The second part of this series examines the alternative procedures for the valuation of provisional sums that exist in many of the JCT standard forms. One option is that the contractor may be asked to provide a value, including the effect on time, for agreement with the employer before the work is executed. This is known as a contractor’s ‘Schedule 2 Quotation’. The alternative is for the work to be valued in accordance with the Valuation Rules.
This approach applies when the architect/contract administrator requests that the contractor provides a quotation.
The contractor may notify the architect/contract administrator, within a defined time period, identifying disagreement with the approach of producing a quotation. The contractor is then not obliged to proceed unless instructed further, in which case the variation will be valued by the quantity surveyor in accordance with the Valuation Rules.
A reason for the contractor refusing to provide a quotation could be that there is insufficient information to provide a lump sum and take the financial and/or time risks of invoking the change. For example, a lack of design information, inability to access the affected area, unknown ground conditions etc.
Schedule 2 of the Conditions provides a detailed procedure for the submission and acceptance of a quotation. The key issues for inclusion and consideration in a quotation are:
- sufficient information must be provided to the contractor to enable preparation of a quotation;
- prescriptive time periods exist for the preparation and acceptance of a quotation;
- the quotation must include the value of the varied work and the effects on any other work;
- supporting calculations should be submitted, with appropriate reference to the Valuation Rules;
- any requirements for an Extension of Time;
- any amounts to be paid in lieu of ascertaining Loss & Expense;
- a fair and reasonable amount in respect of the cost of preparing the quotation should be included. This fair and reasonable amount is to be paid even if the quotation is not accepted;
- method statements and resource requirements should be included if asked for by the instruction to provide the quotation.
The Valuation Rules are set out in the Contract Conditions and reflect a sliding scale of options, based on how closely the varied work resembles work that is part of the Contract Documents.
The RICS ‘Valuing Change’ Guidance Note (1st edition) looks in more detail at the Valuation Rules and the practical application of these general principles:
1. Similar Character
Where work is of similar ‘character’ to work in the original Contract Documents then the valuation of the Variation shall be consistent with rates, prices or amounts for work in the Priced Document, which could be a bill of quantities or a schedule of rates. The valuation shall include a ‘fair allowance’ to reflect any change in conditions or change to the quantity of work carried out. It should also make appropriate allowance for any addition to or reduction of preliminary items.
The application of these various factors is sometimes referred to as ‘re-rating’ or ‘star rating’. These rules apply to all rates, even those that a contractor may have over or under priced at tender stage. There are many quite complex issues to deal with when valuing a variation and these are considered below.
- The character of an item of work is what distinguishes it from other, possibly similar, specifications of work. An example of this could be in the specification of finishes such as joinery or stonework. A piece of stone may be bedded in the same material and attract the same labours in terms of cutting and grouting, but the specification of the material itself will effect cost greatly. Joinery is the same. A carpenter may take more time to hang a hardwood door then a softwood door and the material itself will be more expensive. These operations may be carried out under the same conditions but the character means that the rates are not relevant and need to be adjusted.
- The stage at which work is programmed into the contract period will affect the cost of execution. This could be due to the timing in the year, such as carrying out groundworks in winter as opposed to summer, or constraints due impinged access or productivity impacts such as completing cladding works once scaffolding has been struck.
- At tender stage, the contractor will assess the economies of scale that can be achieved by carrying out the quantity of work indicated in the Contract Documents. The estimator will make judgments such as procurement volume discounts, labour gang efficiencies and supervision ratios. If these quantities change, up or down, then these factors need to be revisited and adjusted. There should not automatically be a rate adjustment if the quantity of work changes and these, or other, factors need to be considered relative to the particular operation in question.
- It is usual for a contractor to prepare a bill of preliminaries for a project, which should follow the structure of the Standard Method of Measurement/New Rules of Measurement (NRM). These preliminary resources may include site accommodation and set up, staff, scaffolding and access equipment, craneage, power, and many other items that are not included in rates for work items. It is necessary to review these resources for each variation to assess if allowances are due to be made (in addition or omission) to cater for the impacts on the contractor’s preliminaries by execution of the change. It is not the case that adjustments should be made automatically, and in fact the conditions state ‘where appropriate’. The contractor is not required to evidence his other cost in connection with additional preliminaries (these are value based adjustments to contract rates as opposed to ascertainment of costs or losses) but there should be evidence provided of additional resources being used, such as prolonged use of staff, additional staff, additional or prolonged attendant labour, plant, access equipment etc. The contractor should be prepared to demonstrate where costs are fixed (a single one-off cost) or time related (where the costs vary with time, such as rental, maintenance and the like). Increased preliminaries due to the cumulative effect of multiple changes is most likely to be dealt with as Loss & Expense.
2. Fair Rates and Prices
In instances where work is not of a similar character then it should be valued at ‘fair rates and prices’. The requirements of this form of valuation are open to debate and interpretation. Case law does not provide a definitive position. For the purposes of this guidance note it is assumed that the terms ‘fair rates and prices’ and ‘fair valuation’ are the same.
This is a method of valuing additional or substituted work which cannot properly be valued by measurement. Records, or vouchers, need to be prepared by the contractor recording the labour, plant and materials used in the operation. These records are to be submitted to the architect/contract administrator for verification.
The valuation of work on daywork is made by using the verified records and applying rates derived by reference to the ‘Definition of Prime Cost of Daywork carried out under a Building Contract’ current at the Base Date, together with the percentage definitions set out in the Priced Document. Examples of daywork activities could be opening up works for inspection, testing operations, repair of damage etc. It is intended for short duration, limited scope activities.
Significant works, or works of a prolonged duration, should be capable of valuation by measurement, either using a contract rate as a basis or preparing a new rate based on fair rates and prices. Daywork is a last resort basis of valuing works and care should be taken that a daywork valuation is not covering the payment of resources that are already being recovered via the valuation of other variations or Loss & Expense.
4. Contractor’s Designed Portion
The valuation of changes to the CDP works broadly follows the same process as other works under the contract. There are, however, some key points to highlight:
- Allowance is to be made for the addition or omission of design work. This is likely to be professional fees from consultants engaged by the contractor, or fees from specialist sub-contractors.
- The CDP analysis is used as the basis for determining the contract baseline, upon which allowances should be made for changes of condition, character, etc. It is not uncommon for a CDP analysis to be a summary level breakdown or a series of lump sums. This is obviously of little use for valuing changes and it is therefore necessary to include as much pricing information as possible into the CDP analysis. This would normally include a schedule of rates, possibly quantified, which details the most common items as a minimum.
5. Change of Conditions for Other Work
The conditions state that where there is a substantial change in the conditions under which other work is executed, then that other work shall be treated as if it had been the subject of a variation instruction. It is likely from the use of the word ‘substantial’ that it is not intended that this provision should by operated regularly. Substantial is a subjective term and this clause, like any other provision of a contract, should be operated fairly.
An example of such an instance could be a change in ceiling design having a serious effect on the way the mechanical and electrical services installation is installed and commissioned, or some additional external drainage work impacting on the method of supporting scaffolding for cladding works. Where a substantial change of conditions has occurred then those effects on other work can be valued as well, in accordance with the Valuation Rules.
6. Additional Provisions
Where a valuation does not relate to carrying out additional or substituted work, or the omission of work, or where the Valuation Rules cannot effectively deal with the valuation of a variation, then a fair valuation shall be made. These provisions provide a very wide authority to the effects of change to be valued as part of a variation. If used properly, then there is likely to be less need to invoke the Loss & Expense provisions of the contract. When valuing work on a fair basis it is necessary to understand how the contractor’s costs are generated.
The contractor will employ a series of resources, some directly engaged such as labour, plant, materials, staff and other preliminaries, while other resources are provided by sub-contractors. The contractor will have limited choices as to how to execute work imposed by a variation. In many cases the contractor will be in breach of his or her subcontracting arrangements if the contractor brings in other companies to do substituted works. It is also not desirable, from a management and programming perspective, to introduce additional trades or companies into the supply chain unless absolutely essential. These constraints mean that the contractor’s cost for executing a variation are, in reality, quite fixed.
A ‘fair valuation’ or one based on ‘fair rates and prices’ should therefore be cognisant of the contractor’s cost of carrying out the works. Where new resources are brought to the how these are procured, then it is not unreasonable to expect the contractor to demonstrate market competitiveness (where this does not cause delay to the execution of the variation). Where existing resources are used, either directly or via existing sub-contracting arrangements, then the valuation should reflect these costs. An allowance should be made for the contractor’s overheads and profit as part of any ‘fair valuation’ or computation of ‘fair rates and prices’. Any costs associated with putting right defective work should not be included in any valuation.
The third and final part of this series considers other case law related to provisional sums, including whether an employer who decides to omit provisional sum work and appoints another contractor to complete this item could, in theory, be faced with a breach of contract claim.