6 Sums properly due
6.1 The contract sum, which will be the tender figure accepted or agreed following negotiation, is entered in Article 2. However, the wording of the contract recognises that, in practice, this is rarely the amount actually paid, and refers in Article 2 to the contract sum ‘or such other sum as becomes payable’. It should be noted that the contract sum itself does not change, the provisions refer to adding or subtracting amounts to or from the contract sum to reach an adjusted figure.
6.2 There are many reasons why the amount finally payable will differ from the contract sum. Under IC16 the sum may contain provisional sums or approximate quantities to cover the cost of work that cannot be accurately described or measured until work is under way. If variations to the works are instructed, then the amount payable must be adjusted accordingly. There is also the possibility of claims from the contractor for loss and expense arising from intervening events which could not be foreseen at the time of tendering. Fees or charges in respect of statutory matters which are not allowed for in the contract documents will require an adjustment to the sum. IC16, like most contracts, contains ‘fluctuations’ provisions allowing for adjustments in the event of changes in statutory charges. If Supplemental Provision 3 is included (Schedule 5), the contractor may propose savings that result in an agreed adjustment. VAT is, of course, not included in the contract sum.
6.3 There will therefore almost inevitably be adjustments during the course of the contract; IC16 makes it clear that the only alterations that may be made are those provided for in the terms of the contract (cl 4.2). Items to be included in the adjustments are summarised in clause 4.3, and the ascertained amounts will normally be added or deducted as appropriate at the next interim certificate (cl 4.4).
6.4 Arithmetical errors by the contractor in pricing are not allowed as a cause for adjustment. Errors in the preparation of the contract bills, if used, must be corrected and will then be treated as if they are a variation (cl 2.12.2). Any divergence between the contract drawings and other documents which necessitates an instruction by the contract administrator may also result in a variation (cl 2.13).
An approximate quantity
6.5 Where bills of quantities are used and work can be described in accordance with the ‘Measurement Rules’ – the RICS New Rules of Measurement 2: Detailed Measurement for Building Works (NRM2), but the quantity involved is uncertain, an ‘Approximate Quantity’ can be included. The contract administrator is not required to issue any further instruction for the contractor to carry out this work. After it has been carried out, the work is valued under clause 5.2.4.
6.6 Difficulties can arise if the approximate quantity is not a reasonably accurate forecast of the quantity of work required. The valuation must then include a fair allowance for the difference in quantity over and above the rates or prices tendered by the contractor (cl 5.3.1.4 and 5.3.1.5). The inaccuracy is also an event which may give rise to an extension of time under clause 2.20.4 and a ‘Relevant Matter’ for direct loss or expense under clause 4.17.3.
Provisional sums
6.7 Where bills of quantities are used but it is not possible to provide sufficient information at the time of tender to allow an item to be described and measured according to the NRM2, then a provisional sum may be inserted in the bills to cover the item (NRM2 Rule 2.9.1). The contract administrator must issue instructions with regard to the expenditure of any provisional sums (cl 3.13) and the contractor can take no action until receiving an instruction. The work is then valued under the valuation rules described below for a variation (cl 5.2.3) and the effect of the instruction will depend on whether the provisional sum is for defined work or for undefined work. Under the NRM2 a provisional sum can be for defined or undefined work.
Defined work
6.8 The information required to place provisional work in the defined category is listed in NRM2 Rule 2.9.1.2. The tenderer must be aware of the nature and construction of the work, how and where the work fits into the building, the scope and extent of the work and any specific limitations on method, sequence or timing. In other words, the description must be sufficiently detailed for the contractor to make proper allowance for the effect of the work when pricing the relevant preliminaries, and to allow for the work in the programme.
6.9 If the information provided is not as detailed as the rule requires, or if it is erroneous, then a corrective instruction is required from the contract administrator. This is to be treated as a variation (cl 5.5.3), and could give rise to a notice of delay and an application for reimbursement of direct loss and expense from the contractor.
Undefined work
6.10 A provisional sum for undefined work will be applicable where it is not possible to supply the amount of information needed to comply with NRM2 Rule 2.9.1.2. The contractor will not have been able to make proper allowance for the work in programming, planning or the pricing of preliminaries. A provisional sum in this category should not only be sufficient to cover the net cost, but should also take into account the fact that there might be additions to preliminaries, attendance, etc. as an allowance must be made when valuing the instruction. There is also a risk that the contractor might give notice of delay arising from the contract administrator’s instruction. Unlike an instruction for the expenditure of a provisional sum for defined work, that for a provisional sum for undefined work could be a relevant event (cl 2.20.2.1) and a relevant matter for which a loss and expense application can be made (cl 4.17.2.1).
6.11 Provisional sums may be included for items that are not specifically work, for example testing, site boards, site facilities, etc. The heading in the bills of quantities will simply be ‘include the Provisional Sum of … for’, or some other appropriate wording. For work to be carried out by statutory authorities it is suggested that the description of the work be followed by a similar heading.
Valuation of variations
6.12 The contract states that the value of variations is either as agreed between the contractor and employer, or as assessed by the quantity surveyor (cl 5.2). Agreement on a saving could be reached using optional Supplemental Provision 3. Otherwise, the contract does not set out any procedure for reaching an agreement, but in practice it would be open to the contract administrator to request a statement from the contractor, and then, if it is acceptable, to accept the price on behalf of the employer, provided the employer has been consulted and has agreed to the figure. It is generally preferable to agree the value of variations as the project progresses, ideally before the work is carried out, but in some cases, perhaps because the contractor is unable to provide a statement, or because time is short, it will not be possible to reach such an agreement.
6.13 If the quantity surveyor is to value variations, the valuation must be conducted according to the valuation rules set out in clauses 5.3 to 5.6 (Table 6.1). Clause 5.3.1 includes for:
- work of similar character undertaken under similar conditions and where the quantity does not change significantly (cl 5.3.1.1);
- work of similar character but not undertaken under similar conditions and/or where the quantity changes significantly (cl 5.3.1.2);
- work not of similar character (cl 5.3.1.3).
Table 6.1 Valuation rules
6.14 In the first two cases, bills of quantities’ rates and prices are to be used in assessing the value of the variation, and it should be noted that the work is not necessarily identical, and that the contractual rates must be used even where those figures contain errors (Henry Boot Construction Ltd v Alstom Combined Cycles). In the third case, the work should be valued at ‘fair rates and prices’. Dissimilar conditions might include, for example, that the instructed work is carried out in winter, whereas under the bills it had been assumed it would be carried out in summer. Such an assumption, however, would have to be clear from an objective analysis of the contract documents (Wates Construction v Bredero Fleet).
Henry Boot Construction Ltd v Alstom Combined Cycles [2000] BLR 247
By a contract formed in 1994, Alstom Combined Cycles employed Henry Boot to carry out civil engineering works in connection with a combined cycle gas turbine power station for PowerGen plc at Connah’s Quay in Clwyd. During post-tender negotiations, a price of £258,850 was agreed for temporary sheet piling to trench excavations. Disputes arose regarding the valuation of this work, and these disputes were initially taken to arbitration. The arbitrator found that the agreed figure contained errors that effectively benefited Boot. Boot argued that, nevertheless, the figure should be used to value the work under clause 52(1). The arbitrator decided that clause 52(1) (a) and (b) were inapplicable, and that 52(2) should be applied to achieve a fair valuation. Boot appealed to the Technology and Construction Court, and Judge Humphrey Lloyd decided that the mistake made no difference; the agreed rate should be used even if the results were unreasonable. Clause 52(2) created only a limited exception where the scale or nature of the variation itself made it unreasonable to use the contract rates.
Wates Construction (South) Ltd v Bredero Fleet Ltd (1993) 63 BLR 128
Wates Construction entered into a contract on JCT80 to build a shopping centre for Bredero. Some sub-structural work differed from that shown on the drawings and disputes arose regarding the valuation of the works, which were taken to arbitration. In establishing the conditions under which, according to the contract, it had been assumed that the work would be carried out, the arbitrator took into account pre-tender negotiations and the actual knowledge that Wates gained as a result of the negotiations, including proposals that had been put forward at that time. Wates appealed and the court found that the arbitrator had erred by taking this extrinsic information into consideration. The conditions under which the works were to be executed had to be derived from the express provisions of the bills, drawings and other contract documents.
6.15 Work for which an approximate quantity is included in the contract documents is valued at the stated rates and prices under clause 5.3.1.4, except that where the approximate quantity was not a reasonably accurate forecast of the amount of work carried out, the stated rates and prices shall be the basis for valuation and a fair allowance for the difference is to be included (cl 5.3.1.5).
6.16 Work not of similar character should be valued at ‘fair rates and prices’ (cl 5.3.1.3). Where the appropriate basis of a fair valuation is daywork (when the additional or substituted work cannot be properly valued by measurement) clause 5.4 sets out the rules to be followed in assessing the amount. Otherwise it would be the responsibility of the quantity surveyor in the first instance to determine what a fair rate might be. If the contractor disagrees with this assessment, and the dispute cannot be resolved amicably, then the contractor could take the matter to arbitration.
Reimbursement of direct loss and/or expense
6.17 The objective of the ‘Loss and Expense’ provisions is to enable the contractor to be reimbursed for direct loss and/or direct expense suffered as a result of delay or disruption and for which the contractor is not reimbursed under any other provision in the contract. The contractor is entitled to be reimbursed for loss and/or expense incurred as a result of deferment of possession or any occurrence of a ‘Relevant Matter’ set out in clause 4.17 (cl 4.15). The amount to be paid is determined under the procedure in clause 4.21.
6.18 Under clause 4.15, the entitlement to direct loss and/or expense is subject to the contractor having complied with the procedure set out in clause 4.16 (cl 4.15.1). This requires the contractor to notify the contract administrator promptly, i.e. ‘as soon as the likely effect of a Relevant Matter on regular progress or the likely nature and extent of any loss and/or expense arising from a deferment of possession becomes (or should have become) reasonably apparent to him’ (cl 4.16.1). The notice is to be accompanied by, or followed by, an assessment of the losses already incurred and those likely to be incurred (cl 4.16.2). The contractor must keep the contract administrator updated at monthly intervals until all information reasonably required and necessary for ascertaining the amount due has been supplied to the contract administrator (cl 4.16.3).
6.19 The contract administrator or quantity surveyor is required to notify the contractor of the ascertained amount of loss and/or expense within 28 days of receipt of the initial assessment and information, and subsequently within 14 days of receipt of each monthly update of the assessment and information (cl 4.16.4). Each ascertainment must be made by reference to the information supplied by the contractor and be in sufficient detail to allow the contractor to identify differences between its own assessment and the contract administrator’s ascertainment.
6.20 The procedure is more detailed and contains stricter time limits than that in IC11. It ensures that the contract administrator is kept fully up to date with the effect and likely costs associated with any relevant event. As well as allowing the employer to budget for the additional costs, there may be steps that can be taken at an early stage to minimise the potential increase. It also ensures that the contractor is informed at an early date of any disagreement of the contract administrator with the contractor’s assessment, and is updated on a regular basis as to any changes in that position.
6.21 Importantly, as noted above, the contractor’s right to loss and expense is ‘subject to … compliance with the provisions of clause 4.16’. The courts held even on earlier, less clear versions of this clause that the right to loss and/or expense could be lost if the contractor did not act promptly (see London Borough of Merton v Leach). Given the new wording, there is no doubt that the employer could refuse to consider late applications. However, it is still arguable that for matters that would constitute a breach of contract on behalf of the employer, the contractor might retain the right to claim damages under common law (a right confirmed by clause 4.19). Therefore it may be sensible to agree that such claims should be dealt with under the contract, particularly in cases where the procedural failing on the part of the contractor is minor.
London Borough of Merton v Stanley Hugh Leach Ltd (1985) 32 BLR 51 (ChD)
Stanley Hugh Leach entered into a contract on JCT63 with the London Borough of Merton to construct 287 dwellings. The contract was substantially delayed and a dispute arose regarding this delay and related claims for loss and expense. The dispute went to arbitration and the arbitrator made an interim award on a number of matters. Merton appealed and the court considered 15 questions framed as preliminary issues. Among other things, the court stated that applications for direct loss and/or expense must be made in sufficient detail to enable the architect to form an opinion as to whether there is any loss and/or expense to be ascertained. If there is, then it is the responsibility of the architect to obtain enough information to reach a decision. This responsibility could, of course, include requests for information from the contractor. The court also held that the application must be made within a reasonable time and not so late that the architect was no longer able to form an opinion on matters relevant to the application.
6.22 Not only must the contractor apply promptly, but the applications must be dealt with according to the procedures of the contract, including responding within the tight time limits. Failure to certify an amount properly due will not prevent recovery, and could leave the employer liable in damages for breach of contract (Croudace v London Borough of Lambeth). Where the contract administrator delegates the duty of ascertaining the direct loss and expense, it appears that it is not obligatory for the contract administrator to accept the quantity surveyor’s opinion (R Burden v Swansea Corporation), although the quantity surveyor’s assessment would be strong evidence as to what the correct amount should be. At final account stage there is a requirement to review the awards already made, and to notify the contractor of any further amounts due (cl 4.20.2.1, see paragraph 7.48).
Croudace Ltd v The London Borough of Lambeth (1986) 33 BLR 20 (CA)
Croudace entered into an agreement with the London Borough of Lambeth to erect 148 dwelling houses, some shops and a hall. The contract was on JCT63 and the contract administrator was Lambeth’s chief architect and the quantity surveyor was its chief quantity surveyor. The contract administrator delegated his duties to a private firm of architects. Croudace alleged that there had been delays and that it had suffered direct loss and/or expense and sent letters detailing the matters to the architects. In reply, the architects told Croudace that they had been instructed by Lambeth that all payments relating to ‘loss and expense’ had to be approved by the borough. The chief architect then retired and was not immediately replaced. There were considerable delays pending a further appointment and Croudace began legal proceedings. The High Court found that Lambeth was in breach of contract in failing to take the necessary steps to ensure that the claim was dealt with, and was liable to Croudace for this breach. The Court of Appeal upheld this finding.
R Burden Ltd v Swansea Corporation [1957] 3 All ER 243 (HL)
Burden entered into a contract with Swansea Corporation to build a school. The contract provided for interim certificates to be issued at intervals by the contract administrator. The contract administrator, who was the Corporation’s Borough Architect, acted originally as both contract administrator and surveyor under the contract. Later, after 20 certificates had been issued, the firm of quantity surveyors which had originally prepared the bills was appointed to act as surveyor under the contract in place of the Borough Architect. In the next certificate the surveyor reduced the amount applied for by the contractor by around 75 per cent, and the contract administrator certified the lower figure. The surveyor later discovered that it had made a mistake, but did not inform the contract administrator of the error. The contractor gave notice determining the contract, on the grounds that the employer had interfered with the issue of the certificate. The House of Lords decided that a mistake in a direction as to the amount to be paid did not amount to interference or obstruction. It was suggested that the contract administrator would have been at liberty to have certified a different amount if aware of the error.
6.23 The matters listed in clause 4.17 are concerned with situations where the loss and/or expense is attributable to actions of the contract administrator or the employer, including ‘any impediment, prevention or default, whether by act or omission, by the Employer’, and excluding the neutral causes which feature in the extension of time provisions of clause 2.20. It should be noted that costs and expenses resulting from the contractor exercising its right to suspend work under clause 4.14 are not dealt with under clause 4.15, but are treated separately (see paragraph 7.28).
6.24 Clause 4.15 refers to regular progress of the works being ‘materially affected’ by the relevant matter. This could include situations where an overall delay to the programme is experienced (often termed ‘prolongation’) for which an extension of time may have been awarded. However, it can also include disruption to the planned sequence that does not cause any overall delay, provided it can be shown that losses were suffered as a result. Any disruption claim should be related to the progress necessary to complete the works by the completion date, not necessarily the actual sequences of events on site, and the disruption would have to be significant for it to entitle the contractor to compensation.
6.25 In ascertaining the loss and expense, the contract administrator must determine what has actually been suffered. The sums that can be awarded can include any loss or expense that has arisen directly as the result of the relevant matter. The loss and expense award is in effect an award of damages, and the contract administrator should approach its assessment using the same principles as a court would in awarding damages for breach of contract. In broad terms, the object is to put the contractor back into the position in which it would have been but for the disturbance. The contractor ought to be able to show that it has taken reasonable steps to mitigate its loss, and the losses must have been reasonably foreseeable as likely to result from the ‘matter’ when the contract was entered into.
6.26 The following are items which could be included:
- increased preliminaries;
- overheads;
- loss of profit;
- uneconomic working;
- increases due to inflation; and
- interest or finance charges.
6.27 The items claimed must not be recoverable by the contractor under any other term of the contract (and, for example, duplication of a claim under clause 5.2 must be avoided). Prolongation costs, such as on-site overheads, would normally only be claimable for periods following the date for completion. (For head office overheads, etc., see McAlpine v Property and Land Contractors below.) Interest may also be recoverable, but only if it can be proved to have been a genuine loss (F G Minter v WHTSO). As clause 4.15.1 refers to losses which the contractor ‘incurs or is likely to incur’, the award need not be restricted to losses suffered prior to the time the contractor’s application is made, but could include those suffered up to the date of the ascertainment (this would apply particularly to financing charges), and could arguably be extended to losses that could be predicted as likely to occur up to the date the reimbursement is made.
Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd (1995) 76 BLR 59
An appeal arose on a question of law arising out of an arbitrator’s award regarding the basis for awarding direct loss and expense with respect to additional overheads and hire of small plant, following an instruction to postpone the works. The judgment contains useful guidance on the basis for awarding direct loss and expense. To ‘ascertain’ means to ‘find out for certain’. It is not necessary to differentiate between ‘loss’ or ‘expense’ in a head of claim. Regarding overheads, a contractor would normally be entitled to recover as a ‘loss’ the shortfall in the contribution that the volume of work had been expected to make to the fixed head office overheads, but which, because of a reduction in volume and revenue caused by the prolongation, was not in fact realised. The fact that the ‘Emden’ or ‘Hudson’ formulae depend on certain assumptions means that they are frequently inappropriate. The losses on the plant should be the true cost to the contractor, not based on notional or assumed hire charges.
F G Minter Ltd v Welsh Health Technical Services Organisation (1980) 13 BLR 1 (CA)
Minter was employed by Welsh Health Technical Services Organisation (WHTSO) under JCT63 to construct the University Hospital of Wales (second phase) Teaching Hospital. During the course of the contract, several variations were made, and the progress of the works was impeded by the lack of necessary drawings and information. The contractor was paid amounts in respect of direct loss and/or expense, but the amounts paid were challenged as insufficient. The amounts had not been certified and paid until long after the losses had been incurred, therefore the figures should have included an allowance in respect of finance charges or interest. Following arbitration, several questions were put to the High Court, including whether Minter was entitled to finance charges in respect of any of the following periods:
- between the loss and/or expense being incurred and the making of a written application for the same;
- during the ascertainment of the amount; and/or
- between the time of such ascertainment and the issue of the certificate including the ascertained amount.
The court answered ‘no’ to all three questions and Minter appealed. The Court of Appeal ruled that the answer was ‘yes’ to the first question and ‘no’ to the others.
6.28 The contractor must provide full details and particulars of all items concerned with the alleged loss or expense (cl 4.16.3). These should identify which of the losses claimed relate to each of the relevant matters that have occurred. This is sometimes compromised by the use of a ‘rolled up’ or composite claim approach, where it is not really practicable to separate and itemise the effect of a number of causes. This approach has been accepted by the courts, provided that as much detail as possible has been given, and provided that all disturbance was due to matters under clause 4.17, and not caused by the contractor.
6.29 Formulae such as the ‘Hudson’ or ‘Emden’ formulae are sometimes used for estimating head office overheads and profit, which may be difficult to substantiate. These formulae can only be used when it has been established that there has been a loss of this nature. To do this the contractor must be able to show that, but for the delay, the contractor would have been able to earn the amounts claimed on another contract, e.g. by producing evidence such as invitations to tender which were declined. Such formulae may be useful where it is difficult to quantify the amount of the alleged loss, provided a check is made that the assumptions on which the formula is based apply.
6.30 Although direct loss and/or expense are matters of money, not time, which are quite separate issues, there is often a practical correlation in the case of prolongation. Any general implication, however, that there is a link would be incorrect and, in principle, disruption claims and delay to progress are independent. An extension of time, for example, is not a condition precedent to the award of direct loss and/or expense (H Fairweather & Co. v Wandsworth, see paragraph 4.30).
Fluctuations
6.31 In some projects it may be an advantage to insist on a ‘fixed’ or ‘guaranteed’ price, whereby the contractor accepts the risk of all changes in the cost of the works due to statutory revisions and market price fluctuations. However, requiring this degree of certainty will, in some economic climates, result in higher tender figures as the contractor will need to allow for possible increases, particularly if the contract period is relatively lengthy. In order to avoid inflated tenders, most contracts allow for some ‘fluctuations’, whereby the employer accepts some of these risks.
6.32 In IC16 the default fluctuations provisions are set out in Schedule 4, which allows for contribution, levy and tax fluctuations. The contract particulars (cl 4.3 and 4.9) allow the parties to state that there will be no fluctuations, or to set out their own provisions; if no selection is made then Schedule 4 applies. Parties who wish to consider other options could refer to the traditional full fluctuations in labour and materials or the use of price adjustment formulae, which used to be included in the Standard Building Contract (as Options B and C); these have been omitted from SBC16 but are now available from the JCT website.
6.33 Schedule 4 provides for full recovery of all fluctuations in the rates of contributions, levies and taxes in the employment of labour, and in the rates of duties and taxes on the procurement of materials. In short, the only amounts payable are those arising out of an Act of Parliament or delegated legislation. Contractors, however, have pointed out that many less obvious increases are nevertheless not included, therefore a ‘percentage addition’ is made to allow for these. The agreed percentage is entered in the contract particulars.
6.34 Where a contract includes for fluctuations, in the absence of anything to the contrary, they will be payable for the whole time the contractor is on site, even though it fails to complete within the contract period (Peak Construction v McKinney Foundations). There is a socalled ‘freezing’ provision in IC16 (Schedule 4:9.1) but this depends on the clause 2.19 and 2.20 text being left unamended, and all notices of delay properly dealt with by the contract administrator.
Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 1 BLR 111 (CA)
Peak Construction Ltd was main contractor on a contract to construct a multi-storey block of flats for Liverpool Corporation. As a result of defective work by nominated sub-contractor McKinney Foundations, work on the main contract was halted for 58 weeks, and the main contractor brought a claim against the sub-contractor for damages. The Official Referee, at first instance, found that the entire 58 weeks was delay caused by the nominated sub-contractor, and awarded £40,000 damages, £10,000 of which was for rises in wage rates during the period. McKinney appealed, and the Court of Appeal found that the award of £10,000 could not be upheld as clause 27 of the main contract entitled Peak Construction to claim this from Liverpool Corporation right up until the time when the work was halted.
6.35 The fluctuations to be added to the contract sum in respect of named sub-contractors are the amounts resulting from the application of any fluctuations provisions identified in the sub-contract particulars of ICSub/NAM/C. These are also frozen once the sub-contractor is in a period of culpable delay. In addition, should the period in which the sub-contractor is to complete its work be extended on account of a default of the main contractor, the net amount of fluctuations resulting from the period of extension, although added to the monies due to the sub-contractor, is not added to the contract sum. In other words, although the main contractor must pay to the sub-contractor fluctuations for a period of delay which it has caused the sub-contractor, this amount is not reimbursed by the employer.