7 Sums properly due
7.1 DB16 is a lump sum contract, which means that all the work described in the contract documents, including completion of the design to meet the employer’s requirements, is to be carried out for the agreed sum, and there is no provision for any remeasurement. The contract sum, which is the tender figure accepted or agreed following negotiation, is entered in Article 2.
7.2 Although the employer may assume that the contract sum is ‘fixed’, in design and build procurement this is rarely the case in practice. Most forms of contract include provisions to deal with situations where the employer requires changes to the design, usually with heavy financial penalties. Additional provisions may be introduced to accommodate changing circumstances, such as disruption to the works or changes in statutory charges, which serve to reduce the considerable risk to the contractor of tendering a truly ‘fixed’ price and which would normally result in a high tender figure.
7.3 DB16 includes several provisions which provide for adjustment to the amount to be paid and refers, in Article 2, to the contract sum ‘or such other sum as becomes payable’. The provisions for adjustment are summarised in clause 4.2. It should be noted that the contract sum itself does not change and the provisions refer to adding or subtracting amounts from the contract sum to reach a revised figure.
7.4 There are many reasons why the amount finally payable may differ from the contract sum (Table 7.1). If the employer instructs a change to the employer’s requirements, then the
Table 7.1 Adjustments to the contract sum
amount payable will 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. Under the supplemental provisions, the contractor is encouraged to propose cost-saving and value-improvement measures, which may also result in a change (Supplemental Provision 7) and, if an amount is agreed following an acceleration quotation, then this is to be added to the contract sum. Fees or charges in respect of statutory matters for which no provision is made in the contract documents will require an adjustment to the contract sum. DB16, like most contracts, contains ‘fluctuations’ provisions allowing for adjustments in the event of changes in statutory charges or the market price of materials and labour. VAT is, of course, not included in the contract sum.
7.5 There will, therefore, almost inevitably need to be adjustments during the course of the contract. However, DB16 clause 4.1 makes it clear that the only alterations that may be made are those provided for in the terms. Any such amounts should be added or deducted as soon as they have been ascertained in whole or in part and included in the next interim payment (cl 4.3). There is no allowance for adjustments due to arithmetical errors in pricing made by the contractor.
Valuation of changes in the employer's requirements and provisional sum work
7.6 There are three mechanisms by which a change can be valued under the provisions of the contract. Clause 5.2 requires that all changes and all instructions relating to the expenditure of provisional sums are, unless agreed between the parties, valued using the ‘Valuation Rules’ in accordance with the provisions of clauses 5.4 to 5.7 (see paragraphs 7.14 to 7.16). The valuation would be made by the employer, although there would be nothing to prevent the contractor preparing an assessment. If the supplemental provisions are incorporated, the second mechanism is through the submission of contractor’s estimates (Schedule 2:2). In both cases, the valuation should include a sum in respect of any additional design work required by the instruction. Under Supplemental Provisions 7 and 8, the contractor is encouraged to propose changes (cost-saving and value-improvement measures, and environmental performance improvement measures). The value of any resultant change will be a matter for agreement between the parties.
Supplemental Provision 2: contractor's estimates
7.7 If Supplemental Provision 2 is incorporated, the contractor must, on receiving an instruction requiring a change, submit an estimate to the employer, unless the employer states otherwise in the instruction or informs the contractor within 14 days of the date of the instruction that such an estimate is not required, or unless the contractor makes reasonable objection to the provision of the estimate (Schedule 2:2.2). The estimate must be submitted to the employer within 14 days of the date of the instruction, or within any other period agreed or ‘as may be reasonable in all the circumstances’.
7.8 The estimate is to comprise (Schedule 2:2.3):
- the value of the change (with supporting calculations referring to the contract sum analysis);
- the additional resources required to comply;
- a method statement for compliance;
- the length of any extension of time required;
- the amount of any loss and/or expense required.
7.9 The contractor and employer are then required to ‘take all reasonable steps’ to agree those estimates. If they can agree, the agreement is binding on both parties and should be put in writing, but if they cannot agree, the employer can either instruct the change, which could be valued under the valuation rules (see below) or withdraw the instruction. In the second case, the contractor will be paid for any design work carried out in order to submit the estimate. Although the clauses do not say so, it would be possible to agree on only part of the estimate (e.g. the price) and determine the other parts using the normal procedures.
7.10 These provisions differ from the Schedule 2 provisions in SBC16 in that the estimate is automatic unless the employer indicates otherwise and the contractor is not paid for the cost of any estimate of a change which the employer does not implement, except that it would be paid for any design work (Schedule 2:2.5).
7.11 If the contractor fails to provide an estimate as required, the instruction will be dealt with under the provisions of clauses 2.23 to 2.26, 3.9 and 4.20, except that any addition to the contract sum will not be included until the final statement is prepared, and the
contractor will not be entitled to any financing charges as a result of compliance with the instruction.
Cost saving and value improvement
7.12 If Supplemental Provision 7 is incorporated, the contractor is encouraged to propose cost-saving and value-improvement measures. Any proposed measure should relate to the design and specification and/or to the programme, and should result in an immediate saving or a saving in the life-cycle costs of the project. Once the contractor has submitted a proposal with relevant details, the parties are required to negotiate with a view to agreeing its value and, if the negotiations are successful, the change and the cost saving are confirmed in an instruction.
7.13 Supplemental Provision 8 relates to environmental considerations. The contractor is encouraged to propose amendments to the works which, if implemented, would result in an improvement in environmental performance. The proposed measures are required to be ‘economically viable’, which could mean a saving (possibly in life-cycle costs) or could result in an addition to the contract sum. If agreed, the measures are instructed as a change.
Valuation under the valuation rules
Measurable work — contract sum analysis
7.14 Omissions are valued in accordance with the values in the contract sum analysis (cl 5.4.3). Additional work of ‘similar character’ to that in the contract sum analysis is valued according to prices stated in that document, even if those prices contain an error (Henry Boot Construction Ltd v Alstom Combined Cycles), with a fair allowance being made if the conditions change or the quantity changes significantly (cl 5.4.2). An example of dissimilar conditions might include the instructed work being carried out in winter, whereas under the contract sum analysis it had been assumed that 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.
Daywork — fair valuation
7.15 When considering work which is not of similar character to that in the contract sum analysis, the contract states that ‘a fair valuation shall be made’ (cl 5.4.2). Where the appropriate basis of a fair valuation is daywork, clause 5.5 sets out the rules to be followed in assessing the amount. Otherwise, it would, in the first instance, be up to the employer to determine. If the contractor and employer cannot reach agreement on a fair rate, and the dispute cannot be resolved amicably, then the matter must be resolved in adjudication.
7.16 Any valuation of omitted, additional or substituted work should make appropriate adjustment for the provision of site administration and temporary works (cl 5.4.4).
Reimbursement of direct loss and/or expense
7.17 The objective of clauses 4.19 to 4.23 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. Alternatively, the contractor may be able to claim for general damages for breach of contract at common law where the delay etc. is caused by a breach of contract, but this would need to be pursued through adjudication, arbitration or litigation (cl 4.23).
7.18 The contractor is entitled to be reimbursed for loss and/or expense incurred as a result of any occurrence of a ‘Relevant Matter’ set out in clause 4.21. The amount to be paid is determined under the procedure in clause 4.20 or under Supplemental Provisions 2 or 3 (Schedule 2), if incorporated (Figure 7.1).
7.19 Under clause 4.19, the employer is only obliged to compensate for direct loss and/or expense where the contractor has complied with the procedure set out in clause 4.20 (cl 4.19.1). This requires the contractor to make a written application, and to submit it promptly, i.e. ‘as soon as the likely effect of the 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 4.20.1). The notice is to be accompanied by, or followed by, an assessment of the losses already incurred and those likely to be incurred (cl 4.20.2). The contractor must keep the employer updated at monthly intervals until all information reasonably required and necessary for ascertaining the amount due has been supplied to the employer (cl 4.20.3).
Figure 7.1 Ascertainment of loss and/or expense (L/E)
7.20 The employer 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 4.20.4). 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 employer’s ascertainment.
7.21 The procedure is more detailed and contains stricter time limits than that in DB11. It ensures that the employer 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 the employer can take at an early stage to minimise the potential increase. It also ensures that the contractor is informed at an early date of any disagreement by the employer with the contractor’s assessment, and is updated on a regular basis as to any changes in that position.
7.22 Importantly, clause 4.19, as well as stating the contractor’s right to loss and expense, also states that the entitlement is ‘subject to compliance with the provisions of clause 4.20’. 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, as it is still arguable that in some circumstances the contractor might retain the right to claim this amount under common law (a right confirmed by clause 4.23), it may be sensible to agree that it should be dealt with under the contract, 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. The local authority 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, in fact, 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.
Alternative procedure using Supplemental Provision 2 estimate
7.23 Supplemental Provision 2 (Schedule 2), if incorporated, provides an alternative means of determining the loss and/or expense incurred as a result of a change instruction. Under this provision, if a change is required under an instruction, the contractor must submit an estimate of any consequential loss and/or expense before carrying out the instruction. If the estimate is accepted, then this becomes a binding agreement as to the amount to be paid in respect of that instruction, and no further claims can be made irrespective of the extent of losses suffered by the contractor. If the estimate cannot be agreed, then either the work can be instructed or the instruction withdrawn.
Alternative procedure using Supplemental Provision 3 estimate
7.24 Supplemental Provision 3 (Schedule 2) provides an alternative means of determining the amount of loss and/or expense to be paid as a result of any of the relevant matters cited in clause 4.21. If Supplemental Provision 3 is incorporated, then with each application for an interim payment the contractor must submit an assessment of the loss and/or expense incurred during the preceding period. For example, where an application for payment for September is made in early October, it should include the amount of direct loss and/or expense suffered in August. Any loss and/or expense which has been, or is being, dealt with under Supplemental Provision 2 should not be included in the application, as a binding agreement on this will have already been reached.
7.25 The employer must, within 21 days of the estimate (Schedule 2:3.4), give notice to the contractor that it either accepts the estimate, or that it wishes to negotiate an agreement on the amount (and, if no agreement is reached, refer the matter to arbitration or legal proceedings), or that the provisions of clause 4.20 as set out above will apply. During these 21 days, the employer may request further information, but may not use this as a means of delaying a decision.
7.26 If the estimate is accepted or agreed, the amount is added to the contract sum and no further amounts can be claimed for losses during that period. In other words, the loss and/ or expense are finally determined for that period, in contrast to the clause 4.20 provisions, where the amount could be re-assessed following the provision of further information from the contractor. If the amount cannot be agreed, then the employer can either waive the requirement in Supplemental Provision 3.2, so that the matter can be dealt with under clause 4.20, or refer the matter to adjudication.
7.27 For subsequent payments, the contractor must submit estimates of any additional loss and/or expense incurred during the immediately preceding period. Each period is treated discretely, and the contractor cannot, in any application, revise any amount claimed in respect of a previous period.
7.28 If the contractor fails to submit an estimate as required by the provisions, then the ascertainment is dealt with under clause 4.20, and is not added to the contract sum until the final payment. When this applies, the contractor may not claim financing charges for the period between when the loss was incurred and the final payment. The provisions in Supplemental Provision 3 provide a sensible method of resolving the issues of loss and/ or expense as the project proceeds, although the penalties on the contractor for noncompliance are quite severe (Schedule 2:3.6).
Matters for which loss and expense can be claimed
7.29 Claims under clause 4.19 can only be made for loss and expense suffered through deferment of possession, or the relevant matters listed in clause 4.21 which, it should be noted, include delay in the receipt of planning and other approvals. Other losses are irrecoverable under the contract, although disputed claims may be referred to adjudication, arbitration or litigation. The matters listed in clause 4.21 are concerned with situations where the loss or expense is attributable to 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 2.26. It should be noted that costs and expenses resulting from the contractor exercising its right to suspend work under clause 4.11 are not dealt with under clause 4.20, but treated separately (see paragraph 8.37).
7.30 Clause 4.19 refers to regular progress of the works being ‘materially affected’ by the relevant event. The phrase ‘regular progress of the Works or any part of them has been or is likely to be materially affected’ allows a claim for disruption not anticipated when tendering. 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.
7.31 In ascertaining the loss and expense, the contractor or employer must determine what has actually been suffered. The sums that can be awarded may include any loss or expense that has arisen directly as the result of the ‘matter’. The loss and expense award is, in effect, an award of damages. Its assessment should be made on the same principles as those a court would adopt when awarding damages for breach of contract. In broad terms, the object of the award is to return the contractor to the position in which it would have been but for the disturbance. The contractor should 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.
7.32 The following are items which may be included in the award:
- increased preliminaries;
- overheads;
- loss of profit;
- uneconomic working;
- increases due to inflation;
- interest or finance charges.
7.33 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 5.4 must be avoided). Prolongation costs, such as on-site overheads, would normally only be claimable for periods following the original completion date. (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).
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 ‘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 sums 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.
7.34 The contractor would normally provide full details and particulars of all items concerned with the alleged loss and/or expense. These should identify which of the losses claimed relate to each of the ‘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 effects of a number of causes. This 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 4.21 and not caused by the contractor.
7.35 Formulae such as the ‘Hudson’ or ‘Emden’ formulae are sometimes used to estimate head office overheads and profit, which may be difficult to substantiate. Such formulae can be used only where 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, for example 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 that a check is made that the assumptions on which the formula is based are appropriate.
7.36 Although direct loss and/or expense are matters of money and not time, which are quite separate issues, there is often a practical correlation in the case of prolongation. Any general implication that there is a link would be incorrect and, in principle, disruption claims and claims for 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 5.33).
7.37 Applications by or claims from the contractor made under the contract must be dealt with according to the procedures contained in the contract. Failure correctly to ascertain an amount properly due could leave the employer liable in damages for breach of contract (Croudace v London Borough of Lambeth).
Croudace Ltd v 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 architect was Lambeth’s chief architect and the quantity surveyor was its chief quantity surveyor. The architect delegated his duties to a private firm of architects. Croudace alleged that there had been delays and that they 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 the appointment of a successor 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.
Fluctuations
7.38 In some projects it may be advantageous 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, pricing with 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.
7.39 In DB16 the default fluctuations provisions are set out in Schedule 7, which allows for contribution, levy and tax fluctuations (Option A). The traditional full fluctuations in labour and materials (Option B) and the use of price adjustment formulae (Option C) are no longer included in the contract, but are available from the JCT website, and are referred to in the form. The contract particulars (cl. 4.2, 4.12 and 4.13) set out the three options; if no selection is made then Option A (i.e. so-called ‘fixed price’) applies.
7.40 Option A provides for full recovery of all fluctuations in the rates of contributions, levies and taxes on 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. However, contractors have pointed out that many less obvious increases are not included, therefore a ‘percentage addition’ is made to allow for these. The agreed percentage is entered in the contract particulars. Option C allows for adjustment based on the use of formulae: it does not necessarily take account of the actual costs, but is relatively simple to operate, and is generally considered by contractors to be a fair adjustment. 7.41 Where a contract includes recovery for fluctuations, they will, in the absence of anything to the contrary, 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 so-called ‘freezing’ provision in DB16 (paragraphs A.9, B.10 and C.6), but this depends on the text of clauses 2.23 to 2.26 being left unamended and all notices of delay being properly dealt with by the employer.
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 of 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.