COMMITMENT

1 Contract sum 2 Client’s revised requirements 3 Fluctuations VARIATIONS AND ADJUSTMENTS 4 Omission of provisional sums for contingencies and

daywork

5 Adjustment of PC sums 6 Adjustment of provisional quantities and provisional

sums

7 Other architect’s instructions 8 Instructions confirmed by contractor but for which

architect’s instructions have not been issued

9 Anticipated variations in cost for which no formal instructions have been issued

10 Amount of ‘direct loss and/or expense’ resulting from disturbance to the regular progress of the works

ESTIMATED FINAL COST £ Net under/overspend £ LIQUIDATED DAMAGES Following the issue by the architect of his certificate under clause 24 of the Conditions of Contract, the employer may elect to claim liquidated and ascertained damages amounting to £ ......................... unless further extensions of time are granted, assuming completion by ......................... CLAIMS Claims lodged but not included above £ .................... Quantity surveyor


Appendix A Example QS valuation statement


Appendix A (continued)

Documents

Contract Administration Payment