Table of Contents
In the modern construction environment, there has been a scarcity of resources as well as limited funds to finance completion of huge capital investment projects. Thus, it is important for any cost accountant to accurately estimate the project’s costs so as to ensure there is value for money invested. It is also important for a contractor to accurately estimate the project’s costs so as to aid in the recovery of the total amount incurred in the contract costs during construction or upon completion. This report addresses the procedures, personnel and typical documentation that are involved in the course of a contract with a view of highlighting the need for a contractor to recover all costs incurred on the project. The report specifically focuses on the nature and purpose of the documentation and procedures that are involved in the preparation and presentation of interim certificates and final account of projects that are of high value. In order to achieve this, the report highlights on the procedures and documentation involved in the preparation and presentation of interim valuations, variation valuation, the final account, claims, and agreement of the final account.
There are a lot of personnel, typical documentation and procedures involved in the preparation of interim valuations/certificates. An interim certificate is a provisional document that is prepared by a certified professional, which serves as authorization for commencement of contract work. The interim certificate is usually subject to the issuance of the final certificate by the professionals involved in the valuation of contract work. They thus provide a good basis on which the clients can rely on in order to make interim payments to contractors before the contract term expires. In order to arrive at the correct interim contract value, there has to be the process of overhead allocation whereby indirect costs are apportioned to cost units. The nature and amount of indirect costs to be apportioned to the project is determined and specified by the client on the face of the interim payment certificate.
The Housing Grants, Construction and Regeneration Act provides the guidelines in making interim payments to contractors. It also specifies that both the client and the contractor must come into agreement on the amounts to be paid in advance and the periodic payments that will be made over the course of the contract. Usually, the personnel who are involved in the preparation of interim valuations are cost consultants, lead designers and clients. The cost consultants must first take into account the variations in costs during the construction work, following advice from the project designers, before entering the amounts of work completed on the interim certificates.
It is a legal requirement as stipulated under The Housing Grants, Construction and Regeneration Act that the client must always honor his/her responsibilities with regards to making interim payments as stipulated. There is a set of procedures involved when the client purposes to pay an amount different from the interim certificate amount. Sufficient notice must be given to the contractor detailing the amount to be retained and the basis of retention. The cost of materials not yet on the site must be included in the interim valuation so as to ensure that the project materials are ordered in advance and in good time (Designing Buildings Ltd. 2015).
Variation valuation is the process of determining the extent of departure from the original scope of the project. Variation valuation is usually in the form of a change order, variation instruction or variation order that is a normal occurrence in any contract work. It usually involves the omission, substitution or addition to the original scope of the project in terms of changes in the original scope, design or project definition. The original project design, scope and parameters are prepared and documented by the design staff. A number of factors necessitate variation valuation such as statutory factors, geological anomalies, technological progress, lack of specified construction materials and changes in conditions.
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The valuation of variations is limited to the valuation of the alterations to the project design, quantities, quality, working conditions and the sequence of work. Given that the Client/Employer is a developer, specializing in residential projects up to £3 million in value, these variations will likely push up this value. It is necessary that the client obtains written consent from the contractor in the case of a significant change in the nature and value of contract works, if the work is to be performed by a different contractor other than the major contractor.
The procedures involved in variation valuation require that a variation must be consideration supported. It must, therefore, be detailed in express terms rather than implied terms. The provision is meant to protect the contractor against any unsupported legal consequences.
The personnel involved in contract variation valuation are the contract administrators, usually the project engineers or architects. The variations are valued by the cost consultants by agreement that is reached at between the client and the contractor. It can also be valued by the contractor subject to approval by the client and depending on the prices and rates included in the tender documents. There is a need for the valuation of the project’s profits, overhead costs, and direct costs if the variation instructions cannot be ascertained from the bills of quantities, project drawings and specifications. The provision in the contract is meant to ensure that there is proper decision making and cost control. Thus, the variation involving the change of specification for the road surfacing (from asphalt to mono-block paving, and the addition of traffic calming) is significant enough. It should be valued separately and the client billed appropriately (Designing Buildings Ltd. 2015).
Compiling of the Final Account
The process of compiling the final account involves the determination of project’s financial aspects so as to ensure fair valuation. The process is important to both the client and the contractor as it enables the issuance of a final certificate by the contract administrator who is usually the project’s architect or engineer. It is the final stage in any contract works, and it must be completed before a final certificate is issued, indicating the successful completion of project work. The procedures that are involved in the compiling of final accounts of the project involve negotiation between the contract administrators, project consultants, the client and the contractor. The procedures of preparing the final account are usually strenuous and time-consuming so as to ensure that the project is up to the required standards.
Agreement of the Final Account
An agreement of the final account is the last step that is undertaken before a final certificate is issued by the project administrator. Once an agreement has been reached, it becomes legally binding, the final certificate is issued; and then the final payment is made. Thus, it ensures that the contractor fully recovers the total cost incurred in the course of the contract works. With regards to this project, the expected project duration was 36 months. Due to the variations in the original scope of work, the project was completed within 45 weeks. Thus, it would require a fair valuation in the preparation of the final account. The contract administrator has the rights to demand that the contractors furnish them with lump sum amounts of the project’s variations so as to assist them in determining the fair valuation amount of the project (Designing Buildings Ltd. 2015).
Claims arise in engineering and construction projects. These claims include claims lodged by the client against the contractor in the case of liquidated damages and defective work by the contractor. Claims can also be lodged by the contractor against the client in the case of variations, project time extensions and losses. The personnel who are involved in the claims process are the contractors and employers. The process of lodging claims is usually highly regulated so as to eliminate cases of fraud. Claims made against the client relate to additional money and time spent by the contractor in case expenses and losses arise outside the original scope of work. Also, quantum meruit and variations are in the nature and scope of the contract. Claims lodged for the extension of the completion date for the contract works are only allowed if the contractor fails to complete the contract within a reasonable time.
The client will claim liquidated damages against the contractor in case of delays in project duration. The procedures that govern project duration give an adjustment for contract duration, which may give rise to claims of losses and expenses. These expenses result from delayed work and disruption of work as a result of the delay in delivery of materials or employment of unproductive materials. The costs that are claimable in this instance are costs relating to finance charges, lost management time, general disruption costs and loss of profits. Other personnel that can lodge claims against the client are the professional consultants. Such claims can be lodged if the clients fail to pay the consultancy fees or there is a breach of the professional consultant’s copyrights with regards to the use of project design, drawings and plans (Thomson Reuters 2015).
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The importance of full cost recovery by the contractor during the course of contract works or upon completion of the contract cannot be underestimated. In order to ensure that the contractor fully recovers the project outlay cost, there is need to observe the contract regulations by ensuring that condition surveys and site investigations are carried out. Recovering all the contract costs is advantageous as it eliminates unsupported claims while at the same time minimizing the risk of potential variations. Therefore, recovering the full contract costs ensures that the contractor remains in business and can undertake future infrastructure projects.