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Payment: The Valuation of Variations

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Payment: The Valuation of Variations


Daniel Atkinson 2001 04 November 2001 Methods of Valuation SUMMARY Variations under the contract can be valued by a number of methods. Most Standard Forms adopt Rules which are based on the application of rates either in a bill of quantities or a Schedule, with a fall back position of fair valuation, or fair rates or reasonable rates. Under ICE 6th edition standard form the rates are to be applied whether or not they include a mistake or error. A fair valuation will generally be based on cost with an allowance for profit and overhead. ICE Valuation Rules

1. Methods of Valuation Variations under the contract can be valued by a number of methods. The price can be agreed by the Employer and Contractor directly, more usually by means of a quotation mechanism subject to analysis by the A/E. The contract may contain a Schedule of Rates to be used to value variations or standard published rates may be used as Dayworks. If the Contract contains a Bill of Quantities then the rates in the Bill of Quantities may be used as the basis of valuation (see Article on Bill of Quantities for general issues). Most standard forms of contract (including ICE and JCT Standard Forms in the U.K.) which adopt Bills of Quantities have a four tiered approach to the valuation of variations. These are: 1. 2. 3. 4. Valuation using bill of quantity rates or schedule rates Valuation on the basis of rates analogous to 1 above Valuation on the basis of fair valuation or fair rates or reasonable prices Valuation on the basis of dayworks

Which of the above "Rules" will apply as the as the basis of the valuation will depend largely upon the timing of the variation order, the location of the work, the quantity of the work involved and the circumstances in which the work is executed. If it can be established that these factors preclude the valuation on the basis of bill rates then the valuation will usually be based on fair or reasonable prices. There have been a number of recent cases which explain the meaning of the valuation rules in the ICE 6th Edition, which will apply equally to the ICE 7th Editions. Although the decisions are based very much on the interpretation of the ICE clauses, it is suggested that the essential principle of the application of rates, irrespective of the reasonableness of the rate itself, will have general application to most standard forms, since most forms adopt the same approach as the ICE to valuation of variations. 2. ICE 6th Edition - Valuation Rules The ICE 6th Edition is a re-measure form of contract using the Bill of Quantities. In addition the Bill rates and prices are used in the valuation of variations. They are also used to value the effect of changes in the measure of the Works. The decision in Henry Boot Construction Limited v Alsthom Combined Cycles Limited establishes the principles for valuation and provides useful guidance on the interaction and operation of Clauses 52(1), 52(2), 51(4), 55(2) and 56(2). Clause 52(1) applies three Rules to the direct valuation of the varied work. Rule 1 is to be found in Clause 52(1)(a). The principle is that if the varied work is of a similar character and executed under similar conditions to work priced in the Bill of Quantities then such Bill rates and prices shall be used to value the varied work. The intrinsic profitability or otherwise of the rate or price is not relevant in applying Rule 1.

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Rule 2 is at Clause 52(1)(b). The principle in this case is that if the varied work is of a dissimilar character or is executed under dissimilar conditions to work priced in the Bill of Quantities, then the Bill rates and prices shall be used as the basis of valuation so far as may be reasonable. Rule 2 provided a half-way house between Rule 1 and Rule 3. Like Rule 1, Rule 2 is mandatory. It applies where the work covered by the variation order is of a different character from the work priced in the Bill of Quantities, or is executed under different conditions. If the differences are relatively small, the Engineer is obliged to use the rates set out in the Bill of Quantities as the basis for his valuation, making such adjustment as may be necessary, to take account of the differences. If the differences are very great, such as where excavation is to be in rock instead of clay, the Engineer may take the view that it would not be "reasonable" to base his valuation on the rates contained in the Bill of Quantities. He then must adopt Rule 3. It was held that this was the sole function of the words "so far as may be reasonable" in Rule 2. The words called for a comparison between the work covered by the variation order and the work priced in the Bill of Quantities. The words did not enable the Engineer to open up or disregard the rates on the ground that they were inserted by mistake. It was the use of the rates in the changed circumstances brought about by the variation order that must be reasonable, not the rates themselves. Rule 2 requires the Engineer to break down the quoted rates into the elements of plant, materials, labour and overheads, in order to make the appropriate adjustment. The Engineer is required to do so even if he does not have from the contractor any build up of the rate upon which the new rate is based. In that case he will have to arrive at a notional build up. He may be assisted in doing so by information obtained from the contractor's contemporary records under Clause 52(4)(c). The elements of the rate are to be adjusted to make appropriate allowances for the effects of the variation, but those elements unaffected by the extra effort are not changed. Rule 3 is also at Clause 52(1)(b) and applies if the other two rules do not apply. It requires a fair valuation to be made. A fair valuation under Clause 52(1)(b) generally meant a valuation which does not give a contractor more than his actual costs reasonably and necessarily incurred plus similar allowances for overheads and profit. It was held further that fairness is an objective test which takes into account the position of both parties. A fair valuation under ICE 6th Edition Clause 52(1) has ordinarily to include elements for cost of labour, the cost of plant, cost of materials, the cost of overheads and profit, otherwise it would not be a fair valuation within the meaning of the ICE contract Weldon Plant v Commission for New Towns [2000] BLR 496. A fair valuation must include profit except in special circumstances, but those special circumstances were not described by His Honour Judge Humphrey Lloyd in his decision in Weldon. On the matter of overheads, a distinction had to be made between different elements of overheads. Some overheads such as site overheads were constant and not normally related to base costs, unless brought into an assessment of the cost of prolongation by reference to the base costs. Other overheads were directly related to the value of the work. Some overheads will only be recovered if there was proof that they were in fact incurred or increased, as they will have been recovered from valuations of the work executed. Time related overheads were required to be proved. The fair valuation had to have an addition as a contribution towards fixed or running overheads. Unlike overheads such as time-related overheads, it was not necessary to prove that they were actually incurred for the purpose of a fair valuation. The approximate amount must be established for example by deriving a percentage from the accounts of the contractor including where appropriate associated companies that provide services or the like that qualify as overheads. The decision in Weldon together with previous decisions now gives a full interpretation of the three rule for valuation of variations in Clause 52 of ICE 6th Edition, which it is suggested applies to the ICE 7th Edition. The third rule of fair valuation is clearly to be read as part of the structure of valuation in accordance with the Bill rates. It differs from the first two rules, since it is initially based on actual cost. Usually, the valuation will also include profit. In circumstances where it can be shown that the contractor would not have made any profit at the tendered rates, it is suggested in that case that there would be no

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entitlement to the addition of profit in a fair valuation. The decision is not clear on this point, but it is difficult to envisage other circumstances referred to. On the matter of overheads, it appears that an allowance for fixed overheads will always be recoverable without inquiry on the basis that this is part of valuation of any work. The fixed percentage to be added to the cost of the variation will derived from the contractors accounts. Other overheads such as site overheads and time related overheads will not be recoverable, but will need to be proved as having been incurred or lost. It is suggested that this must be correct, since that part of the valuation does not arise from the direct valuation of the work, but from the consequences of the variation on progress or the balance between site overheads and the cost of the works.

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