What’s its Value? The Biggest Argument in Construction

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Monday, January 4th, 2016
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If there’s one common theme in construction disputes, it’s arguments about value.

I’m not talking about the nutty valuations where a contractor has built a seven-lane highway and the client has back charged it back to $0. I’m talking about the various scenarios where both parties are arguing over what the work is worth. Here are some observations that may help bring some sense into these disputes:

Basis of Valuation

A common error is to value work, especially variations, in a way that is not contained within the contract. A common example is for the contractor to quote a lump sum and have it accepted, only to have client subsequently argue for a lower value based on applying a schedule of rates. The thing here is that the bargain was based on an agreed fixed value. You can’t apply rates when that was not the agreed basis of valuation, and there is virtually never any agreement on rates, either. Even if a series of rates were agreed upon, if the work was agreed on a lump sum basis, then that is the value.

This works in reverse too, and again this is little understood. If work is being carried out on an agreed schedule of rates, then the value will be simply the quantum of work done by the applicable rate.

I sometimes see clients produce a lump sum quote from another supplier arguing that the work is too expensive because ‘I’ve got a cheaper quote’ for the same work. But again, these are two different bases of valuation. Plus, did the competing contractor actually do a site measure to see what had been done in order to quote on an ‘apples with apples’ basis? Most likely, they did not.

So it is important to realise that, if you’re going to argue about value, always do it on the same basis. A good example is labour. If the parties have agreed on an hourly labour rate, then they can only argue about the hours worked. They can’t compare it with fixed quotes for the same work.

Retention

Almost all of your adjudication matters feature a disagreement about the value of retentions. This is of course because the parties have competing ideas on what the subcontract sum is, and retentions derive from a percentage of that sum.

A common mistake is to include the value of variations as part of the subcontract sum where the contract does not allow it. The term ‘subcontract sum’ is clearly defined, and that definition either allows for the sum to change with the value of variations, or to remain fixed. If it remains fixed, then the retention can only be calculated from the base contract sum; unaffected by variation value.

Defective or Incomplete Work

This is the greatest battleground of all! This is an area where contractors tend to make absurd valuations both in support of, and rejection of, the value of defects. The best thing I can say here is to not apply crazy and unsubstantiated valuations. This makes you look silly and certainly will not get you very far in adjudication.

You must apply a reasonable and substantiated basis for valuing the cost to rectify defects, or the cost of completing work. Common examples are where a contract item of work is valued at say $50,000. The client will agree that 80 per cent is complete ($40,000) but then argue that it cost $37,000 to have the final 20 per cent completed by another party. Another example is where that same item is defective and the client argues that it cost $126,000 to rectify. These are so out of whack compared to the contract value that they will not stand up unless backed by some serious evidence. So the rule here is to exercise common sense and reasonableness.

Percentage complete

This is a really vague way to agree (or more likely disagree) on value. How do you work out percentage complete? If you say that the work on level seven is 76 per cent complete and your client says it’s only 55 per cent complete, how does either side prove it?

The problem here is a lack of a unit of measure. Often to overcome this, the parties will agree on a value per floor, or value per something else. It is necessary when some works comprise so many different elements that, short of a detailed cost assessment, you can’t really value it accurately. The percentage method is plagued with these difficulties. The best way here is for the parties to agree on some units of measure with which to progressively vale the work until 100 per cent is reached.

Rawlinsons Construction Cost Guide

This guide is often used to support valuations of work. The important thing to realise that there are many factors around the work that make this guide a less reliable basis of valuation. In fact, the inside cover of it makes exactly that qualification. So while this may be perfectly valid, these kinds of guides are not correct in all scenarios where other factors can change the value of the work.

You will always be on far better ground in any payment dispute if you approach valuations on the basis of what is reasonable, what can be substantiated, and what is real. Self-serving valuations are visible a mile off and will collapse under their own weight in any dispute resolution process. So keep it real.

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