contract admin final accounts and reports

Contents

Aim

Learning outcomes

1. Financial reports

2. Final accounts 2.1 Deductions 2.2 Additions 2.3 Variations 2.4 Adjustment of prime cost sums 2.5 Provisional sums and quantities 2.6 Fluctuations 2.7 Loss and expense claims 2.8 Other forms

Appendix A: Calculation of retention

Appendix B: ICE Form

© The College of Estate Management 2001

Paper 1448V3-1

Contract administration: final accounts and reports

Contract administration: final accounts and reports Paper 1448

Aim This paper considers the preparation of final accounts and other periodic financial reports as a part of the contract administration process.

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

Explain the function of periodic financial reports

Explain how a typical final account might be prepared for a construction project.


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

The essence of control is the frequent and regular reporting 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 thus make the employer aware of his prospective 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 provide him with information on proposed instructions and other matters that affect the contract financially as soon as such matters become known and, preferably, before the instructions are issued to the contractor. The quantity surveyor should also keep in touch with the contractor so that he may have early warning of any changes that originate from that quarter.

Many of the disputes which arise on building contracts could be avoided by better communications and the adoption of formalised procedures for the regular reporting on the physical and financial state of the work. The quantity surveyor’s contribution would be the preparation of financial statements in the form of 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 may, at any time, be given an up-to-date picture of the financial state of the contract.

It is recommended that financial statements should be sent to the architect for comment before forwarding to the client. It will often be necessary to send a covering letter giving an explanation of any items which are in doubt, eg the amount of future claims from the contractor.


The post-contract services provided by the quantity surveyor will vary according to the type of contract, ie whether it is lump sum, measurement or cost reimbursement.

Before commencing 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. He will also need a true copy of the priced bills of quantities and of the drawings and dimensions from which the bills were prepared. A copy of the contractor’s construction programme would also be useful where the quantity surveyor 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


2 Final accounts JCT98 requires the quantity surveyor to prepare a statement of all the adjustments to be made to the contract sum (the Final Account), including those relating to the work of nominated subcontractors, within the period of final measurement and valuation (subject to having received all necessary documents from the contractor).

Other forms (eg ICE form) require the contractor to prepare the final account for checking by the Engineer.

When preparing the final account, the provisions of Clause 14 should be strictly observed, ie the contract sum shall not be adjusted or altered in any way whatsoever otherwise than in accordance with the express provisions of the contract.

Before beginning the measurement and valuation it will be necessary to collect and cross-reference all the source documents which, in addition to those mentioned earlier for interim valuations, will include architect’s instructions, copies of minutes of site meetings, daywork sheets, wages sheets and materials invoices for conventional fluctuations and nominated subcontractors’ and suppliers’ accounts. It is also helpful to establish the final format of the account and so provide a framework within which to organise the measurements.

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

FINAL ACCOUNT Office block

The full list of items which should be considered is given in Clause 30.6 as follows:

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

Day works 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


2.1 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 (22A.2) defects in nominated subcontract work (35.18.1.2 or 35.24.6).

Provisional sums and quantities.

Variations – omissions.

Fluctuations – amounts allowable to employer.

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

2.2 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 (6.2) setting out (7) inspections and tests (8.3) royalties (9.2) defects, etc (17.2 and 3) insurance (21 .2.3)

Variations – additions

Value of work executed in respect of provisional sums and quantities

Loss and expense payments (26.1 and 34.3)

Fluctuations – 38, 39 or 40

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.

2.3 Variations These may be the subject of Clause 13.A quotations or Clause 13 Alternative A. Price Statements which have been accepted, or those which need to be measured and valued according to Clause 13.5.

In accordance with Clause 13.6 the quantity surveyor must give the contractor an opportunity to be present when he is measuring the work and usually the prices to be charged would also be discussed at the meeting. However, failing agreement, the quantity surveyor must use his own judgement in fixing prices and 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 in regard to oral instructions. The only exceptions would be changes which under the JCT Form are ‘deemed to be variations’, eg errors in bills of quantities and work arising under clauses 22B or 22C in reinstating damaged work. These do not require any authorising instruction although the contractor may be under an obligation to give notice before proceeding with the work. Thus 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 and only if the architect fails to issue an instruction within seven days may he proceed with the work and recover any additional cost as a ‘deemed variation’.

Difficulties sometimes arise where an over-enthusiastic clerk of works exceeds his authority and orders changes which involve additional cost to the contractor. Such disputes can be avoided quite easily by drawing the contractor’s attention to the provisions of Clause 12 at the initial site meeting. The architect may, of course, ‘sanction in writing any variation made by the contractor otherwise than pursuant to an instruction of the architect’ under Clause 13.2. But this power is entirely discretionary and would usually be restricted to such cases as emergency work undertaken by the contractor on his own initiative in the interests of safety.

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

The Job Book produced by the Aqua Group and published by Blackwells may be found useful in providing in tabulated form a complete record of all site visits and the subsequent actions taken by the architect and the quantity surveyor.

It is assumed that, at this stage in your career, you will have had practical experience in measuring and producing bills of variations and will require little instruction in this particular aspect of quantity surveying. Suffice it to say 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 will be found 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 purposes. To avoid any possibility of 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 upon whether or not the varied work is of a similar character and executed under similar conditions to work in the contract bills and whether or not it is capable of being measured, as illustrated in Figure 2.


In the case of daywork, Clause 13.5 provides that the contractor is to be 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 NFBTE (now 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 is required to submit vouchers specifying the workmen’s names, the time spent daily on the work and the plant and materials used for verification by the architect or clerk of works not later than the end of the week following that in which the work was carried out. 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 the following factors should be considered:

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 were those current at the time the work was carried out. Also 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 were 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.

2.4 Adjustment of prime cost sums The amounts paid or payable by the contractor to nominated subcontractors and suppliers are set against the PC sums included in the bill and the contractor’s profit 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. Thus if the amount payable is in excess of the PC sum solely because of better quality materials, and no additional attendance is called for, there would 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.

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


The invoices should be checked to ensure that any trade discounts have been deducted and that the cash discounts are as permitted, ie 2½ percent for nominated subcontractors and 5 percent for nominated suppliers. Clause 17.1 of NSC/4 provides for the valuation of variations to the subcontract work to be determined by the quantity surveyor under the main contract. The process would be similar to that adopted for valuing the main contractor’s variations but some subcontractors attach a schedule of priced items to their tender and this would form the basis of any re-measurement rather than the SMM. Fluctuations would also be dealt with in the same way as under the main contract but where the formula method of price adjustment is adopted it would be necessary to use the specialist indices where appropriate.

2.5 Provisional sums and quantities Such sums are included for work which cannot be entirely foreseen at the time of tendering. They are also referred to in the JCT Form in connection with local authority and statutory fees (6.2.3) and insurance of employer’s liabilities (21.2.1). The architect is required to issue instructions regarding the expenditure of provisional sums and where the work is carried out by the contractor it is valued in accordance with 13.5 with the possibility of extra loss and/or expense under 26.2.7.

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

It has been suggested that the term ‘provisional sum’ is a corruption of the old specification phrase ‘provide the sum of £ . . .’. It is therefore not provisional in the usual sense of the word but connotes work which can be identified but which is of uncertain scope and may be executed by either the main contractor or a nominated subcontractor.

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 in that if the actual quantity is radically different from the provisional quantity, the rate may be inappropriate and unless it is treated as a variation there is no machinery for substituting a new rate.

It should be noted that under the ICE Form all the quantities are provisional and subject to re-measurement but there is provision for adjusting the rates if there is a substantial difference between the actual and estimated quantities.

2.6 Fluctuations The method of determining the amount of fluctuations has been dealt with earlier under ‘interim certificates’, the reason being 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.


2.7 Loss and expense claims The assessment of loss and expense claims is dealt with in detail in Paper 0259.

2.8 Other forms Under the ICE Form the contractor is to 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 of all the information reasonably necessary for its verification, the engineer shall issue a final certificate stating the balance due to the contractor. Such balance shall be paid to (or by) the contractor within twenty days of the date of the certificate.

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

The adjustments provided for in the ICE Form are tabulated in Appendix B.


Appendix A Calculation of Retention

CONTRACT Office Block VALUATION No /2

MAIN CONTRACTOR A Build & Co SITE DATE 6/7/71

ISSUE DATE 7/7/81

Clause Additions Valuation

Amounts subject to retention £

Total value of:

30.2.1.1 & 5 Work properly executed by contractor 97 000

30.2.1.2 Materials and goods on site 3 000

30.2.1.3 Materials and goods off site –

30.2.1.4 Work properly executed by nominated subcontractors inc. their materials

55 000

Total of amounts subject to retention £155 000

Amounts not subject to retention

30.2.2.1 Amounts to be included under 6.2, 7, 8.3, 9.2, 17.2,17.3 & 21.2.3

–

30.2.2.2 Amounts ascertained under 26.1 or 34.3 –

30.2.2.3 Amount of final payment to nominated subcontractor under 35.17

–

30.2.2.4 Fluctuations payable to contractor under 38 or 39

–

30.2.2.5 Fluctuations and other amounts payable to nominated subcontractors

–

£155 000

Deductions

Amounts not subject to retention

30.2.3.1 Fluctuations allowable by contractor under 38 or 39 –

30.2.3.2 Fluctuations allowable by nominated subcontractors –

Total deductions – –

GROSS VALUATION £155 000

Less

30.2 Retention (from calculation overleaf) 6 750

30.2Total amount stated as due in interim certificates previously issued

127 000 133 750

AMOUNT DUE £ 21 250


Appendix A (continued)

CALCULATION OF RETENTION

Amount

£

Percentage retained

%

Retention

£

Total of amounts subject to retention from overleaf 155 000

Less Amount for work which has reached practical completion and for which a certificate of completion of making good defects has been issued (not subject to retention) – Nil –

155 000

Less Amount for work which has reached practical completion but for which a certificate of completion of making good defects under Clause 17.4 or a certificate under Clause 18.1.3 or an interim certificate under Clause 35.17 has not been issued (subject to half retention) 40 000 2½% 1 000

Balance (subject to full retention) 115 000 5% 5 750

TOTAL RETENTION £6 750

Work which has reached practical completion but defects not made good

Tanking basement 5 000

Steelwork 35 000

£40 000


Appendix A (continued)


Appendix B ICE Form

Adjustments to contract price

Clause Contingency A = Addition D = Deduction

Procedure

7 * Failure to issue drawings or instructions requested by the contractor and considered necessary by the engineer at a time reasonable in all the circumstances

A Contractor to give adequate notice in writing of further drawings required

12 * Adverse physical conditions (other than weather conditions) and artificial obstructions which could not reasonably have been foreseen by an experienced contractor

A Contractor to give notice specifying the conditions, anticipated effect and measures proposed. Following receipt of notice, engineer may

a. require estimate of cost of proposed measures

b. approve such measures with or without modification

c. give written instructions as to how the conditions are to be dealt with

d. order a suspension

To the extent that the conditions couldnot reasonably have been foreseen the engineer shall allow:

a. reasonable cost of additional work and additional plant

b. reasonable % for profit

c. reasonable cost of any delay or disruption

13 * Engineer’s instructions or directions which cause delay or disruption

A

14 * Engineer’s consent to proposed method of construction unreasonably delayed or any limitations imposed by design criteria which could not reasonably have been foreseen by an experienced contractor at the time of tender

A

17 Rectification of setting out errors due to incorrect data supplied by engineer

A

20 Making good damage arising from excepted risks, ie riot, war, rebellion etc

26 Payment of fees under any Act of Parliament, regulation or by-law and rates and taxes in respect of site or anything erected thereon


Appendix B: ICE Form (continued)



Procedure

30 Damage to bridges and highways provided contractor has used every reasonable means to prevent them being subjected to extraordinary traffic and has selected suitable routes

A Contractor to notify engineer as soon as he becomes aware of such damage or as soon as he receives any claim

31 * Facilities afforded to other contractors causing delay or extra cost beyond that reasonably to be foreseen by an experienced contractor

A

32 Expense involved in complying with engineer’s orders in respect of removal and protection of fossils, etc

A

36 Cost of tests not provided for in the contract borne by employer if results show work to be in accordance with contract

A

38 Costs of uncovering work which was left open for a reasonable time for the engineer to examine borne by employer if revealed that work is in accordance with contract

A

40 * Extra cost flowing from suspension except where

a. provided for in contract

b. necessary by reason of weather conditions or contractor’s default

c. necessary for the proper execution of the work or for safety reasons

A If suspension lasts for more than 3 months contractor may serve written notice on the engineer requiring permission to proceed and if permission is not granted within 28 days the contractor may by further written notice elect to treat it as an abandonment of the contract by the employer

42 * Delay in giving possession of site A

49 Making good defects which are not due to use of materials or workman- ship but in accordance with contract or to any neglect or failure of the contractor

A

50 Searches, tests, trials, etc to determine cause of any defect

A/D Cost borne by employer if contractor not liable; otherwise by contractor

52 Variations – bill prices for work of similar character executed under similar conditions or pro-rata prices or a fair valuation or daywork

A/D If the contractor intends to claim a higher rate than one notified to him bythe engineer he is to give notice to the engineer within 28 days

55/56 Errors or omissions in bills corrected and value of work actually carried out ascertained. If the actual quantities are substantially different from those stated the engineer, after consultation with contractor, shall determine an appropriate increase or decrease of any rate rendered unreasonable or inapplicable

A/D Engineer to give reasonable notice to contractor when work is being measured so that he may send a qualified agent to assist. If he fails to send anyone the measurements made by the engineer shall be taken to be the correct measurements


Appendix B: ICE Form (continued)



Procedure

59 * Costs consequent upon engineer’s direction to employ an ‘unwilling’ subcontractor

A

59 Adjustment of PC sums for nominated subcontractor’s work and materials according to actual price paid with pro-rata adjustment to profit

A/D Contractor to produce all invoices, etc

59 * Extra cost occasioned by forfeiture of a subcontract where with the consent of the employer, by a direction of the engineer, or if given without the employer’s consent in circumstances which entitle the contractor to give such notice

A Contractor is under an obligation to recover such losses, so far as possible from the subcontractor

60(6) Interest on overdue payments – 2% plus bank rate

A

62 Urgent repairs consequent on any accident or failure – if on default of contractor employer engages others to do work cost deducted from contract sum if work which contractor was liable to do at his own expense

65 War clause – procedures for determination and settlement of account in event of war

69 Tax matters – adjustments for changes in level of labour taxes

A/D

Contract price fluctuations – separate optional clause describing formula method of adjusting for price fluctuations

* These items are subject to the claims procedures laid down in 52(4). These provide:

a. if contractor intends to claim any additional payment, he shall give written notice within a reasonable time after the event giving rise to the claim and keep contemporary supporting records

b. within a reasonable time of the notice contractor to send the engineer a first interim account and thereafter further accounts at such intervals as the engineer may reasonably require

c. if contractor fails to comply with provisions, eg not keeping contemporary records, only entitled to payment to the extent that the engineer has not been prevented from or substantially prejudiced by such failure in investigating the claim.

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