Final account of a construction contract provides the final contract sum upon project completion. To facilitate this arithmetical process, all relevant and permissible adjustments are applied to the initial contract sum. This exercise is in principle to identify the final amount due and payable to the contractor after deducting sums already paid from the final contract sum. For projects that are in dispute, such final amount could instead be payable to the Employer by the contractor. The submission and review of draft final account can be a delicate and contentious exercise because parties are required to agree on a financial summary that is conclusive of all claims, including those that are disputed. Therefore different standard forms of contract typically set out its respective procedures, timeline and certifications to help facilitate this process.  

This article examines some of the key commercial considerations behind the preparation of final account including both the contentious and non contentious aspects. It firstly provides an overview of the arithmetical adjustments applied to an initial contract sum and how such process may be influenced by different procurement pathways adopted by the parties i.e. lump sum or remeasurement contract. An understanding of this arithmetical exercise can perhaps shed light on why final account may be contentious even though notionally it can be perceived as a mere financial reconciliation process. Positions taken or deemed taken by parties evidenced by the final account may affect parties’ positions under any potential legal proceedings. This is because whilst final account is ideally a statement representing full and final settlement of all claims between the parties, in reality the situation may be different. Certain issues such as latent defects may arise much later after the conclusion of final account. Further any settlement between the parties if not properly worded may have consequential implications on related third parties such as project consultants, subcontractors, suppliers etc. 

Unlike most certification carried under construction contract which is generally an impartial and independent determination made by an authorised contract administrator, final account may be an outcome of a commercial settlement. In other words, the details encapsulated in the final account may not be entirely based on merit of substantive issues but rather a function of concessions, expedience and business decisions. Whilst at the initial process it typically involves the consultant quantity surveyor and the contractor’s quantity surveyor/ commercial manager, it may be concluded with active participation by senior executives from both the contractor and the Employer where the situation warrants their attention. Therefore despite strict timelines and procedural requirements of final account stipulated under the contract, it is not uncommon to find that such formalities are waived by the parties’ conduct. Notwithstanding that, parties should be careful not to stray beyond the mandatory legislation requirements such as those set out under Security of Payment Act, where applicable.

Overview of Arithmetical Adjustments To Initial Contract Sum

Projects awarded with incomplete design development where its scope of works lacked firm definition usually are the ones that require the most arithmetical adjustments during preparation of final account. The construction phase for these projects usually commence prematurely resulting in multiple contingency allowances in its contract sum and also mid stream design changes that resulted variation orders that were avoidable. The original contract sum usually consists of provisional sums, provisional rates, prime cost sums, contingency sums and other similar budgetary or design allowances. Whilst some of these allowances are genuine contract instruments to reflect the agreed risk allocation philosophy between parties, the vast majority of these arrangements are aimed at deferring decision making for design development.

The preparation of final account involves identifying any closure to these allowances, valuation of changes to original scope of works and assess other established compensable events. In theory, these arithmetical adjustments could be carried out progressively throughout the construction period where the contractor’s claims are assessed and paid where justifiable through interim progress payments. Any disputes in assessment can be resolved via statutory adjudication of Security of Payment Act. In reality a significant number of these issues are only assessed and resolved upon preparation of final account due to a variety of reasons including sheer volume of administrative work and the desire to avoid legal action via adjudication to preserve relationship. The subsequent paragraphs consist of some examples of arithmetical adjustments performed to the original contract sum.

Firstly, prime cost sums are allowances included in the contract sum for nominated subcontract works. These are works that are procured and negotiated directly by the Employer, where the main contractor is instructed to enter into a subcontract agreement with the nominated subcontractor of choice. Under phase 1 of arithmetical adjustments, the prime cost sums are replaced with nominated subcontract sum. All nominated subcontract works are subjected to the process of preparation of its respective final accounts much like the main contract. In this regard, the original nominated subcontract sum may also vary throughout the construction period. Under phase 2 of arithmetical adjustments, the initial nominated subcontract sum will be replaced with the final nominated subcontract sum, after considering valuation of variations as well as assessments of compensable events. 

Secondly, provisional sums are allowances included in contract sum where it is used to describe certain scope of works where it is uncertain whether such works will be executed, thus the term ‘provisional’. Further, the party that may be assigned to carrying out such provisional sums may either be the main contractor or other designated subcontractors. In this regard apart from the uncertainty in terms of execution, it also unclear which party will be entrusted with its execution. If such provisional sums are not carried out, these budgetary amounts will be omitted entirely from the contract sum in the final account statement. In the event that the provisional sums are carried out, it will be administered much like an ordinary variation order where the amount payable will be valued based on valuation of variations provisions under the contract. Therefore for the purposes of finalisation of account, the provisional sum will be replaced with the amount valued by the contract administrator or consultant quantity surveyor per schedule of rates or applicable market rates.

Thirdly, there are also rare instances where contingency sums are included in the contract sum. Such practice is rare because the utilisation of prime cost sums and provisional sums would have catered for most if not all situations where budgetary allowances are necessary. In the remote possibility where contingency sums are used, the valuation is treated similar to that of provisional sum except that the contractor would not have reasonably expected to include such works in its construction programme. Therefore it is likely that the valuation of contingency sum may also attract additional preliminaries cost otherwise known as indirect cost apart from the direct cost to carry out the instructed works. For the purposes of finalisation of account, if the contingency sum is used, it will be replaced with the sum of direct and indirect costs of the works instructed. 

Apart from the adjustments to individual budgetary allowances within the contract sum listed above, the majority of the efforts in preparation of final account relate to variations instructed under the main contract. These are typically design changes made to the original scope of works resulting in nett addition of works and/or omission of works. For purposes of clarity, all variations should be consolidated under a standalone section that is separate and distinct from the other sections included within the original contract sum. This separation provides an immediate insight on the overall amount of changes initiated on the original scope of works. Such separation is also necessary because variations are administratively treated differently from the original scope of works. Each variation order should be individually supported by its corresponding instructions chronologically issued under the contract. Whilst in theory the contractor would only carry out variation works upon receipt of the instruction from contract administrator, this may not always be the case for variety of reasons. Therefore it is advisable to only proceed with the assessment of the variations only to the extent that it is supported by an instruction. As the instructions do not wholly describe the varied scope of works, each instruction are typically accompanied by ‘clouded’ construction drawings, specifications, sketches or even narratives as supplementary information. 

Lump Sum vs Remeasurement – Arithmetical Treatment In Final Account

When a contract is procured on a lump sum basis, the contract sum is fixed based on scope of works that is well defined as described in tender document and tender drawings. The risk is on the contractor to ensure the sufficiency of its tender price so as to be inclusive of all works including those that may not be specifically mentioned in the contract document but are indispensably necessary to bring the works to completion. As long as the scope of works remain unchanged, the Employer enjoys price certainty for its project. 

Remeasurement contract on the other hand is used when the magnitude of the underlying scope of works is uncertain and therefore parties agree on a contract sum that is estimated based on provisional quantities. These provisional quantities are subject to remeasurement in accordance with actual quantities of work carried out. Whilst the Employer is unable to benefit from price certainty, it will not be required to pay beyond the actual scope of works. 

One of the more distinct differences between these two types of contract  is the arithmetical treatment during preparation of final account. Upon completion of a lump sum contract, the contractor is paid the full contract sum for its original scope of works, subject to any variation orders. There is no necessity for any measurements to be done to the original scope of works. By way of illustration, if a contractor was awarded $10million to build a school that is based on the contractor’s measurement of 100m3 of concrete, amongst other construction materials, the $10million is payable upon completion even if the actual quantity of concrete under the original scope was 90m3. Any arithmetical adjustments arising from variation orders are subsequently applied to the $10million. This approach can be contrasted with the remeasurement contract where the original contract sum was merely an estimate and the actual amount payable is based on measured final quantity of works carried out. By way of illustration, if a contractor was awarded a concrete piling works contract based on total provisional pile length of 50,000m at a contract sum of $10million, the average unit rate is $200/m. If the actual concrete pile length installed is 25,000m, the final contract sum is $5million. It should be noted that whilst there is a difference between provisional pile length and actual pile length, such difference does not constitute a design change or variation order. In other words, any difference between provisional quantity and actual quantity of works does not require an instruction from the contract administrator for payments to be made. However if the piling contractor is instructed to carry out additional works above and beyond its original scope of works e.g. to supply and install sheet piles which amounts to $1million, this variation order is applied to the $5million. In this case, the final contract sum is $6million ($5million for concrete piles and $1million for sheet piles). 

The original $10million contract sum under the remeasurement contract is not featured in the final account because it was merely an estimation based on provisional quantity that was subsequently superseded. The final contract sum under remeasurement contract is derived based on a ‘bottom up’ approach where it is calculated from scratch based on actual quantities of work. On the other hand, the lump sum contract final account is prepared based on a ‘top down’ approach where arithmetical adjustments are applied to  the fixed lump sum of $10million.

Contentious Issues In Preparation of Final Account

Some of the more contentious issues that parties may need to grapple with during preparation of final accounts relate to recovery of liquidated damages, loss and expense claims, disputed variations and set off or contra charges for any remedial works. As the final account is administered by the contract administrator with assistance from consultant quantity surveyor, the scope of final account is dependent on their authorities provided for under the contract. By way of example, the public sector standard form of contract in Singapore i.e. the PSSCOC include express provisions for contractor to claim loss and expense which is noticeably absent in the private sector standard conditions e.g. SIA Building Contract. Therefore the ambit of the final account is within these certification limits. In order to overcome these limitations, parties that are in agreement may consider entering into a carefully worded supplementary agreement to include other claims settlement that are beyond the scope of the original agreement. In any case, assuming there are no certification restrictions, the following paragraphs deal with some of the more contentious issues in final account.

Where liquidated damages recovery by the Employer is applicable in the preparation of final account, it is not merely an arithmetical exercise. There is a chain of events that precedes the computation of liquidated damages which is listed as follow. Firstly, the contractor is liable for liquidated damages if it is in culpable delay. Such culpability in turn depends on assessment on any extension of time by the certifier. The contractor’s entitlement to extension of time is generally dependent on the merit of its application as well as compliance with any condition precedents and/or notification requirements. The merit of its application requires detail delay analysis of any concurrent delays, existence of supporting contemporaneous programmes, identification of critical paths and understanding the time impact of any delaying event etc. In other words, whilst the use of liquidated damages provides certain extent of relief as it relates to proof of damages sustained, it often involve a web of interwoven issues that can be subjective, complex and time consuming. The contract administrator making these assessments may also be responsible for causing or contributing to these delays in his concurrent role as the Employer’s agent or architect. Therefore it is not uncommon for the contractor to be dissatisfied with such determination regardless of the merit of the assessment. A contract administrator administering a final account often require certain measure of deft and skill when there is an absence of complete neutrality, whether actual or perceived. 

By contrast, if the contractor is found to be entitled to extension of time due to delays caused by Employer related events, there may be a case for recovery of prolongation cost, disruption cost etc which are part and parcel of loss and expense claims. In cases where there are express provisions for claims of loss and expense, there are extensive and fairly onerous reporting, disclosure and notification requirements. Whilst these requirements are aimed at preservation of evidence and contemporaneous records to support such claim, occasionally the contractor may find that the level of access and audit to its books, financial records, internal documents may be intrusive. After all the contractor may take the view that since it was not responsible for the delay, why should it be penalised by having prying eyes over its sensitive records just to recover due compensation. Again, this is another reason why the preparation of final account is much more than just an arithmetical exercise of project financials. 

Finally, there may be occasions where the Employer and its consultants are at odds with the contractor over the interpretation of the specification for the construction works. Works that are duly completed from the perspective of the contractor may be challenged by the Employer’s team as being non compliant with the project requirements. The issue of how should certain contract term or conditions be interpreted and construed can be challenging and it is not uncommon to find such dispute to be subject of a lengthy legal proceedings. However when the Employer rejects certain scope of works and decline to pay, it is fundamentally premised on its interpretation of the relevant specifications which happen to differ with the contractor’s position. Even if the contractor undertakes to comply with the Employer’s demand and carry out alteration to the works that it deemed completed, the contractor would seek additional payment and consider it as a variation order. In other words, the contractor may consider the issue concerned a matter of disputed variation. If and when the Employer decides to engage third party contractor to ‘rectify the defective work’, the finalisation of account is confronted with two opposing issues. Firstly, whether the Employer is entitled to set off the remedial costs from amounts payable to the contractor? Secondly, whether the contractor is entitled to any payment for the works in dispute? Unfortunately as the preparation of final account is by no means an appropriate forum for parties to contest over the construction and interpretation of contract terms, the contract administrator and/or the consultant quantity surveyor is left with the unenviable task of making financial assessment of an underlying problem that is objectively out of their scope of expertise. 

Whether Final Account Represents Full And Final Settlement

In view of the possibility that finalisation of account can be contentious, parties are understandably reluctant to fully commit to a final account statement to the extent that it may restrict their future legal rights. This is why it is not uncommon to find that standard conditions of contract often have provision to deal with the scenario where the contractor refuses to participate in the preparation of final account. This commonly arises when the disputes between the parties had escalated to a level where there is a breakdown of working relationship and the acrimony eventually implicates even claims that are less contentious. In this case, there are common provisions for the certifier to either proceed with its own assessment unilaterally based on information available or to bar the contractor from submitting any additional supporting information in future arbitration that was not previously disclosed. One of the possible explanation for the breakdown in settlement of final account is the fear that any commitments made to the final account may implicate one’s future ability to review or re-litigate disputed claims. The question is whether final account represent a full and final settlement of all issues? 

The more commercially sensible approach to this scenario is the avoidance of ‘throwing baby out with the bathwater’. Parties should attempt to resolve non contentious claims and be able to compartmentalise these from other contentious issues. From the contractor’s perspective it allows facilitation of cashflow at least partially and to include proviso in the final account statement that ‘this settlement does not prejudice either party’s future rights to pursue other claims.’ This statement should be acceptable to the Employer as well since it is also in the Employer’s interest to preserve such right for future issues that are latent in nature e.g. defects rectification, warranties etc. In negotiating and agreeing to such carve out provision, parties should also ensure that the ambit of arbitration clause is preserved accordingly to avoid expending unnecessary legal costs in battling over the future arbitrator’s jurisdictions including the enforceability of the eventual arbitral award.

Conclusion

Settlement of final account is often a blend of commercial acumen and appreciation of strict contractual rights. It is an area of practice that requires certain flair in navigating contractual landscape. It requires one to mentally distinguish the concept of ‘justice’ and ‘concession’ where trade off is necessary even if one believes in the absolute merit of its position. It is clearly a tricky area that goes beyond the mere arithmetical exercise of project financials.




Koon Tak Hong Consulting Private Limited