7: Final Accounts

Final Accounts
Generally
Once a contract has been completed and the Rectification Period has expired,
the Contractor is entitled to be paid the Final Valuation. In order to make this
payment it is necessary to produce a Final Account.

Except in the case of a very small project, it is likely that there will be a large
number of adjustments to be made to the original Contract Sum. This requires a
detailed document setting out how much the Employer is due to pay the
Contractor and showing how it has been calculated. It is also important that the
details of this calculation are acceptable to the Contractor, Architect and, of
course, the Employer.

Lump Sum Contracts:

If the contract amount is based on a lump sum, (Tender Amount or Contract
Sum), then the final account will start with that sum, and will proceed to identify
the additions and deductions which require to be made, and record the reasons
for those variations. The account will conclude with the adjusted total amount,
which sum represents the total value of the work executed by the Contractor
under the terms of the contract. This account can also be described as a
Variation Account.

Measured Contracts:
In this case there will not be a Tender Amount or Contract Sum so the final
account will need to be built up from a zero amount to an Ascertained Final
Sum detailing the measured and valued areas of the project.

Who prepares the Final Account?

If the contract is let under a contract such as the SBCC 2005 Standard Form of
Contract, it is the responsibility of the Quantity Surveyor to prepare the final
account. Clause 4.5.1 requires the contractor to submit to the Architect (Or the
Quantity Surveyor if the Architect nominates him, not later than 6 months after
Practical Completion, all documents necessary for the purposes of the
adjustment of the Contract Sum. In some cases the Employer, (especially Local
Authorities), may modify this clause and reduce the period. It is prudent to
advise the client to do so. The Quantity Surveyor then has 3 months to prepare
a statement of adjustments to the sum. The Architect also has this period of

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 time to ascertain the amount of any loss and expense under clause 3.24 or 4.23.
It should be noted that the stated period is often not achieved for various
reasons.

Format of the Final Account

This can depend on the firm of quantity surveyors but there are TWO methods
most commonly used.

The table below, (Figure 5.1), shows the two methods of producing a Final
Account, and the arguments for and against each method.

Figure 5.1: Methods of Final Account Production

Bill omissions and Cost of each variation is The account

additions are listed obvious showing total document is likely
separately under each values for omissions and to be thicker due
Architect's Instruction additions. to repetition of
(AI) items in different
variations and
space needed for
separate totals.

All omissions can be Fewer items, resulting in a The cost of each

collected together, and compact document that is variation is not
similarly all additions, quicker to prepare and individually
with each group price available and may
identified under the be more difficult to
appropriate work section ascertain
or trade heading. accurately.

How are Variations Valued?

There are generally three methods used, the one chosen being that most
appropriate to the situation:

1) By lump sum in accordance with a Contractor's quotation, which

has been accepted by the Architect or Employer.

2) Pricing the measured items in the variation account.

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 3) By calculating the total prime cost of the additional work and
applying appropriate percentage additions.

The Scottish standard form SBCC 2005, states in clause 5.2.4, it is the duty of the
QS to value variations and decide on the most appropriate method and means of
doing so. Consequently, if the Architect states in the Architects Instruction, (AI),
that the variation work is to be carried out on Daywork the QS is not bound to
do so if a preferred method is more appropriate.

As noted previously, it is prudent to agree variations on an ongoing basis. Even

smaller contracts can have a number of variations, which can lead to a lengthy
final account agreement. Most variations will have been completed months or
in some cases years prior to the final account being agreed. The passage of time
can make it more difficult to accurately recall the scope of works in a variation,
or if a variation is a valid contract adjustment. A good QS will aim to have
adjustments agreed within 2 months of the varied work being carried out.

All variations should be attributable to an Architects Instruction, or similar

contractual instrument. Any which have not been confirmed by the Architect,
should be referred to the Architect for comment before being assessed. Again,
this can help reduce the timescales for agreeing final accounts as time is not
wasted assessing costs on a variation for which the contractor is not entitled to
have the contract sum adjusted.

How is the Final Account Agreed?

The Employers QS is required to prepare the account, fully price it, (or give the
Contractor an opportunity to provide rates and/or prices where necessary), and
send a copy to the Contractor for examination. In most cases there will be some
areas of disagreement requiring the QS and Contractor's surveyor to meet,
discuss and negotiate the areas, items or rates in dispute until the whole
document is agreed.

The Contractor will then sign the summary page to record agreement, and the
QS will report to the Architect, pass on a copy for the Architect's records and for
calculation of post-contract fees. The Final Valuation Certificate will then be
prepared using the Final Account total and passed to the Employer for payment.
In some cases the QS may be asked to meet with the Architect and Employer
jointly or separately to give a detailed report and answer questions on the
contents of the account.

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What are the Contents of the Final Account?
The following sections are normally required for Lump Sum contracts:

a) Summary of Account
b) Prime Cost Sums - adjustments
c) Provisional Sums - adjustments
d) Variation accounts
e) Provisional Items - adjustments
f) Fluctuations, i.e. increased costs (labour, materials. statutory
contributions, levies and taxes)
g) Contractors claims.

a) Summary of Account
This is normally found on the last page of the document, with space for the
Contractors signature, which should be dated, to indicate agreement.

Most clients do not have the knowledge or interest to examine the complete
final account in detail. Therefore a simplified statement of account is normally
prepared, or use is made of the general summary sheet for the account.

It should be noted that with the type of contract in which a Final Account is
compiled based upon bills of quantities, you would always commence the
account with the original contract sum and all sections would be an adjustment
plus or minus to this figure.

b) Prime Cost Sums adjustments

The prime cost sums inserted in the Bills of Quantities, (BofQ),do not include
profit for the Main Contractor. Provision must therefore be made so that the
Contractor is entitled to insert the percentage profit they require. In addition to
the profit, the Contractor will have to attend upon the Nominated sub-
contractor; provision is made in the BofQ for the Contractor to price this item.

c) Provisional Sums adjustments

The work included as Provisional Sums in the BofQ will be omitted and the work
measured and valued as executed, by whichever means appears the most
appropriate under the rules for valuing variations.

It is common practice to keep the use of Provisional Sums for work which will
eventually be undertaken by the Main Contractor. As this type of sum is used
where the amount of work is unknown at the tender stage, it is unlikely that
there will be any work covered by measured unit rates in the BofQ suitable for
use in valuing this work, and it will be necessary to produce fair rates for the
work.

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 There are two types of Provisional Sum. They are referred to as Defined
where the scope of work is adequately described. For example, the client may
require a reception desk of a certain size which fulfils a certain performance
specification. It cannot be priced at tender stage as the final details have not
been agreed, but the contractor is aware of the scope of works required. For
this reason, Preliminaries (site set up, attendance, labour etc) are deemed to be
included for Defined sums, and the contractors programme should allow an
item specifically for this work. There are also undefined provisional sums.
These are more common in areas where a full scope of work cannot be
ascertained, but where there is very likely to be further works required. For
example, in a renovation project, the Architect will be aware there are a number
of existing services within the building to be stripped out and made safe. He
may not know where these services are, nor the full extent of the works. An
undefined provisional sum will be added to ensure the price is included. A
contractor cannot possibly accurately programme for this, or allow accurate
work related preliminaries. For that reason, neither of these are deemed to be
included, although the contractor will be expected to take cognisance of these
when putting the tender and the programme together to mitigate delay where
possible.

d) Variation accounts
Most contracts make provision for variations and indicate how these will be
valued.

These are:

Rates in the BoQ where the work is the same as that originally described.

Pro-rata rates where the work is not quite the same as in the BofQ, or
has been executed under different conditions or where
the quantity has altered.

Agreed rates where none of the rates in the bill appears appropriate.

Daywork rates where the work cannot be properly measured and valued.
An example daywork sheet is shown on at fig 9.2

Most standard contracts make provision for Dayworks and the first thing to be
decided will be a definition of what is meant by the Contractors cost. A
Contractors cost under a claim for Dayworks will generally be the actual costs
they incur for all labour, plant and materials.

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 If the Contractor is to be fully paid for such costs, then it has to be established
exactly what is covered by such costs, because all other items will have to be
covered by an allowance added to cost.

There is a document produced by the RICS called The definition of prime cost for
work carried out on a daywork basis. Most tender documents for building
projects within the UK mention this, and contractors are aware of what they can
claim for on their daywork sheets and what must be allowed for in the
percentage addition.

The daywork sheet should make provision for a description of the work together
with the name of the operative, and a space to fill in the number of hours spent
on the work each day. The total amount of material and the plant used on the
particular item of work should also be listed.

The daywork sheets should be completed by the Contractor as soon after

completion of the work as possible, and submitted to the clerk of works or
Architect for signature. It should be noted that generally this signature is only for
record purposes and does not agree that dayworks will be paid. It is the quantity
surveyor who will decide whether the work can be measured and valued using
measured unit rates contained within the BofQ, pro-rata or agreed rates, or paid
for by dayworks.

Eventually the quantity surveyor will be required to check all daywork claims and
a number of points should be considered including:
From the Contractor's wage sheets check that the named operative worked
on site for the number of hours shown;
Check that the hourly labour rate used is the correct one. (Gangers, for
example, although paid extra money, can only be claimed for on the
appropriate tradesman's rate on daywork.);
Check that the quantity of material used appears reasonable;
Check that the material prices used are appropriate (e.g. if only a small
amount of cement was used on the work, there will probably be cement
already on site bought in bulk, and therefore the bulk price should be used
and not a price for small quantities);
Check from the plant record sheets that the plant was on site for the times
stated on dates quoted, and check that the correct hire rate has been
applied;
Check that the correct percentage additions have been used;
Arithmetically check the complete sheet.

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 If the daywork sheet covers work resulting from an Architects Instruction (AI),
and shown on a variation order, (VO), then keep a check of daywork sheets
issued in conjunction with the VO so that work is not measured twice.

Dayworks are becoming less common on projects and should always be used as
a last resort when valuing variations. Indeed, some Employers may choose to
amend the contract to note dayworks will not be used to assess variations.
Dayworks are considered to be a less competitive way of having works carried
out and for this reason, Contractors tend to use them where possible to have
prices agreed. There are actually very few instances where dayworks is the only
tool available to assess the cost of a variation, especially on a new build project.
The QS has a responsibility to fairly assess every variation and if a dayworks price
is not a reasonable price, it should always be challenged.

Figure 5.2: A typical Daywork Sheet

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 In dealing with the labour element the quantity surveyor should check all wage
sheets have been certified, and all operatives shown on the claim for increased
costs have been employed for the times indicated on that particular project.

A check should be made that the correct costs have been applied and the claims
made are in accordance with the contract conditions, e.g. the time spent by the
contractors surveyor in producing the claim would not be claimable.

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 The basis of the material element adjustment has to be dealt with in the original
tender documents and a basic price list of materials should be incorporated into
the tender documents. The contractor should include on this list all materials,
(with their price at the time of tender), for which he wishes to claim fluctuations.

It is the quantity surveyors responsibility at the tender stage to check the pricing
of this list to see that prices are reasonable. It is obviously in the contractors
interest to try to price this low so that a larger increase in price would show up
during the contract. An example of what is meant here is where the contractor,
having already allowed for materials in the bill at current rates, seeks to enter a
lower cost in the list than they have included within the bill unit rate. By doing
this they hope to be paid not only for their actual costs contained within the bill
rates, but for a double payment for the difference between these rates and the
low cost entered in the list when the updated higher cost is claimed.

e) Provisional Quantities adjustments

In this type of work the items will be shown in the BofQ as having been
measured as provisional. Note, these are different from Provisional Sums.
Provisional Quantities (sometimes called Approximate Quantities) are items
where we know the specification of the work and the methods for carrying it
out, but we are unsure of the quantity. This is more commonly the case in the
substructures packages. For example, we know there is a quantity of rock to be
removed. We will assess the likely amount from ground surveys, and add a
provisional quantity to the BofQ for this package. It used to be common for all
substructure packages to be marked as provisional but improved information
from engineers means we are more able to make an accurate measure of most
substructure works.

In the final account all the work contained within the BofQ item is omitted and
the work re-measured on site as executed, to be valued at the rates shown in the
bills. Under this method no agreement of rates is necessary, as the Contractor
has already given rates for the work within the bills. It would only be necessary
to agree rates if the work was executed under conditions which made the
original rates inappropriate.

The quantity surveyor should keep a record of all Prime Cost and Provisional
Sums, Provisional Quantities and Provisional Items in the original tender
documents. They should make sure that each item has been accounted for
during the contract by marking off when instructions have been received for
each, how each has been dealt with, when they are measured, and how and
when their value has been agreed.

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 f) Fluctuations (increased costs incurred for labour, materials. statutory
contributions, levies and taxes)
The procedure for dealing with this in the final account is first to examine the
conditions of contract and ascertain whether fluctuations apply to a particular
contract. Even on fluctuating type contracts it is common practice to require the
Contractor to include any known increase in their tender so that only increases
after the tender date would be recoverable.

Where traditionally the Contractor can claim additional costs for any increase in
labour and material costs, it is the quantity surveyor's job to check all such
claims. To accomplish this the quantity surveyor will require access to the
Contractor's wage sheets and material invoices. Whilst the Contractor can
normally be relied upon to claim for any increase, the quantity surveyor should
be aware of possible decreases in statutory contributions, levies and taxes.

The quantity surveyor should check any materials claim for increased costs, and
make sure that all items claimed for are on the list, that material invoices are
provided, and that discounts shown are the same for both sets of prices.

It should be noted that only genuine changes in the market price of materials are
allowable and this would not cover any increase in cost due to inefficient buying
or small quantity orders, unless these were caused by instructions and were
therefore unavoidable.

This method of dealing with fluctuations is very time consuming and often the
contractor does not receive payment for these increases until some considerable
time after incurring the cost. For these reasons it is becoming increasingly more
popular within the UK to deal with these increases by other means.

The major alternative method within the UK is to deal with the problem by
means of a nationally agreed formula calculation. Briefly, this involves the
calculation of an index of price but this index is calculated separately for
different sections of the building so that a separate index may be calculated for
the brickwork, concrete, roofing, plastering, etc.

The project is therefore broken down into a number of sections and each section
has a corresponding index. Each section will therefore have an index at the time
of tendering and an index at the time the work was carried out.

Generally, the calculation can be undertaken each month, taking the amount of
work done in each section that month, and working out the change in price by
multiplying the value of work for the period of a given section by the change in
index cost, and dividing by the original indices at the time of tender. An example
of how this works is shown below.

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 Assuming the index for brickwork at time of tender was 110 and the
current index this month to be 145 and allowing for 5,000 worth of
work having been done this month, then the allowable increase would
be:

5000 x (145-110) = 35 x 5000 = 1591

110 110

This calculation would be carried out for each section every month, therefore
the Contractor would be paid all increases virtually automatically, as soon as
incurred; additionally the time spent in dealing with this will be considerably
reduced.

On contracts with firm bills of quantities, all the previous sections a) g) will be
brought together and dealt with as an adjustment to the original contract tender
figure.

Fluctuations clauses are often deleted from the contract. Unless there is a
specific material which is facing market difficulties (e.g steel and copper have
faced world market forces which make it impossible to obtain a price fixed for
longer than a few weeks) or a project is particularly long, Contractors are
expected to allow for normal fluctuations in their tender.

g) Contractor's claims
Claims for payment under any claims clause in the form of contract should be
fully detailed and documented and kept separate from the rest of the account.

Conclusion
On some contracts it is not possible to deal with the account in the manner
described above. Projects where the original contract was let on the basis of a
schedule of rates, or a bill of approximate quantities, invariably require the
complete project to be measured on site as executed. It is not possible in such
circumstances to deal with the final account by means of adjustments to the
contract sum. Civil engineering projects typically are re-measured and make use
of this arrangement.

In these cases the works are broken down into logical sections and all the work
measured, with totals being carried to a general summary. Each work section has
a section of measured work; this is carried to a collection for that section. The

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 collection totals are transferred to the general summary which, when totalled,
gives the final account figure.

When the final account has been agreed, a copy will be sent to the Architect
giving the final balance due in payment to the contractor as final settlement. This
figure is calculated by taking the total final account figure and deducting all
previous payments to leave a final balance due.

In some cases it may be necessary for the Architect to advise the client of his/her
right to reduce this payment in the event of liquidated and ascertained damages
being chargeable under the contract. Liquidated and ascertained damages are
the costs of actual losses incurred by the employer due to the failure by the
contractor to complete the works on time. Under UK law, liquidated and
ascertained damages cannot be imposed as a penalty, and the amounts charged
to the contractor must represent actual loss by the employer. These figures
dont form part of the adjustment to the contract sum as noted in the Final
Account summary, as the final figure is a reflection of the costs relating to the
work being carried out. The Employer may withhold these monies from his
payment, subject to the issue of the appropriate notifications.

It is quite common on government projects to have a proviso to the acceptance

of the final account by the contractor that all accounts are subject to a possible
audit by a technical audit section, which can choose to check any project
account. The contractor accepts the account on this understanding.

A suitable wording for this could be a statement on the final summary page:

We hereby certify that we agree this final account figure subject to audit by
technical audit section.

References
1Wallace,
I.N.D., (1979), Hudsons Building Engineering Contracts, (10th Edition), Sweet
and Maxwell, London

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