Andrew Hemsley - Wrong contract rates are a classic construction conundrum, to which the courts have provided a beautifully simple answer. So everyone should learn it
IF YOU ARE AS OLD AS ME, YOU WILL REMEMBER those old “Teach Yourself” books. They were yellow and black, and told you all you needed to know about a subject in the space of a hundred or so pages. Picture yellow and black in your mind as we learn how to value variations under a contract (or at least one aspect of this subject) at an even faster pace than “Teach Yourself”.
The first question is: what happens when the contract rates are too high or low?
If you are a quantity surveyor, you will have been here at some time in your career. Somehow, the contractor has priced an item in the bills at a rate that is fundamentally wrong. Nobody spotted it, and negotiations get a bit heated when a variation is instructed which increases the quantity of the item in question. If the rate is way too high, the QS may feel that applying it to extra work would be unfair to the client. If it is way too low, the contractor will lose money and therefore feel aggrieved.
The answer to this question has been around for a while. The strange thing is that not everyone seems to know it.
The case of Henry Boot Construction vs Alstom Combined Cycles solved this back in 1999. The facts were that Alstom had employed Henry Boot to carry out civil engineering work on a power station under an ICE 6th edition form of contract. Because of a mix-up, the contractor’s rates for temporary steel sheet piling were effectively twice what they should have been. When a variation order was issued to add more sheet piling, the contractor argued that the rates were contract rates and should apply. The employer contended that the contract rate should be disregarded because of the error and that a fair valuation should be made.
The case ended up in the courts. You can go and look out the 14,000 word judgment if you want. But in line with the “Teach Yourself” philosophy, I will extract the relevant parts of the judgment for you.
Where the work is of similar character and executed under similar conditions to work priced in the bill of quantities, the contract rates will apply. The fact that they are too high or low is irrelevant. The parties to the contract have agreed in the contract that they will be used to value variations.
I can feel QSs reaching for the escape clause and trying to show the work is not of similar character. Don’t try too hard
I can feel QSs reaching for the escape clause and trying to show that the work is not of similar character and executed under similar conditions. Don’t try too hard. In Boot vs Alstom, it was held that piling rates from one area of the site applied to additional piling instructed elsewhere.
The judge also made the point that “executed under similar conditions” did not refer to economic or financial conditions. In other words, the profitability or otherwise of a rate cannot be taken into account. Work is not executed under dissimilar conditions simply because the rate results in the contractor being paid more or less than might be considered fair. The only get-out is if the work really does not qualify to be valued under this heading.
Where work is not of similar character and executed under similar conditions to work priced in the bill of quantities, the contract rates have to be adjusted for the effect of the difference in character or conditions. In Boot vs Alstom, the bill rate for piling was nearly £90/m2 against a “right” rate of about half that. If an instruction were issued for additional work that was 10% more labour intensive, the correct way to deal with this would be to analyse the original rate, establish the element of it that relates to labour, and add 10% of that to the £90/m2. What should not be done is to correct any error in the original rate. The fact that the resulting rate may not be “reasonable” is irrelevant.
Where there is a change in the quantity of the work, this may mean it is correct to change the rate. But again, the reworking of the rate should follow the same methodology and be based on the original high or low rate.
So there you are – what started off yellow and black turns out to be black and white.
Andrew Hemsley is Managing Director of Consulting at Cyril Sweett and can be reached on 020 7061 9007 or at firstname.lastname@example.org