There are often debates about the value of variations. Sometimes a client disputes a rate because the contractor’s rate differs from the cost plan. A similar occurrence often occurs between contractors and their subcontractors. In this instance, the actual cost varies from the contractor’s price to do the works.
When a variation occurs, we have to abide by the terms of the contract. Under JCT, these are the valuation rules and, in summary, the order of precedence is as follows:
- If the same work is in the bill with a similar quantity, you must use the same rate
- If there is similar work, adjust the rate to suit
- If there are no similar works, reasonable rates apply
- Otherwise dayworks
In practice, this method is often followed in other forms of contract.
When 1–2 apply, there is little room for manoeuvre. Ultimately, these are related to the rates submitted in your tender. For this reason, it is important that you have confidence in the rates you submit in a tender.
When rule 3 applies, a payee is in a position of strength!
I’ve seen all sorts of defences used by Clients in this circumstance, a few being:
“this isn’t close to the rate in my cost plan”
“that’s not what I paid on this project”
And my personal favourite
“That’s not what it says in SPONS“
Here, it is important to note that a reasonable cost is not the same as a competitive cost.
So what do the two mean?
- A competitive cost consists of setting the price at the same level as one’s competitors.
- A reasonable cost is simply what a reasonable person would be willing to pay themselves in the same or similar circumstances.
The cost of any item of work is unique to that particular business. For example, if you have 2 flooring companies installing the same carpet, the cost to each company is unique. This is due to many factors, some of which are as follows:
- The operatives installing the floors work at different rates of productivity
- Each company will likely use different suppliers
- Each company will negotiate different prices for materials
- The cost of each company’s overheads will vary. Normally larger companies have higher overheads.
- The list goes on…
Where a company is required to do something that they wouldn’t ordinarily do, the costs increase. e.g. If the flooring company were asked to construct a brick wall (believe me, stranger things have happened!), you can bet the cost would be much higher than what a brick worker would be able to do!
As a general rule, the more an item of work varies from the business’s core business, the higher their reasonable costs will be compared to competitive costs.
Advice for the Payers
There is little point in arguing to the hilt that a competitive cost should be the same as a reasonable cost. A smart payee will know this and hold fast until they’ve run out of steam! A better tactic is to break down the cost and require the payee to evidence each of the costs, such as requesting invoices, timesheets etc. Negotiate with logic and reasoning.
Advice for the Payees
Keep good records of all costs and time spent on items. List them and clearly present them to the client. It is very difficult for a client to win an argument against your cost if the records are clear – although sometimes you may be led to believe this isn’t the case! By all means, negotiate a position to get to an agreement, but don’t feel pressured to accept it just for the sake of it.