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Tender promises can end in tears

Guy Cottam (left) explains how to cope when the unexpected throws the contractor and client into conflict over the cost of extra work

THERE must be many contractors who would like the power of foresight on their side to help them predict events they did not foresee at the time of tender. Perhaps the most common is how to sort out payment for additional costs incurred by unforeseen events not specified when the tender was accepted.

The contractor's belief that they should not pick up the bill for additional expenditure can be shrouded by more complicated reasons as to why they should.

The most common method of sorting out who pays for these unforeseen costs is settled on the basis of taking the total expenditure incurred and deducting the money allowed for in the tender.

This has the quality of simplicity but very little else.

Generally, unless the contract for a tender expressly provides that one or other of the parties will pay for unforeseen events, such costs 'rest where they lie'. That is that the person who incurs them pays for them.

The Institution of Civil Engineers (ICE) Conditions of Contract, for instance, allow for extra payment for unforeseen physical conditions but the Joint Contracts Tribunal (JCT) does not.

But even when the contract provides for payment of such additional costs the simple

approach is seldom appropriate.

Remuneration is not calculated on the basis of the increase over the tender allowances, but on the basis of the extra costs caused by the event above what it would have cost if it had not occurred.

This can normally be resolved by a study of rates of output before the unforeseen event strikes, while its effects are being felt and when its effects are passed. Only when the event affects the operation completely would the tender allowance be relevant.

The same approach is often used when the works are varied and the contractor claims that the contract rates are no longer appropriate.

Most construction contracts fol-low the 'three limb approach' for valuing variations:

similar work which is carried out under similar conditions use the bill rates;

where the work is either not similar or not executed under similar conditions to the work priced in the contract then new rates are negotiated on the basis of the agreed tender rate; and

if there are no suitable rates to work from then a fair valuation is made.

The ICE, JCT and the General Conditions (GC)/Works/1 all follow this approach.

Deciding on what is a fair valuation is something the courts have had many occasions to grapple with.

Their starting point is the legal remedy known as quantum meruit, which means 'what it is worth' and is called upon when there either is no contract or no prices exist in a contract.

Value must be interpreted in relation to the market in which the goods or services are sup

This is echoed by the valuation clause in GC/ Works/1, condition 41 (4)(c), which

requires that fair rates and prices be determined 'having regards to current market prices'.

It is important that the valuation remains objective and fair to both parties. It therefore does not follow that is determined on a cost-plus approach.

This might be fair to the contractor but not the client.

In Willmott Dixon Housing Southern Ltd v London Borough of Merton, Judge Havery, an Official Referee, said that the cost plus approach would deprive the contractor of any savings that it could have made and would compensate it for any inefficiency in carrying out the work.

The cost plus approach might also benefit the client when varied work is carried out by a contractor who was already on the site because the necessary costs of mobilisation of another contractor would not have to be incurred. The market value would of course include such costs.

In Costain Civil Engineering and Tarmac Construction v Zanen Dredging and Contracting such a situation arose.

Additional work was ordered under a Federation of Civil Engineering Contractors CEC Blue Form sub-contract, but that work, the court held, was not in connection with the main contract but in connection with another contract which had been entered into by Costain and Tarmac.

The work involved was turning the basin in which the units for the A55 Tunnel at Conwy had been cast into a marina.

Originally the basin had had to be filled in when all the units had been cast. By avoiding this Costain and Tarmac had made a reasonable profit.

Judge Wilcox decided that the power given to the contractor under the FCEC Blue did not extend to work outside the main contract and therefore the subcontract did not oblige the subcontractor to carry out works which were not part of the contractor's obligations under the main contract.

The work, therefore, was outside the scope of the subcontract and there were no rules by which the extra work was to be valued.

He also decided, agreeing with an earlier arbitrator's award, that a reasonable sum for Zanen's work could include 'an assessment of the value of the advantage gained by the other party'.

He found that the arbitrator had been right in including a portion of the profit made by Costain and Tarmac in his assessment of what was a reasonable sum for Zanen's work.

Interestingly, for those producing claims he also found that the two approaches - the claim and costs plus were not mutually exclusive. They were both elements to be taken into account when assessing what was reasonable.

Cost plus may therefore be thought of as not just cost plus a percentage, but plus a portion of any particular gains that may have been obtained by the client.

But contractors should not get too exited. While agreeing with the general rule that a fair valuation should include a reasonable profit margin above the cost of carrying out the work, Judge Reece in Lachhani v Destination Canada (UK) Ltd said that this did not apply in all circumstances.

If the contractor had indicated a particular level of pricing for which he was prepared to undertake the works then that level should be taken into account when assessing a fair valuation, even if that would end up showing an overall loss.

Which, of course, brings us back to where we started because the rates in the contract indicate the level of pricing at which the contractor is prepared to undertake the work.

The tendered prices were after all the market prices at the time of tender - they were the prices at which the deal was done.

Guy Cottam is a conciliator and arbitrator, and chairman of the conciliation advisory panel of the Institution of Civil Engineers