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FAIR RATES AND PRICES UNDER THE STANDARD FORMS OF CONSTRUCION CONTRACTS

By

ROGER KNOWLES

INDEX

FAIR VALUATION and FAIR RATES and PRICES

1. Quantum Meruit is a Fair Valuation

2. Standard Forms of Contract JCT Forms ICE Conditions GC/Works/1

3. Methods of Evaluation

4. Contractor’s Costs

5. Market Prices

6. Fair Valuation Linked to Contract Rates

7. Summary

8. Questions

9. Answers

Fair Valuation and Fair Rates and Prices

1 Quantum Meruit is a Fair Valuation

1.1 Quantity Surveyors when valuing variations in accordance with standard forms of contract are often faced with valuing work undertaken by contractors and subcontractors on the basis of a fair valuation. What is meant by a fair valuation and how should it be calculated? There is a lengthy legal history of quantum meruit being employed in relation to the entitlement of a party for whom work has been undertaken but no agreement arrived at as to the manner in which the value is to be calculated. Legally an evaluation of work on a fair valuation basis and using a quantum meruit approach has been held to mean one and the same thing.

1.2 In the case of Weldon Plant Ltd v Commission for the New Towns (2000) the term quantum meruit was held to represent two different concepts:

Where there is a clear agreement that the builder will carry out work and there is an express or implicit agreement that (in the absence of an agreed price) the employer will pay a reasonable price for such work – an arrangement known as a contractual quantum meruit; or

Where there is no agreement whatsoever, but work carried out by the builder is of benefit to the employer (or by analogy where in the absence of any contract, a tug saves a ship in distress and the salvage of the ship is of benefit to the ships owner) here if a quantum meruit payment is due it is founded on the legal concepts of quasi-contract restitution or unjust enrichment. This aspect of quantum meruit is rarely of any use when evaluating work carried out under the terms of one of the standard forms of construction contract.

In this case in respect of the ICE 6th Edition it was stated by Judge Humphrey Lloyd QC:

“…Mr. Thomas is right to assimilate a fair valuation to the assessment of a

quantum meruit in the contractual matrix”

1.3 In Hudson’s Building and Engineering Contracts 11th Edition a similar

explanation is provided:

“It is important to realize that the quantum meruit expression is frequently employed in two quite different legal contexts. On the one hand it may be used where a true contractual situation exists in the sense of a request to do work accompanied by an intention to pay for it… but where the price may not have been fixed at all….so that a promise to pay a reasonable price or remuneration requires to be implied to give practical effect to the parties intentions. On the other hand the expression may be used where no agreement exists, or subsequently comes into existence, but it would be unconscionable to allow one party to benefit from work done or services rendered by the other”.

2. Standard Forms of Contract

It would seem appropriate to start at the beginning by identifying when it becomes necessary to evaluate variations on a fair valuation basis.

2. 1 JCT Forms

JCT Forms such as JCT 98 and 05 provide prescriptive methods of valuing variations which break down into three rules and were referred to in Weldon Plant Ltd v Commission for New Towns (2000) and Henry Boot Construction Ltd v Alstom Combined Cycles Ltd (2000).

Rule 1

“Where the additional or substituted work is of similar character and executed under similar conditions as and does not significantly change the quantity of work set out in the Contract Bills/Contract Documents the rates and prices for the work so set out shall determine the valuation”.

Rule 2

“Where the additional or substituted work is of similar character to work set out in the Contract Bills/Contract Documents but is not executed under similar conditions thereto and/or significantly changes the quantity thereof the rates and prices for the work so set out shall be the basis for determining the valuation and the valuation shall include a fair allowance for such difference in conditions and/or quantity”

Rule 3

“Where the additional or substituted work is not of similar character to work set out in the Contract Bills/Contract Documents the work shall be valued at fair rates and prices”

The above rules relate to work where the Employer has undertaken the responsibility for the design

Where “With Contractor’s Design” conditions apply the wording as set out below is similar except that all the Rules are combined into one.

“The valuation of additional or substituted work shall be consistent with the values of work of a similar character set out in the Contract Sum Analysis making due allowance for any change in the conditions under which the work is carried out and/or any significant change in the quantity of the work so set out. Where there is no work of a similar character set out in the Contract Sum Analysis a fair valuation shall be made”.

2.2 ICE Conditions

The ICE conditions comprise only two rules which are similar to the JCT rules.

Rule 1

“Where work is of similar character and carried out under similar conditions to work priced in the Bill of Quantities it shall be valued at such rates and prices contained therein as may be applicable”

Rule 2

“Where work is not of a similar character or is not carried out under similar conditions or is ordered during the Defects Correction Period the rates and prices in the Bills of Quantities shall be used as the basis”.

2.3 GC/Works/1

GC/Works/1 has three rules in like manner to JCT

Rule 1

“(a) by measurement and valuation at the rates and prices in the Bill of Quantities/Schedule of Rates/Pricing Document for similar work”.

Rule 2

“(b) if it is not possible to value as subparagraph (a) then by measurement and valuation at rates and prices deduced or extrapolated from the rates and prices in such Bill of Quantities/Schedule of Rates/Pricing Document”.

Rule 3

“ (c) if it is not possible to value as in subparagraph (b) then by measurement and valuation at fair rates and prices having regard to current market prices”.

3. Methods of Evaluation

There is no universally agreed method by which a fair valuation can be evaluated. Some of the alternatives include the following:

1. Contractors costs used as the basis for evaluating a fair valuation. This raises as many questions as it answers. How should the cost of rectifying defective work be dealt with? What is the situation regarding work which is incomplete? In both these situations it can be argued that a reduction of the contractor’s costs should be made. To take this one step further would it be appropriate to credit the contractor’s costs to reflect work which has been carried out inefficiently. The counter argument would be that when pricing work contractors takes some account of defects, incomplete work and inefficiency otherwise they would never make a profit. This being the case if the method of payment is contractor’s costs no reduction should be made. Perhaps the fairest method of dealing with the matter is to make a reduction when these elements of the costs are outside of what may be regarded as normal. This begs the question as to what can be regarded as normal.

2. Market prices can often be argued as being a fair valuation. Prices which fall into this category may be derived from rates which have been extracted from other projects where the work is of a similar nature. The GC/Works/1 contract specifically states that a valuation at fair rates and prices must have regard to market prices

3. Contract rates which may be used as a basis.

This method of course will not apply when evaluation is undertaken under Rule 3 as specifically contract rates do not apply. However it may be argued that if the contract rates are lower than market prices for the work then a fair valuation should reflect the under valuation inherent in the contract rates.

4. Contractor’s Costs

4.1 In the case of Floods of Queensferry Ltd v Shand Construction Ltd (1999) a subcontract was let incorporating the FCEC conditions (Blue Form) which provided in clause 9(2) that where the subcontract rates were not applicable then the value of variations shall be such as is fair and reasonable in all the circumstances having regard to any valuation of the same variations made under the main contract. With regard to what is mean by this clause Judge Humphrey Lloyd QC said:

“the guiding principle is ….the valuation must be fair and reasonable. Where in general contract rates and prices are not available or appropriate and where the contractor’s actual costs of labour, plant and materials reasonably and properly incurred can be established with an acceptable degree of certainty then those figures together with an appropriate addition for site and head office overheads and profit would produce a fair and reasonable valuation”.

4.2 In the case of Weldon Plant Ltd v The Commissioner for the New Towns (2000) a dispute arose in connection with the valuation of a site instruction to excavate gravel and backfill with clay in connection with the construction of the Duston Reservoir. The contractor’s entitlement was to be paid a fair valuation. The judge took the view that in evaluating a fair valuation the calculation should be based upon the reasonable costs of carrying out the works if reasonably and properly incurred. If in the execution of the works, costs or expenditure is incurred which would not have been incurred by a reasonably competent contractor in the same or similar circumstances, then such costs would not form part of a fair valuation.

4.3 In the case of Serck Controls Ltd v Drake and Scull Engineering Ltd (2000) it was held that Serck was entitled to be paid a reasonable sum for the work it had completed. Drake and Scull was of the opinion that payment should be based upon normal rates and prices. This was not accepted by judge Hicks QC. In assessing Serck’s entitlement he commenced with their costs. However in considering Serck’s entitlement he took into account defective work and inefficiencies when he said:

“If the value is being assessed on a costs plus basis then deduction should be made for time spent in repairing or repeating defective work or for inefficient working”

4.4 Recorder John Reece made similar comments in the case of Sanjay Lachhani v Destination Canada (UK) Ltd (1997)

“If the building contractor works inefficiently and/or if the building contractor leaves defective work then quite obviously the actual costs incurred by the building contractor must be appropriately adjusted and/or abated to ensure that the owner will not be required to pay more than the goods and services provided are truly (objectively) worth”.

4.5 It would seem obvious that a fair valuation should include an element of profit. In the case of Henry Boot Construction Ltd v Alsom Combined Cycles Ltd (2000) judge Humphrey Lloyd made this clear when he said:

“a fair valuation must in the absence of special circumstances include an element on account of profit”

4.6 A similar reference to profit was made in the case of Costain Civil Engineering Ltd v Zanen Dredging and Contracting Ltd (1996) where Judge Wilcox said:

“It is clear …that a fair commercial rate would include allowance for reasonable

profit”

5. Market Prices

5.1 There may be circumstances where the contractor’s cost may not be an appropriate method of arriving at a fair valuation. This may occur if the contractors cost records are incomplete or there is suspicion as to their accuracy. In the case of Laserbore Ltd v Morrison Biggs Wall (1992) a dispute arose in relation to the construction of a tunnel under the main Carlisle to Glasgow railway line. Laserbore Ltd was the subcontractor who undertook tunnelling work. Work commenced following the issue of a letter of intent by the main contractor. No contract was ever entered into but the letter of intent stated that Laserbore were entitled to be paid “fair and reasonable rates for the work executed” Unusually the contractor was willing to pay the subcontractor on a costs incurred basis but the subcontractor refused. In supporting the subcontractor the judge said:

“I have no doubt that the costs plus basis in the form in which it was applied by the defendant’s quantum expert (though perhaps not in other forms) is wrong in principle even though in some forms it may produce the right result. One can test by examples. If a company’s directors are sufficiently canny to buy materials from stock at knock down prices from a liquidator, must they pass on the benefit of

their canniness to their customers? If a contractor provides two cranes of equal capacity and equal efficiency to do an equal amount of work, should one be charged at a lower rate than the other because one crane is only one year old but the other three year old. If an expensive item of equipment has been depreciated to nothing in the company’s accounts but by careful maintenance the company continues to use it, must the equipment be provided free of charge apart from the running expenses (fuel and labour) ? On the defendants argument the answer to those questions is yes. I cannot accept that as being right”

5.2 The judge rejected the idea that a fair valuation should be based upon the subcontractor’s costs and supported the subcontractor’s view that prices in the market place for the work was more appropriate.

5.3 The GC/Works/1 contract specifically states that when evaluating variations on a fair rates and prices basis regard must be taken of current market prices.

5.4 In ascertaining what constitutes market prices it may be appropriate to make use of rates employed on other similar work, technical journals, information produced by professional organizations and price books. In this modern age reference may also be made to the worldwide web for guidance.

6. Fair Valuation Linked To Contract Rates

6.1 Some text book writers consider that a fair valuation must in some way or other be linked to contract rates. In this respect Hudsons Building and Engineering Contracts 11th Edition states:

“such reasonable or fair rates or prices or valuations should have regard to the contractor’s general level of pricing disregarding any element of profitability …there seems no logical reason for a possibly very different price level to apply simply because no sufficiently similar item is to be found”

“ The intention throughout including the last fair valuation basis is it is submitted to value at prices as closely analogous as possible to the original contract prices so that any underpricing or overpricing element in the original contract prices would be perpetuated or reflected in the variation valuation”

6.2 Vincent Powell Smith and Douglas Stephenson take a similar line in saying:

“The extent to which a fair valuation should have regard to the rates and prices which have not been applied is unclear. It is probable that the fair valuation must have regard to the way in which rates in the contract have been estimated even

though there may be no rate for work that even remotely resembles the varied work. This is because a fair valuation must represent as closely as possible the rate the contractor would have inserted had the work in question been included in the original bill”.

6.3 This approach was adversely criticized by John Lyden in a paper delivered to the Society of Construction Law in Cork on 8th November 2004 later published in February 2006 when he said:

“The first difficulty is that where a variation involves completely different work from the bill of quantities it is simply not practical to tie a fair valuation back to bill of quantities rates.

Suppose for example that the variation involves plaster and there are no rates for plaster in the bill of quantities and a general market rate for plaster is Euro 30 per square metre. Suppose that in relation to market rate the rate in the bill of quantities are erratic and that the rates for concrete are 20% low for blockwork 15% low, for steel reinforcement 12% high and for pipes 18% high.

It is difficult to see what adjustment should be made to the market rate of Euro 30 per square metre since none of the rates in the bill of quantities are relevant to plaster rates…”

6.4 In the case of Tony Cox (Dismantler’s) Ltd vJim 5 Ltd (formerly Tarmac Homes Midlands Ltd) (1996) Judge Bowsher said:

“If any extras can be identified, then the rates for payment should be the rate provided to be the reasonable rate in the industry at the time. Not infrequently rates set out in the contract can be regarded as good evidence of reasonable rates. However in the present case the defendants by their evidence accept that the plaintiff made a bad bargain by the second agreement. It would be unjust if that bad bargain were to be extended into any request for extras. Any extras should be priced in accordance with the fair commercial rate for the services provided”.

6.5 It would seem unfair if extra work was ordered which had no relevance to any of the work measured in the bill of quantities for the contractor to have what may be termed normal and reasonable rates for the work reduced by 10% because the rates in the bill of quantities are generally 10% below market levels.

6.6 In the case of ERDC Group Ltd v Brunel University (2006) the contractor submitted a price based upon JCT 1998 With Contractor’s Design. A formal contract was not entered into due to planning problems but following the issue of several letters of intent work commenced. These letters provided for

certain works to be carried out, referred to the conditions of contract contained in the offer and included caps on the amount of money to be spent. The letters of intent covered work up to 1st September 2002 which was paid for a contract rates. Work was undertaken after this date for which there was no letter of intent and the contractor claimed payment on a cost plus basis. The employer disputed that the contractor was entitled to be paid in this manner and argued that payment should be in accordance with contract rates. Judge Humphrey Lloyd agreed with the employer. He considered that a price or rate which was reasonable before 1st September 20002 did not become unreasonable after that date because the authority contained in the letter of intent had expired. The judge held that for variations the use of contract rates was sensible especially as they were not abnormally low and were objectively reasonable.

6.7 There is little in the way of consistency between the view of the text book writers and the small amount of case law as to whether it is appropriate to base a fair valuation on underpriced contract rates when if used would result in the contractor sustaining a loss.

7. Summary

It can be seen that there is no hard and fast rule where contract rates do not apply as to how a fair valuation or fair rates and price should be evaluated. Of the legal cases which address this method a majority consider a valuation based upon the contractor’s cost to be the most appropriate. However in cases which have used this system there has been a requirement for the costs to be credited to allow for defective work and the contractor’s inefficiency. This is not to say that other methods have not found favour with the courts and legal commentators. There is a body of opinion which considers that fair rates and prices should follow with regard to profitability in the contract rates. Where this occurs contractors could find themselves making losses with regard to variations if the contract rates overall result in a loss to the contractor. In other words each variation which is priced at fair rates and prices results in an increase in the contractor’s losses. Where QSs find themselves in dispute over the method of valuing variations, where there are no applicable contract rates, it may be difficult to advise a client as to the likely outcome if the matter were to be referred to a formal dispute resolution process.

QUESTIONS

1. “Where the additional work or substituted work is not of similar character to work set out in the Contract Bills/ Contract Documents the work shall be valued at fair rates and prices”. Under a JCT contract in relation to the evaluation of variations is this:

Rule 1

Rule 2

Rule 3

2. In which of the following contracts does it state that when evaluating variations on a fair valuation basis regard must be taken of market prices.

JCT contracts

ICE contracts

GC/Works/1 contracts

3. In which of the following legal cases did the judge say that if a fair valuation should be based upon the contractor’s costs then account should be taken of defectives and work carried out inefficiently:.

Floods of Queensferry Ltd v Shand Construction Ltd (1999)

Serck Controls Ltd v Drake and Scull Engineering Ltd (2000)

Henry Boot Construction Ltd v Alstom Combined Cycles Ltd (2000)

4. When applying market prices in evaluating work on a fair valuation which of the following could be used for guidance

4.1 Central Government Department4.2 Contract rates used on similar work

4.3 Price Books

5. When employing contractor’s cost as the basis of a fair valuation should there be a sum included in respect of the contractor’s profit. Yes or No

6. Which of the following contracts provide for variations to be instructed during the defects period:

JCT GC/Works/1 ICE

ANSWERS

1. Rule 3

2. GC/Works/1

3. Serck Controls Ltd v Drake and Scull Engineering Ltd (2000)

4. 4.Contract rates on similar work; Price books

5. Yes

6. ICE