Our experts explain the ins and outs of building insurance, outline the many ways an expert QS can resolve wrangles over costs, and look at who pays when a public sector client clashes with a private utility company over delays

Diverted costs

We paid 75% in advance on an estimate for gas diversion works to one of our sites in September 2001 on behalf of the Highways Agency. The works were not started until September 2003 because of delays on the part of Transco. The agreement provides for the actual costs to be determined on completion with the balance becoming payable. Are we liable to pay the increased construction cost resulting from the delay and can any set-off be applied to the benefit of the advance payment of £175,000 for two years?

Your agreement may well define “actual costs”, which will then be the key to determining how the contractor’s costs are to be calculated. For instance the NEC contract defines “actual costs” as the amount due to subcontractors for work carried out and the cost of the components in the schedule, which is not subcontracted. “Disallowed costs”, which include not following a procurement procedure, are not paid to the contractor. That might include a requirement to place orders within a reasonable or specified time.

However, in the absence of any such definition, and on the assumption that the estimate was not binding in any way, then “actual costs” are likely to be construed as a fair and reasonable price. The courts have held that in determining what is a fair and reasonable price regard is to be paid to estimates and tenders (but for obvious reasons they are merely a factor to be taken into account). The same applies to work being delivered later than reasonably expected. As to the benefit of the advance payment, this also ought to be taken into account. Normally, a contractor will have to finance the cost of works. In this instance the contractor has not had to do so, at least in respect of £175,000 of the cost.

Who holds the risk?

We want to clarify who is responsible for insurance coverage on a £150,000 refurbishment of a floor of an office block undertaken on a JCT. The employer is the leaseholder of the floor. Who would be liable if the entire building were to collapse following an action of the contractor in the course of the works?

The type of insurance and the responsibility for insuring under the JCT contract varies depending on the nature of the development, although essentially there are three options: contractor insures new build, employer insures new build or employer insures existing structures.

The standard position in relation to extensions or refurbishments is for the employer to take out “joint names” policies covering “all risks” and “specified perils”. This names the employer and the contractor as insured parties. The effect is that the insurer has no right of recourse against the employer or the contractor in relation to a claim, save for any excess payable.

The definition of “all risks” includes any physical loss or damage to the works, but excludes defects because of wear and tear, defective design, loss and damage because of war/hostilities etc or “excepted risks” (radioactivity, pressure waves).

The “specified perils” insurance ought to cover the full cost of reinstatement of the existing structure, but not the works. Specified perils include such risks as fire, lightning and storms. In practice, many of these risks may be covered by the existing buildings insurance held by the leaseholder/freeholder of the property.

If the building were to collapse, the liability of the contractor would depend on the cause. Assuming that insurance has been taken out, the contractor would not suffer the financial consequences of its actions if the damage resulted from one of the specified perils. Otherwise the contractor is liable for any damage occurring as a result of it carrying out the works and the JCT contract provides for the contractor to insure for this liability

Sums that don’t add up

A contractor has carried out works on a property. No quote was formally offered or accepted, the works were not carried out efficiently and several defects are apparent. How is the cost of the works to be valued if the contractor claims £66,000 and the client values the work at £36,000?

As there is no formal contract, the work will have to be valued on a "quantum meruit" basis. This literally means "the amount he deserves", and is a claim for a reasonable sum for the work. Case law states the contractor should be paid a "fair and commercial rate", which will certainly take into account defective workmanship and materials.

An expert ought to be appointed to undertake a valuation of the work. Why not see if you are able to agree on the appointment of one QS expert to give his opinion? The defects must then be taken into account in a valuation. If one expert cannot be agreed upon, the court can order that one is appointed. If two experts are appointed, the parties could appoint an independent QS mediator to review the reports and give a decision on the value of the work done, or take the matter to court asking it to determine this from the evidence of the separate QS.