Report: Final Account & The Significance and Implications of the Omission of Works

Procedure of Final Account Adjustment of the essential elements in preparation of

Final Account In the Bills of Quantities Not allowed as Provisional Sums or Prime Cost Sums

Content Page no

1. Introduction 1

2. Definitions 2

3. Procedure of Final Account 3-4

4. Adjustment of the essential elements in preparation of the Final Account 5-9

5. Comparison between Provisional Sums and Prime Cost Sums 10

6. Implications of Omission of Provisional Sums

6.1 From the standpoint of a Client 11-12

6.2 From the standpoint of a Contractor 13-14

7. Conclusion 15

1. Introduction

This report is briefly explaining the adjustment of the essential elements in

preparation of the Final Account. However, this report is prepared to identify the

significance and implications if some works are entirely left out in the Bills of

Quantities and also not picked out as provisional sums or P.C sums.

The conditions of the situation mentioned includes works like structural steel roof

trusses in which are shown on the drawings but not sufficiently designed for

measurement of quantities.

This report will cover the definition, procedure and adjustment essential element

in preparation of the Final Account. Besides that, it also defines and comparison of

the provisional and P.C sums relating to the situation presumed and later discuss on

the significance and implications from two points of view, consisting of the client and

the contractor. Lastly is the conclusion.

2. Definitions

Final Account

According to SMM2 (Clause 30.10) defines the Contractor shall send all document

within 6 Months after the Practical Completion of the Work for preparing the Final

Account.

Provisional Sums

According to SMM2 (Clause A.8.1.a.) defines provisional sum as a sum provided for

work or for costs which cannot entirely be foreseen, defined or detailed at the time the

tender documents are issued.

P.C. Sums

According to SMM2 (Clause A.8.1.b.) defines prime cost sums as a sum provided for

works or services to be executed by a nominated sub-contractor, a government or a

statutory authority or for materials or goods to be obtained from a nominated supplier.

Such sum shall be deemed to be exclusive of any profits required and/ or attendance

to be provided by the main contractor and provision shall be made for the addition

thereof where applicable.

3. Procedure of final account

Generally, Article 7 (ab) of PAM Contract 2006 defines Final Account as the

document showing the adjustment of the Contract Sum issued under Clause 30.10.

Clause 30.10 stated the Contractor shall send all document within 6 Months after the

Practical Completion of the Work for preparing the Final Account. The Final Account

must be completed within 6 Months from receipt of all the document from the

Contractor. All document including all documents relating to the accounts of

Nominated Sub-Contractors and Nominated Suppliers. Such document shall contain

all the latest construction drawings and details, details of all quantities, rates and

prices and any adjustment of the Contract Sum and additional payment or

compensation claimed by the Contractor under the Contract together with any

explanation and supporting vouchers, documents and calculations. If there is any

delay by the Contractor, the period for the completion of Final Account shall be

adjusted. In the event, the Contractor fail to submit all documents the Architect or

Quantity Survey shall nevertheless complete and issue the same based on the

information available within the Period to complete the Final Account stated in the

Appendix. When the Final Account is completed, a copy would need to be sent to

both the Employer and the Contractor to obtain their agreement.

Clause 30.10(a) Sometimes, they may not respond with any

agreement/disagreement to the Final account. In that event, this clause expressly

provides that if both the Employer and Contractor fail to notify any dispute on the

Final Account within 3 Months from the data of receipt of Account, the Final Account

shall be conclusive and deemed agreed by the parties.

Clause 30.10(b) If either party disputes the Final Account, the party disputing

the Final Account shall by written notice to the other party (with copies to the

Architect and Quantity Surveyor) set out any disagreement complete with particulars

within three (3) Months of the date of receipt of the Final Account from the Architect

or Quantity Surveyor.

The Architect or Quantity Surveyor within three (3) Months from the date of

receipt of the grounds of dispute shall either amend or not amend the Final Account.

Any party disagreeing with the amended Final Account or decision not to amend the

Final Account shall refer the dispute to arbitration under Clause 34.0 with three (3)

Months from the date of receipt of the amended Final Account or decision not to

amend the Final Account. Failure to refer the dispute to arbitration within the

stipulated time, the Final Account or amended Final Account shall deem to be

conclusive and agreed by the parties. To be more precise, it is a financial document

indicating the final value of the works executed by the Contractor and his NSCs and

NSs.

4. Adjustment of the essential elements in preparation of the Final Account

A well prepared Final account is able to establish the final construction cost of

project. There are a few essential elements which constitute a complete Final Account

and the relevant elements are as per stated below:

• Variation works (clause 11.6)

• Remeasurement of Provisional Quantities (clause 11.6 (f))

• Omission of Prime cost and Provisional sum (clause 30.11 (c))

• Adding-back of NSC’s and NS’s Final Accounts (clause 30.11 (c))

• Adjustment of Profit and Attendance (clause 30.11 (c))

• Adjustment of Provisional Sum based on actual expended and omitted if not

expended (clause 30.11 (d))

• Additional Expenses Claims (clause 11.7)

• Loss and Expenses Claims (clause 24.4)

The first essential element in preparing final account is variation works under

clause 11.6. The valuation of variation and work executed by the contractor for which

a provisional quantity is included in the contract and the expenditure of provisional

sum shall be based on 11.6(a), (b), (c), (d), (e) & (f). Clause 11.6(a) stated the rates

and prices in the Contract Documents shall be the basis of valuation where the

Variation work is similar in character to, and is executed under similar conditions set

out in the Contract Documents, and where there is no significant change to the

quantity of work indicated in the Contract Bill.

Clause 11.6(b) the rates and prices in the Contract Documents shall be the

basis of valuation, and shall include a fair adjustment in the rates to take into account

same cost differences where the Variation work is of a similar character to, but is not

executed under similar conditions set out in the Contract Documents. Similarly, the

rates and prices shall also be appropriately adjusted where the Variation work is of a

similar character and is executed under similar conditions, but there is a significant

change in the quantity of work as compared to the quantity indicated in the Contract

Bill.

Clause 11.6(c) stated the Contractor shall be entitled to a fair valuation which

will not give the Contractor more than his actual cost, reasonably and necessarily

incurred, plus similar allowance for overhead and profit. Clause 11.6(d) stated the

Contractor can applicable ‘where work cannot be properly measured and valued.’ The

Contractor has to comply with the procedure when recording the day works, and

should have it verified by the Site Staff and progressively sent to the Architect and

Consultant.

Clause 11.6(e) stated that the rate and prices in the Contract Documents shall

determine the valuation of items omitted. If omissions substantially vary the

conditions under which any remaining items of work are carried out, the price of such

remaining items shall be valued under Clause 11.6(a), (b) or (c). Clause 11.6(f) if the

Works have been measured on a Provisional basis, the Works shall be re-measured

based on the actual quantities executed, and the rates and price in the Contract

Documents shall be the basis to arrive at a Final Account.

This shall exclude the work for which a tender had been accepted under clause

27.14 – Contractor permitted to tender for P.C Sums. For example, variation may

occur in situation such as the architect gives instruction to change the floor layout. If

there is no provision for variation, the employer may need to get the agreement of

contractor and the contractor may negotiate for higher price. This variation clause is

to allow changes to be made and subsequently adjust or amend the contract sum.

Besides, the valuation rules can be applied where the works are carried out by the

contractor for which the provisional quantities and provisional sum had been included

in the contract bills.

Besides that, remeasurement of provisional quantities is also an important

element according to clause 11.6(f). In respect of Provisional Quantity, the quantities

stated in the Contract Document shall be re-measured by the Quantity Surveyor based

on the actual quantities executed. The provisional quantities are estimated quantities

only, for instance the quantities for excavation works, piling works and infrastructure.

It is not possible to know the actual quantities for the works mentioned at the early

stage and thus, the quantities shall be remeasured by Quantity Surveyor in-charged

based on the actual Works that completed. The quantities are subjected to changes but

the rates priced in the Contract Documents will remain constant.

In addition, Prime Cost sums and Provisional Sums are also part of the

essential elements in Final Account. Basically, Prime Cost sums are the sum of the

specialist works carried out by the sub-contractor which normally inclusive of profits

and attendance whereas Provisional Sums are the sum of work done that can be

identified but with no detailed drawing provided and thus, the sum cannot be itemized

in bills of quantities (BQ).

The question worth to be raised up is that, why is there a need to allow

provisional sum in the BQ since adjustment is to be made at the final stage? Let’s take

guard house as an example and the possible reasons are as stated below:

• For instance, contractually, a guard house is to be built but with very limited details

of drawings. In this case, the provisional sums need to be added into BQ so

that client will be aware of the budget of the project as it allows an

approximate contract amount for the purpose of cost control.

• Contractor needs to include the provisional sum works in order to plan his work

program and to finish the works on time. It will easily cause disputes if

provisional sum is not added into the contract document. In this case,

contractor can easily claim for extension of time (EOT) as architect will have

to issue Architect’s Instruction for variation works which are against the

requirements as per agreed in contract document, for instance, guard house.

Prime cost sums and provisional sums with related profit shall be omitted

from the final account based on clause 30.11(c). This is because the prime cost sums

and provisional sums are just estimated sum and act as estimated allowance but both

prime cost sums and provisional sums are subjected to changes. Since the prime cost

sums and provisional sums with related profit are omitted from the final account, the

nominated sub-contractors’ and nominated suppliers’ final account shall be

added back. Every Nominated Sub-Contractors and Nominated Suppliers need

submit the Final Account together with the pro-rata amount for profit. In short, the

adjustment is made after completion of works and final cost is ascertained.

Provisional sums and prime cost sums that are not being used shall be

deducted out from the contract sum. The profit shall be adjusted based on the

amount of final account whereas for attendance shall be remain unchanged. This

is because the attendance is a fixed amount or lump sum amount and it is provided for

supervision works and hence, it is not subjected to changes. However, for profit it is

based on a certain amount of percentage, for instance 2% of the total cost of project.

The reason of charging of profits and attendance by main contractor is because the

main contractor is required to provide the general lighting, general hoisting material

and general power and many more for sub-contractors to work.

Furthermore, the other essential element of Final Account is adjustment of

Provisional Sum based on actual expended and omitted if not expended stated

under clause 30.11(d) in PAM Contract 2006. Adjustment of Provisional Sum is

basically for the things which did not have any design, details, specification, but

needed to construct within the project. The Provisional Sum needed to adjust during

the Final Account because there is no accurate sum that Contractor place at the

Contract Document. Basically it means any adjustment of Provisional Sum will be

measured based on all the actual expended of Provisional Sum by the Contractor. If

some Provisional Sum is not expended, such amount shall be deemed to omit from the

contract bill during the Final Account.

Next, the Additional Expenses claims shall also be considered in the Final

Account which is stated under clause 11.7 in PAM Contract 2006. The objective of

this clause is to enable the Contractor to be reimbursed as part of the cost of variation,

for the additional expenses he has incurred carrying out the Variation, and for which

he would not be compensated under Clause 11.6. However, the Contractor is allowed

to claim for the additional expenses in accordance to the clause 11.7 (a) provided the

contractor shall give written notice to the Architect of his intention to claim for such

additional expenses and the contractor shall send to the Architect and QS complete

particulars of his claim clause 11.7 (b). Eventually, the additional expenses claim will

be added into the Final Account. The final essential element of Final Account is Loss

and Expense claims which stated under clause 24.4 in PAM Contract 2006. The

clause explains that any Loss and Expense incurred by the Contractor which

complying with Clause 24.1, the Architect and Quantity Surveyor shall make certain

and include such amount of loss and expenses into the Final Account. The words

“shall ascertain” stated in the clause basically means that the Architect or the Quantity

Surveyor must access the claim based on particulars and calculations submitted by the

Contractor but not merely rely on a general assessment before including the amount

into the final account. Any claim under common law is outside the jurisdiction of the

Architect and Quantity Surveyor, and the Contractor has to resolve this with the

Employer.

However, there are 3 elements which shall be excluded from Final account

based on clauses 30.11(e) to (g). The first element to be excluded is any liquidated

damages imposed by the Employer as stated in the clause 30.11(e). Secondly, set-off

by the Employer shall also deem to exclude from final account under the clause

30.11(f). Lastly, Interest payable by either Employer or Contractor shall also be

excluded from Final Account under the clause 30.11(g). The main concern is that,

why are the 3 items mentioned above are to be solved separately between employer

and contractor? Why are the 3 items excluded from Final Account? This is due to the

following reasons:

• Architects are certifiers and they certify work done only and not the parties to the

Contract. They need to be fair and independent and it is not their duties to

determine the party who is in dispute and hence, these 3 items are to be

excluded from the Final Account.

• Disputes may easily arise from either party with such elements being included in

the Final account, causing the final account hardly to be completed at the end

of the day. The main intention is not to delay the timely conclusion of the

Final Contract and it simply means without a final account, the Architect and

QS cannot be discharged.

5. Comparison between Provisional Sums and Prime Cost Sums

Basically, as defined in SMM2, Provisional Sums is of the supply of materials

with profits and attendance also labour cost whereas the Prime Cost Sums only

consists of the supply of the materials.

Common examples of Provisional Sums consist of landscaping, piling, earthworks

or scaffolding. Common examples of Prime Cost Sums are supply of cook tops and

ovens, sanitary wares, furniture or floor coverings.

In this case, the structural steel roof trusses are provisional sum as the works will

include the supply of the steel roof trusses and the installation which takes into

account the profits and attendance. Other than that, the situation clearly shown that

drawings are available to identify sum of works to be carried out but the later states

that no details for measurement shows that the sum cannot be itemized in the Bills of

Quantities, hence allowance of Provisional Sums should be given.

6. Implications of Omission of Provisional Sums

Having the condition as below,

(a) The works omitted is the structural steel roof trusses

(b) Shown on drawing but not sufficiently designed for measurement of quantities

(c) Works entirely left out in Bills of Quantities

(d) Not allowed as Provisional or Prime Cost Sums

(e) Using the PAM Contract 2006(with quantities)

(f) Variable assumptions made accordingly

6.1 From the standpoint of a client

(f) At pre-tender stage

Should the quantity surveyor omitted the steel roof trusses, which is

supposed to be an allowance as Provisional Sum, this means that the Contract

Sum excludes the works of the structural steel roof trusses.

When the works are not included in the estimates, this would affect the

cost control process due to omission of works and the budget established will

not be accurate. The client will rely on the budget estimates to derive the

approximate contract sum. Client might tend to spend more on other works

such as specifications relating to the quality of the building if the estimates

shows a budget lower than anticipated. This would cause disputes arising in

the future when the actual contract sum is way too high over the clients’

budget.

(f) After contract awarded

Clause 11.1(a) defines the term “Variation” as the alteration or

modification of the design, quality or quantity of the Works including the

addition, omission or substitution of any work. In this case, the Variation will

be regarding the omission of the structural steel roof trusses.

Upon awarding of Contract, provided if the parties are still unaware of

this omission, the works would be left out. When discovered, this means that

the client has the options whether to enter a separate contract which only

consists of the structural works of steel roof trusses or the client would have to

treat this part of omitted work as variation according to clause 11.2 in PAM

Contract 2006 that the Architect may issue an AI ordering or sanctioning the

variation in order for the contractor to carry out all the variations with due

diligence and expedition.

If the client goes for option 1, it might be time-consuming and the

overall cost will be higher due to the lengthy tender process and sudden

involvement of works. However, option 2 is also not as good as 1 due to the

instruction of AI to variation may give the contractor a ground to claim for

EOT which is in accordance with clause 23.8(g) and meaning that the client

would have lesser imposed liquidated damages.

6.2 From the standpoint of a contractor

(f) At tender stage

If the contractor found out the part of structural steel roof has been

omitted in the tender document, the Contractor may inform the quantity

surveyor and upon confirmation of the omission, there might be a revised

tender or tender amendment. This would be better as it prevents disputes

arising in the future.

(f) Provided if the contractor is to carry out the works due to AI of variation

clause 11.2

The omission of provisional sum would affect the contractor’s master

work programme which would also affects the completion date of the project.

The contractor, unaware of the works of provisional sum at the early stage

would have to submit a new master work programme and this would cost

more to the contractor if he had insufficient plants and machinery or even

experience to carry out the works.

Insufficient experience in specified works (here is the supply and

installation of steel roof trusses) may cost higher due to unfamiliarity with

market prices and suppliers causing higher material costs. Moreover,

contractor would have to bear the defects within the Defects Liability Period

which would cost more to a contractor to rectify the defects should the works

carried out contains defect.

(f) Provide the contractor unknowingly did the part of works

If the contractor is to make a contractual claim, Clause 11.7 under

variations, provisional and prime cost sums will entitle the contractor to claim

additional expenses other than provision in clause 11.6 provided the contractor

has meet the procedural condition stated in the contract. The contractor has to

give a written notice to the Architect regarding his intention to claim for such

additional expenses together with an initial estimate of his claim duly

supported with all necessary calculations within 28 Days from the date of AI

or CAI which is a condition precedent for his entitlement to claim. Within 28

Days of completing such variation, the contractor has to send his actual claim

together with complete particulars and all necessary calculations to

substantiate his claims. Should he failed to do so within the time stated or

within the period agreed by the Architect, the contractor has deemed to waived

his rights to any additional expenses.

According to Clause 11.9, as soon as the Architect ascertained the

amount claimed by contractor under Clause 11.7, the amount will be added to

the Contract Sum.

However, if the contractor unknowingly supplied and installed the steel

roof trusses which are not included in the Contract and he did not follow the

procedural contractual claim as per Clause 11.7, this might cause the

contractor to seek for extra-contractual claim where the claim is made under

quantum merit. This is a claim where a reasonable sum is claimed for work is

done where the contract is silence on how the work is to be paid.

7. Conclusion

There are essential elements needed to adjust during the Final Account.

However, owing the presence of provisional sums due to the error made by the

quantity surveyor would imply consequences to both the client and contractor.

Moreover, the quantity surveying consultant firm would also suffer loss in

both monetary and accountability. This report mainly focuses on implications

to the client and the contractor involving the project.

DECLARATION OF AGREEMENT

We, the undersigned, hereby confirmed our agreement to the attached Final Account as follows:

1. That the Final Account is correct and is in accordance with the Conditions of Contract.

2. That the Final Contract Value of RM 31,060,000.00 is correct.3. That we have no further claims whatsoever against each other.

Employer     Contractor  Date: Date:

Witness    

Witness    

Date: Date:

Question 3(a):

Relocation of an already installed timber door including sealing up the wall

opening. Agreed at the site meeting for Contractor to claim based on Dayworks

for labour, material and plant.

Answer:

Diagram 1.0: Items that should be priced based on daywork rates

PAM Contract 2006 (With Quantities), Clause 11.6(d) stated that, where work cannot

be properly measured and valued in accordance with 11.6(a), (b) or (c), the Contractor

shall be allowed to claim based on daywork rates in the Contract Documents for

labour, material and plant as agreed at the site meeting. Based on this scenario, the

items that should be priced based on daywork rates are the removal of the timber

door, sealing up of the door opening and making of a new opening for the timber

door.

For the removal of the timber door, making of a new opening for the timber door and

installation of the timber door, the labour rates shall be priced in accordance with the

general labour rate provided in the schedule of daywork rates. While for the sealing

Items that should be priced based on

daywork rates

Removal of the timber door

Labour: General labour

Making of a new opening for the

timber door

Sealing up of the door opening

Labour: Bricklayer, plasterer and

painter

Materials: bricks, sand,

cement and paint (refer to the

breakdown rate provided in BQ)

up of the door opening, the labour rates shall be based on bricklayer, plasterer and

painter.

Apart from that, QS shall refer to the breakdown rate provided in Bill of Quantities as

a basis to derive the new rates for the material used in sealing up the door opening

such as bricks, sand, cement and paint. In this case, there is no payment for plant due

to no plant is needed to execute the variation works.

Contractor should prepare a daywork record in order to claim for daywork. The

daywork record shall include the time spent daily upon the variation works, the

worker’s details, scope of works, materials used, transportation as well as other

necessary evidence. The daywork record shall be signed by the client’s representative

or Site Agent and verified by the Site Staff for validation purpose. Then, the

document shall be delivered to the Architect and Quantity Surveyor at weekly

intervals with the final records delivered not later than fourteen (14) Days after the

work has been completed.

Question 3(b)

Omission of the need to provide computer equipment in the Preliminaries section

but item was left unpriced, i.e. BQ item was left black in the rate/amount column

in the contract document.

Answer:

Computer equipment in the Preliminaries is left unpriced, it shall be deemed that the

Main Contractor has included such item in his tender with a Lump Sum price.

Therefore, the Consultant Quantity Surveyor shall identify the price of the computer

equipment; and the Employer has the rights to omit the price of the computer

equipment as stated in Architect’s Instruction if necessary.

According to PAM Contract 2006, in Clause 11.6, the valuation of Variations and

work executed by the Contractor for which a Provisional Quantity is included in the

Contract and the expenditure of Provisional Sums (other than for work for which a

tender had been accepted under Clause 27.14) shall be made in accordance with the

following rules:

Clause 11.6(c), where work is not of a similar character to work as set out in the

Contract Documents, the valuation shall be priced at current fair market rates and

prices are to be determined by the Quantity Surveyor. Therefore, in this scenario, the

Consultant Quantity Surveyor has the rights to omit the price of computer equipment

based on fair market rate. Besides that, the Consultant Quantity Surveyor may obtain

the rate of the computer equipment from previous contract documents of a similar

project.

Question 3(d)

Mistake was made in rate for 50mm thick concrete blinding is RM 10 per m3.

Item was not rationalized during contract documentation. However, original

quantity in BQ is 100 m3 but re-measured quantity is 2,000 m3.

Answer:

According to case law Henry Boot Construction v Alstom Combined Cycles Ltd

[2000] BLR 247, the Court of Appeal found that the relevant variations had to be

priced using the contract bill rate, notwithstanding the apparent mistake which meant

the Contractor was likely to receive a windfall profit. In another manner, it also meant

that if the contractor priced a lower rate, he most likely would receive a windfall lost.

PAM Contract 2006 (with Quantities) Clause 11.6(b) had stated that “where work is

of a similar character to work as set out in the Contract Documents but is not executed

under similar conditions or is executed under similar conditions but there is a

significant change in the quantity of work carried out, the rates and prices in the

Contract Documents shall be the basis for determining the valuation which shall

include a fair adjustment in the rates to take into account such difference”, therefore,

the contractor can claim for the re-measured quantity of element with a fair

adjustment in rates that stated in the Contract Documents.

Based on the above scenario, the contractor will faced a windfall lost due to the

irrationalized rates priced during the contract documentation, this is because the final

account rates will follow the rates that initially priced in the agreed contract document

between two parties. As for the re-measurement quantity, contractor have the rights to

claim for a fair adjusted rates of the elements due to the mistakes done by the

consultant team in preparing for drawings and taking-off.

By following the price of RM10 per m3 for the 50mm think concrete blinding using

the initial quantity of 100m3, the total cost will be RM 1,000, whereas in the new

quantity of 2,000 per m3, the new total cost will be RM 20,000, and the different is

RM 19,000. Consequently, the contractor can only claim an additional of RM 19,000

for the total cost of the 50mm thick concrete blinding.

Project : Apartment Project Appendix 1

Employer : Eddie Sdn Bhd

Contractor : Taylors Builder Sdn Bhd

FINAL ACCOUNT

RM RM

1.0 Original Contract Sum 29,160,000.00

2.0 Less : P.C & Provisional Sums 4,660,000.00

Total Builder's Works 24,500,000.00

3.0 Add : Variation works (V.O. Nos 1-4)Total Additions

2,050,000.00

Total Omissions

1,000,000.00

Nett Additions 1,050,000.00

1,050,000.00

4.0 Add:NSCs' final account

Lift Services 1,500,000.00

Air Conditioning Services 1,200,000.00

Electrical Services

2,300,000.00 5,000,000.00

5,000,000.00

5.0 Constractual Claims:

5.1Additional Expenses 10,000.00

5.2Loss and Expense 500,000.00

510,000.00 510,000.00

FINAL CONTRACT VALUE 31,060,000.00

Project : Apartment Project Appendix 2Employer : Eddie Sdn BhdContractor : Taylors Builder Sdn Bhd

STATEMENT OF FINAL ACCOUNT

Final Contract Value 31,060,000.00

Deduct : Amount previously certified 29,160,000.00

BALANCE DUE TO CONTRACTOR 1,900,000.00