Valuation and payment

Chapter 15

Valuation and payment






117 Under MW, can the contractor insist on
agreement on price before carrying out the

MW deals with instructions in clause 3.4. Variations and the valuation of such instructions are covered in clause 3.6. Clause 3.6.2 states that the architect and the contractor must endeavour to agree a price before the contractor carries out an instruction, but clause 3.6.3 sets out the architect’s power to determine the value of work if no agreement can be reached.

Some contractors have had the unfortunate experience of complying with an instruction and waiting a long time for or never receiving payment. Where the amounts are relatively small, it is no use arguing that the contractor has the option of seeking adjudication; the cost would be prohibitive.

The contractor can certainly insist on endeavouring to reach an agreement with the architect first, but it is impossible to insist that another person agrees anything to which he or she objects. Clauses requiring the architect and the contractor to try to agree something are not much use. Can the contractor argue that the architect did not ‘endeavour’ to agree a price. Yes, of course, but it will be a well nigh impossible task to prove. The architect need only say that they could not agree on the price. It is as simple as that. The contractor cannot refuse to comply with an instruction because there has been a failure to agree the price. It should not be forgotten that the fact that the contractor has carried out additional work does not automatically entitle the contractor to payment. There must be an instruction properly issued under the terms of the contract. If the instruction is properly issued, the contractor should not be out of pocket.

118 Is the contractor obliged to stick to a low
rate in the bills of quantities if the amount of
work is substantially increased?

Contractors occasionally insert the wrong rate in bills of quantities. Sometimes it is done on purpose. But even if the rate can be conclusively demonstrated to be inaccurate, it is of no consequence; the rate or price in the bills must be used as the basis for valuation, and it can be adjusted only to take account of changed conditions and/or quantity. The contractor has contracted on the basis that variations may be ordered in the Work, and the employer has contracted to pay for them on this basis. Neither party can avoid the consequences on the grounds that the price in the bills was too low. The contractor’s only hope is to show that the rate in question is narrow in its application and therefore not capable of being applied if the amount increases. The matter was settled by the courts long ago1 and revisited more recently with essentially the same result.2 A contractor will sometimes take a gamble by putting a high rate on an item of which there is a small quantity or a low rate on an item of which there is a large quantity in the expectation that the quantities of the items will be considerably increased or decreased, respectively. If the contractor’s gamble succeeds, it will make a nice profit. If it fails, the contractor may lose a considerable sum. This approach is not unlawful, but rather part of a contractor’s commercial strategy.3

119 Tenders were invited on the basis of a
bills of quantities. After tendering, the three
lowest tenderers were asked to price a bill of
reductions. The overall lowest tenderer was
appointed. During the progress of the Works,
the quantity surveyor wants to value using
prices from either the bill of reductions or
from the original bills of quantities, whichever
is lowest.

If tenders come in too high, it is common practice for the quantity surveyor to be asked if the tenders can be reduced by varying the bills of quantities so as to change some items and omit others. The lowest tenderer should be approached first, and if a reduced bills of quantities is prepared, it is the lowest tenderer which should be asked to price. Only if negotiations with the lowest tenderer fail should it be necessary to approach the next lowest tenderer. The procedure outlined in the question could result in severe financial repercussions for the employer if the original lowest tenderer is not appointed.

The object of producing a bill of reductions (sometimes called an addendum bill) is to reduce the original tender figure to something which the employer finds satisfactory and which then becomes the contract sum. The bill of reductions is often produced following negotiations with the lowest tenderer in order to record the agreed changes to the bills of quantities. The quantity surveyor is not entitled to choose the lowest of the prices in the original bill or in the reduction bill in order to value work. The reason is quite simple: The contract sum has been agreed and it is based on the original bills of quantities as amended by the bill of reductions. The parties have agreed that the contractor will carry out the Works shown in the bill as amended, and the employer has agreed to pay the amended price, which is then the contract sum. Therefore, the contract sum is comprised of the original bill as amended, and it is only the amended figures which the quantity surveyor can use.

It may be thought that the quantity surveyor is actually correct, and saying that the original bill as amended must be used is simply a quibble with no substance. That would be to misunderstand what happens when the contractor prices a reduction bill or negotiates on its tender. It does not follow that the contractor will reduce all the individual prices. In order to achieve an overall reduction in the price, the contractor may wish to increase some prices and reduce others. There are several reasons why the contractor might do this. It might be because it can make a greater profit on some items than others, or it may be that there is the possibility of increasing in quantity certain isolated items on which a large profit can be made. A modest increase in the rates for such items may eventually recoup the profit lost by reducing the rates for other items.

120 Under SBC With Quantities, the contractor
put in a very high rate for an item of which
there were only 3 in the bills of quantities. It
was subsequently found necessary to instruct
over 200 of these items. Is the quantity surveyor
in order to reduce the unit rate?

The answer to this question is virtually the same as the answer to question 118. It is the contractor’s right to price the bills in any way it chooses. However, the contractor runs the risk that low-priced items may be increased in quantity and high-priced items decreased in quantity. If the contractor is lucky and puts a high price on an item that is subsequently varied so that much more of the item is required, the contractor gets a windfall. The quantity surveyor is entitled to reduce the unit rate only by a reasonable percentage to reflect economy of scale, but from the starting point of the contractor’s bill rate.

121 Can an architect who discovers that the
contractor is making 300 per cent profit on
some goods it is contracted to supply under
MW do anything about it?

An architect might be quite annoyed to discover that a contractor, whose tender has been accepted, is making a large profit on some items. Even where the architect is designated as the person to value variations under MW or MWD, the architect rarely gets to know the profit margin because the only relevant document will be the priced specification or a schedule of rates.

Occasionally, the architect does get to know the build up of some of the rates, and that is when the nasty surprises occur. Generally, it is unreasonable for the architect to get upset if a contractor is making a large profit. It must be remembered that the contractor has won the contract, presumably on the basis of the lowest overall tender. Therefore, if the profit margin on some items is high, it is likely to be correspondingly low on others. When contractors submit tenders, they effectively take a gamble. They have to pitch their tenders at a level that will give them a reasonable return, but not so high that they lose the project to another tenderer.

After carefully considering the project and the site, a contractor will look for items that are few in number but which can fairly confidently be expected to increase substantially. These items will be given high profit margins on the basis that it will not affect the total price very much but may eventually net a large profit. On the other hand, numerous items that can be expected to be reduced or even omitted altogether can be priced at a low profit margin, or even occasionally at a loss; these items will have a big effect on the total price, but if omitted the possible loss will be omitted also. It is a gamble because the contractor may be wrong about its expectations. This approach has been accepted as normal practice by the courts.4

The architect can do nothing about the high profit margin if the tender has been accepted. The priced specification is part of the contract, and the architect must have regard to it when pricing variations. Architects becoming too enraged at the thought of the 300 per cent profit should consider whether they would want to take measures if they discovered that a contractor was making little or no profit at all.

122 What is the significance of retention
being in trust?

Retention is when an amount is withheld from sums otherwise certifiable to the contractor to serve as a safeguard against the possibility of defective work or materials or even failure to carry out the Works by the contractor. It is usually termed a ‘retention fund’. The amount retained is usually 3 per cent (or sometimes 5 per cent of smaller value contracts) of the work properly executed by the contractor. It is accumulated by deducting the appropriate percentage from the valuation of work at each interim payment. SBC clause 4.18.1, DB clause 4.16.1 and ACA clause 16.4 all state that the employer’s interest is as trustee. Not all contracts create a trust fund for the retention. The retention fund under the IC, ICD, MW and MWD contracts is not held in trust.

Where someone is in a position of trust, that person has a duty to exercise any rights and powers for the benefit of the person for whom the trust was created. Some building contracts, such as SBC in clause 4.18.1, provide that the employer’s interest in the retention monies is fiduciary as the trustee for the contractor. The clauses often stipulate that the employer has no obligation to invest the retention money retained. The legal effect of this wording is doubtful and appears to be contrary to the Trustee Act 1925 and the Trustee Investments Act 1961, which impose a duty on a trustee to invest trust monies in specified investments.

Many standard form contracts provide for the employer to set the money aside in a separate bank account at the request of the contractor. This reflects a requirement of the general law whenever the contract provides that the retention money is to be held in trust. The requirement applies in law whether or not the contractor actually makes a request.5 The account name should make it very clear that it is a designated trust account6 and be very clear as to the identity of the beneficiary. It is good practice, although not prescribed in the contract, for the employer to certify the action to the architect. The purpose of holding the retention in trust is to safeguard the contractor’s money in the event of the employer becoming insolvent. Therefore, the obligation to set trust money aside cannot be overcome by deleting such clauses. The court would simply imply a clause to similar effect.

123 Is there a problem for the employer who
assists the contractor by making an advance

SBC clause 4.8 provides that the employer may, but is not obliged to, make an advance payment to the contractor. The idea is fairly straightforward. If both the employer and the contractor agree that an advance payment is to be made by the employer to the contractor, the amount agreed and the date for payment must be inserted in the contract particulars, together with a schedule setting out the times and amounts for repayment. This is achieved by the architect deducting the monthly amount from the amount to be certified. The RIBA standard certification forms make express provision for the insertion of this repayment sum. A form of bond is bound into the back of the contract, and it is used to protect the employer if the contractor fails to repay the amount advanced. The contract has a default position that the bond is required unless expressly stated otherwise. It is difficult to envisage an advance payment situation in which a bond would not be required. The provisions of SBC, IC, ICD and DB are virtually identical. There is no advance payment provision in MW or MWD. The provisions do not apply where the employer is a local authority. It is not clear why that should be the case, especially since many local authorities seek ways to dispose of excess money before the end of the financial year and have to make amendments to the standard form contracts to allow advance payment to be made.

The dangers of advance payment do not appear to be great provided that the employer insists on a bond being taken out. Without a bond, the danger is that, having received the payment, the contractor becomes insolvent before the project is finished and the employer loses his or her money. Where there is a bond and the contractor defaults, the employer simply requests the surety to pay the amount for which the contractor has defaulted. If the contractor becomes insolvent, the employer will continue to receive the repayments, the only difference being that they will have to be requested at the time of each certificate.

124 If work is being done on a daywork
basis, can the time claimed be reduced if the
quantity surveyor thinks that the contractor
has taken too long?

The whole topic of dayworks is the subject of much misconception. Most standard forms of contract provide for dayworks only as an option to be used if the normal valuation mechanism is not appropriate. It brings up the rear in the valuation rules because work done on a daywork basis generally costs more than work valued in any other way. Quantity surveyors tend to be frustrated by this state of affairs and use their own experience to reduce the time claimed if it appears to them that it is longer than it should be. It is in those last five words that the misconception lies.

If the parties have agreed that payment is to be made on a daywork basis, the quantity surveyor has no right to reduce the hours and other resources on the sheets.7 That is because they have agreed that the contractor will be paid for the hours spent and the resources used, not for the hours that should have been spent and the resources that ought to have been used. Of course, the proviso is that daywork is the agreed form of payment. A contractor is not entitled to be paid on a daywork basis simply because it submits daywork sheets. A contractor will often submit such sheets because payment on that basis is usually better than valuation at contract rates.

Often the magic formula ‘For record purposes only’ is added by an architect asked to sign daywork sheets. However, where dayworks is to be the method of valuation in any particular case, the addition of those words has little practical value and certainly does not prevent the contents of the sheets being used for calculation of payment.8

125 Is the contractor entitled to loss of profit
if work is omitted?

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