If someone is overseeing building works under a formal contract, one of their key roles is to make sure that the works are properly valued. This ensures that the contractor has suitable cash flow and is being paid fairly for the works they’ve done, as well as making sure the client isn’t being asked to pay more than the value of the works, being asked to pay an unreasonable amount of money, or pay too far in advance, since this would leave them exposed if any unexpected events were to happen.
The important role of valuing the work falls under Contract Aadministration, and is a criticalresponsibility of the contract administrator and highlights the importance of them undertakingtheir job diligently. Not only that, but it assures that any risks (which all projects carry to some degree) are properly managed and controlled. But did you know that there are different options for valuations, changing the processes in which they are assessed under a standard form contract?
One of the most important things in making sure the whole valuation process happens smoothly and fairly is making sure the documents and figures you’re using for the valuation process are as accurate and fair as possible. This document is usually called the ‘Contract Sum Analysis’, and it breaks down the cost of the works into clearly identifiable areas, with the relevant costs for the materials and labour etc attached to them. When the relevant works are complete, either partially or fully, an accurate assessment can then be made against these figures.
Getting this document right also means the contractor’s figures can be gone over with a fine-toothed comb when assessing their estimates of the cost of works, so the contract administrator can make sure they haven’t over-valued the initial works at the beginning of the project. This would leave the client exposed if the contractors didn’t finish the work, or if they went bust halfway through the project.
Now it’s time for the fun bit – the first valuation! So, what happens?
Usually, the first valuation date is one month after the start of the contract, and on the nearest working day each month after that. This date is an important one, since it’s the earliest trigger point for all other dates, making sure that the contractor is acting diligently and that they know when payments are due to them so that they can cover the costs of materials and trades.
Once the first valuation is submitted by the contractor, or the quantity surveyor acting on their behalf, they will issue their assessment of the works complete on or before the date specified in the contract. This is based on either the contract sum analysis or against a payment schedule depending on the method of valuation chosen within the contract.
They are:
Sometimes referred to as ‘Alternative B’, the works that are complete are valued on a date specified within the contract and assessed against the contract sum analysis. They are then given a percentage assessment of the works completed, which is to be agreed between the contractor or their quantity surveyor and the contract administrator.
Sometimes referred to as ‘Alternative A’, here the contract work is split into defined stages. For example, foundations complete, or structure complete to roof plate. These stages will have agreed values assigned to them that will include all works within that stage. Rather than assessing how much of the works are complete and assigning a percentage of overall value, as in the monthly valuations, stage payments means that payment will only be released once the relevant stage is fully complete. Once again, an assessment of the work on site is done by the contractor and contract administrator, who make sure all payments that are being claimed for are legitimate and valid.
So the valuation has been done – what’s next?
Well, works completed under a contract are assessed and paid for under a rigid series of processes, and for good reason. It gives all parties involved a sense of confidence and understanding on when they need to do something, and when they can expect payment for doing it. No one is left in the dark here.
Remember we mentioned earlier that valuations are done at the end of each month, or in stages? Well, before or on each valuation date, the contractor is due to issue their valuation of the work they believe is complete and correct. When they issue this, it defines the ‘due date’. While this might sound like payment is due at this point, it isn’t. The due date is 7 days after the issue of the valuation, and fixes relevant dates of when contract notices have to be issued.
Once the valuation is received, the Employer, usually through the Contract Administrator, has to assess the works completed, agree the valuation with the Contractor and issue the payment notice confirming the amount due– all within 5 days of the due date. Once this notice has been issued to both Contractor and Employer, the contractor will provide an invoice with the relevant sum, including VAT where applicable.
In case it wasn’t confusing enough already, the date the payment is then due to be paid by isn’t related to when the payment notice or the invoice was provided. Rather, it’s linked back to the due date, set at the time the contractor’s valuation was issued. Usually the payment is then due within 14 days of the due date, meaning the employers might only have 9 days to receive the payment notice and arrange for money to be transferred and cleared in the contractors account. So it can be a bit of a rush! This cycle repeats for month of the worksusually, depending on what the contract states.
There are also other notices under standard contracts, such as pay less notices. These are all tied back to the due date, and also need to be served within 5 days of the final date for payment – which as we just covered is defined by the due date. In this instance, it can mean there’s only a 4-day window to issue this potentially vital certificate, which is why it’s critical that all parties involved give due consideration to it and are aware of the restrictive nature ofthe timings when issuing notices. Failure to comply with these can result in parties being able to change interest, be legitimately due money of a higher value than the works completed, or even be able to make a claim against the party in default of the contract.
It’s definitely a minefield, which is why you need a specialist involved! If you have any questions about what’s in this article, or want to know how we can help you with the administration of contracts and construction work, then you just need to contact our friendly team at Harrison Clarke. We can be found at 023 8155 0051, and we would be delighted to help you with your project.
We also have a range of videos talking through various aspects of the surveying. You can access them via our YouTube channel.
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