Kobus le Roux
Planning and Construction Contract Expert
By Kobus le Roux
This is a common concern for many contractors. (a) When are you entitled to additional payment that was not part of your initial tender? In the JBCC terms, we refer to these circumstances as events which cause an adjustment to the contract value. Furthermore, (b) how do you eventually include these amounts in your payment certificates?
Keith Pickavance* made the following remark when he so eloquently explained the unique nature of construction contracts: “Once the parties enter into an agreement, the Client can change its mind about what it wants, when it wants it, where it wants it and how it wants it”. In response the standard form construction contracts all provide a mechanism for the Contractor to vary its price (making an adjustment to the contract value) and the time within which he is to provide the work in the light of the changes requested by the Client.
Some clients are so focussed on their right to change their mind that they often forget the contractual consequences. Yes Mr. Client, we can move this plug-point for you… but please remember to pay us and adjust the value for the additional expense we incurred.
In terms of the JBCC, let’s start with the most important definitions related to these adjustments. The contract sum and contract value. The contract sum is the amount tendered by the contractor and accepted by the employer. We can also refer to it as the baseline/planned or budgeted cost. This amount is never varied or adjusted and stays fixed, to allow us to have some benchmark from where we can measure variance (difference between planned vs actual value). The word contract value represents the current/actual obligation the employer has towards the contractor. This amount varies and is adjusted in respect of certain defined categories of circumstances.
So, let’s explore these categories of circumstances, in other words, under what circumstances would a contractor have the right to receive an adjustment on the contract value? For all references we have used the JBCC Principal Building Agreement – Edition 6.1 – March 2014.
- Adjustments as a result of Contract Instructions for additional work: When a contract instruction is issued for additional work, clause 26.2;
- Provisional Adjustments: Where there is provisional work in the priced document, such value shall be omitted, and the actual value of work as executed shall be added to the contract value (26.3). As an example, earthworks are usually measured provisionally. Once the actual quantities of work are established, it shall replace the provisional values and it shall constitute an adjustment to the contract value. Take note that not all BOQ’s are measured provisionally. It must specifically be identified as provisional to be subject to re-measurement. I see a lot of practitioners accepting that all work are automatically re-measurable which is not the JBCC’s intention.
- Adjustment for the payment of items by the Contractor which is not necessarily his responsibility: Where the contractor made payment for items not included in the priced document. These must be made in accordance with an instruction or by the approval of the principal agent. These are charges by authorities in terms of clause 2.1, the cost of opening up or testing work where it was later found to be in accordance with the contract documents (think additional concrete core tests), or the cost of insurance in terms of clause 10, where applicable.
- Adjustments for additional expense and loss due to no fault of the contractor: The ghost clause 26.5! I call it the ghost clause because contractors never notice it for some reason. It allows for compensation of any expense or loss that was not provided for or required in terms of the contract sum. Think standing time claims.
The following adjustments are all in terms of an obligation placed on the principal agent, in other words, the principal agent shall make the following adjustments:
- Adjustments for prime cost amounts, provisional sums and budgetary allowance items. (Clause 26.9.1 – 2) In the same manner as provisional sums. Allowance is omitted, and actual values replace them. This includes a prorated adjustment for profit and attendance on these allowed amounts.
- Adjustments for preliminary amounts: this happens in accordance with the method selected and is split between time-related, fixed and value related components.
- Adjustments for escalation: as per the chosen CPA method and only if applicable in terms of the contract data;
- Adjustments for any rectification of errors or discrepancies.
- Adjustments due to compensatory interest; this is an automatic adjustment and calculation should certification be late. It is not optional, and the PA is under an obligation to include it in the certificate for payment.
- Adjustments due to default interest: this is an automatic adjustment and calculation should the employer fail to pay on time. It is not optional, and the PA is under an obligation to include it in the certificate for payment!
- Adjustments due to damages: Should the contractor have a right to recover damages in case of a breach by the employer, clause 27.1 provides the basis on which these damages are recovered by the contractor, through the payment certificate.
- Adjustments due to the termination by a nominated subcontractor as a result of default or insolvency of the sub, or by default of the employer and/or agents: The cost of completing such N/S subcontract work can be recovered by the contractor and becomes an adjustment to the contract value.
Any additional expense and loss the contractor may suffer, due to no fault of his own, will be covered in the JBCC contract under one of these headings. Contractors must find comfort in the fact that they should not suffer losses as a result of circumstances placed beyond their risk in terms of the contract. And yet, so many of them do?
The next question is, how do an adjustment find its way into the payment certificate? As an example, let’s say there is an instruction for additional brickwork. The contractor performs the work and would like to claim it in the next certificate. Or, there is a delay for which you can claim an extension of time, how and when is the compensation or time-related preliminary adjustment added to your payment certificate? Last example – You incur standing time and want to include those expenses in the certificate.
For this purpose, we have established 3 pathways or “roads” which adjustments follow to be included in your certificate. The first road is the recovery statement. The principal agent must, according to clause 27, issue a recovery statement with each payment certificate. This recovery statement sets out amounts due by one party to the other and lists the various amounts that can be included. The second road is automatic contract adjustments in terms of your contract value and the amount certified. They form part of the “Nett amount certified to Date” line of your payment certificate. This must be a reasonable estimate of work done including adjustments as per clause 31.4.1. The 3rd road turns into the previous and is reserved for time claims with adjustment and cost claims.
Below is an easy illustration of the 3 pathways. Any loss and expense imaginable, that is not your risk under the contract, can be claimed by means of these pathways.
If you have any specific questions or unique circumstances you would like some clarity on, feel free to ask your question to our team of experts at firstname.lastname@example.org.
* Pickavance, K. 2010. Delay and disruption in construction contracts, 4th Ed. Sweet and Maxwell publishing, London.
This article was compiled by Kobus le Roux for Le Roux Consulting, all rights reserved. Please contact us for your professional project planning, project control, claims or adjudication assistance services in the heavy civil and building industry.
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