Quantum wordbite: the valuation of actual cost claims

My objective in this informal wordbite is to identify and describe three tests which seem to me to be the logical starting point for the appraiser of construction cost claims. In my experience, the appraiser is typically drawn from the quantity surveying profession.

The proper allocation of costs in disputes of quantum is crucial for establishing recovery. It is essential that the quantity surveyor has the knowledge and skills to allocate costs appropriately. To my mind, these skills are both technical construction expertise and the adept handling of relevant financial data.

Whilst consideration should always be given to the terms of the contract, proof of causation is usually essential in all cost claims. Thus, the umbrella under which the three tests sit is a "but for" analysis, which seeks to establish the nexus between cause and effect. It establishes whether the cost would have arisen in the absence of the claimed event.

I set out below the three tests that I consider to be the logical framework within which an actual cost quantification should commence. It seems clear to me that they are applicable for many different types of actual cost claim, including those which seek recovery for defect rectification, components of the contract, termination related claims, and delay and disruption claims. The expertise of the quantity surveyor charged with the assessment of the claim rests in the application of the three tests. It is not a one size fits all model.

Test 1:

This test examines the extent to which the sums claimed are attributable to the matters relied on by the Claimant. The test considers the allocation of costs, causation, cost nature (one-off, time-based, volume-related), costs in any event and other similar factors.

Test 2:

This test is the requirement to verify that the Claimant has incurred the cost it claims. The analysis involves assessing invoices, outputs from the Claimant’s accounting system, bank remittances and other similar contemporaneous documents.

Test 3:

This test considers if the costs claimed by the Claimant are reasonable. Consideration ought to be given to the nature and type of the procurement process, terms under which costs were incurred, potential duplications or double-counting and the other similar factors. The assessment of reasonableness often involves benchmarking against market rates. The concept of 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.

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 this or any other valuation principle in more detail.

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