Quantum wordbite: costs to complete – key considerations

Introduction

In this informal #wordbite I consider the retrospective quantification of costs to complete following a main contractor's abandonment of the work.

Let’s assume:

  1. The main contractor is responsible for the events that gave rise to the abandonment, and the employer is entitled to the extra over cost it has incurred to complete the work;
  2. The contract requires a valuation of the work performed at the time of abandonment based on the value of that work in the contract sum (including profit); and
  3. The contract requires the cost to complete to be valued based on actual costs.

Entitlement

Entitlement is the right to claim or recover something (typically cost or relief). It is the interpretation of the contract and/or the law rather than cause and value. Entitlement is a matter for the instructing lawyer and the tribunal. Unless instructed to do so, a quantity surveyor should leave entitlement to those best placed to consider it[1].

Approach

The correct approach to the valuation of costs to complete in this hypothetical scenario is to identify the difference between the value of the main contractor’s remaining scope of work at the time of abandonment, and the actual cost the employer incurs to complete the remaining scope of work. The difference is the extra over cost to complete.

Value of Work Completed

Where the contract prescribes interim progress claims, the logical starting point is often the most recent payment certificate (being the agreed amount for the work at that time). The value of work performed in the time following the data date of the progress claim is then added to the value of agreed work, along with the value of materials on site not in-situ (assuming they are not removed by the main contractor).

Key Considerations:

  1. Value is different to payment, and they are often confused in the construction industry. An appropriate value (including profit as applicable) may be different to the amount that has been paid to the main contractor; and
  2. Preliminaries are often included in a contract pricing schedule as a lump sum. Payment is typically made on an interim basis, either as a percentage of the works completed in the period or a fixed monthly amount for the duration of the project. Where the work is claimed as a fixed monthly amount, consideration should be given to the value of progress earning work performed to the date of abandonment and the preliminaries required for that work. If preliminaries were claimed based on time rather than synonymous with the progress of the work, a risk of overpayment arises, particularly if the project was in delay at the time of abandonment.

The Costs to Complete

In a previous article, I proposed three tests which seem to me to be the logical framework within which an actual cost quantification should commence[2].

For costs to complete, these are:

  1. Are the costs claimed for replacement contractor(s) relatable and attributable to the original (main) contractor’s scope;
  2. Has the employer incurred the cost it claims; and
  3. Are the costs claimed by the employer reasonable. The assessment of reasonableness often involves benchmarking against market rates. A "market rate" is specific to the project circumstances, location, industry dynamics, and prevailing supply and demand factors. Where the assessment is time distant from the event, it seems to me that the actual costs incurred are, absent some particular reason, often the best and most reliable measure of ascertaining reasonableness.

Key Considerations

  1. If the employer instructs the replacement contractor(s) to perform additional work, and that work would have been instructed to the main contractor if it had not abandoned the project, the value of the addition should be added to the main contractor’s contract sum. If it is not, the extra over costs to complete are likely to be overstated;
  2. If the employer instructs the replacement contractor(s) to omit scope, or the employer simply does not instruct work that was in the original contractor’s scope, the value of the omission should be deducted from the main contractor’s contract sum. If it is not, the extra over costs to complete are likely to be understated;
  3. If the costs to complete include employer supplied/free issue items that were in the original contractor’s scope of work, the scope is simply transferred from contractor to client supply. The costs are not added or omitted;
  4. If the scope of a provisional sum item is not performed at the time of the abandonment (in full or in part), and the scope of the item is later reduced or omitted, the value of the omitted scope should be deducted from the main contractor’s contract sum. If it is not, the extra over costs to complete may be understated; and
  5. Records on projects are almost never perfect, and ordinary common sense and experience must be applied to reviewing and interpreting those records.

Conclusion

The proper allocation of costs in disputes of quantum is critical for establishing recovery. It is essential that a quantity surveyor has the knowledge and skills to allocate costs appropriately.

The correct approach to valuation is driven by the terms of the contract and the circumstances. The quantity surveyor should consider the circumstances as they relate to each claim.

Please reach out if you would like to discuss his or any other valuation principle in more detail.



[1] Reference

[2] Reference


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