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Articles for the contractor

4 March 2015

The trend in modern construction contracts is to reimburse contractors for additional expenditure via the payment of the actual cost incurred.

Let’s test this proposition shall we?

Under the NEC contract, there is an option to use, by agreement, the rates or the lump sums (option A and B as for example at clauses 63.14 and 63.13) to quantify compensation events. The default position however is that payment for compensation events including variations involving additional work is to pay the contractor his defined cost.

In accordance with the GCC 2010, additional work is paid for using the billed rates or adjusted billed rates where there are differences in the work or where the circumstances under which the work is carried out (see clause 6.4). He gets paid his time related General items (clause 5.12.3) when the time for completion is granted. Otherwise the Contractor gets his “proven cost”, (see for example clauses 5.4.3, 5.9.6 and 5.10.1)

The 1999 FIDIC Red Book contract has a very similar arrangement for the evaluation of variations (see clause 12.3) and other costs are compensated as cost, where the cause of the additional expenditure is beyond either parties control (see for example clause 4.12) or cost plus a reasonable profit where the cause of the additional expenditure is something within the Employer’s control (see for example clause 1.9). This is the remedy available to the contractor also for extensions of time.

Under JBCC 2000, variations are quantified (see clause 32.2) much as they are under FIDIC or the GCC, where additional time is awarded the Contractor gets his Preliminaries (clause 32.12) but where an expense is incurred through no fault of the contractor and which is not recovered through the other rates he gets paid his expense and loss (clause 32.5).

It is also of interest to note that there is a trend to adopt Target Cost Contracts as the preferred contracting strategy in contracts in Europe and North America. These are collaborative type contracts and the Contractors remuneration is in the first instance on a reimbursable (i.e., a cost plus) basis.

So the payment of cost under all these contract forms is an important issue.

It needs to be made clear that these costs are not the “allowable cost” or indeed anything to do with the Contractors tender. They are the out of pocket expense incurred in actually carrying out the work.

How does a contractor proceed to deal with these circumstances?

Well, under the NEC he is well prepared. He has the Schedule of Costs Components (both the “longer” and “shorter” schedules) and he has had the opportunity to complete the Contract Data section of the tender document, section two “Data provided by the Contractor”. He is also entitled to rely on trade publications to establish the cost of hiring certain equipment. So if he has been diligent, he will be in good shape to substantiate what his defined cost will be.

All well and good. How about FIDIC, GCC and JBCC, how does he shape up here? The answer is, not very well. These documents generally speaking do not require that cost information or the acceptable source of such information be provided or stipulated. Even the question of cost adjustments and what constitutes a reasonable mark-up are not normally established at tender stage prior to award.

This puts the professional team at an enormous disadvantage. Their bargaining power is effectively compromised and they have no basis for comparison except perhaps from previous contracts.

So the Contractors are onto a winning streak and are going to come out of this with a handsome profit?

As much as you might think that this would be the situation, this is not, generally speaking, the case. Most contractors are all at sea the moment they have to produce proof of what their costs were. Their accounts departments are not equipped to save this type of information and find it difficult to provide the requisite substantiation of what costs were incurred.

It is, in addition, a lot of work. Some of the information is confidential (like salaries and other remuneration costs) and most information is saved in a manner that makes it difficult to allocate a particular cost to a particular event.

All these contributory factors make the substantiation and agreement of the cost of doing a particular piece of work particularly problematic. Trust is also an issue here and the professionals team are invariably suspicious of the contractors motives and integrity.

So what is the lesson learned? Practitioners who are committed to using contract forms other than the NEC should take a leaf out of the NEC’s book and include a section into the Contract Data which the Contractor is required to complete, which will empower the consulting team to manage the process whilst at the same time enabling the contractor to quantify his claims for cost using accepted known data.

Author: Ian Massey – Director