It is time to dispel the myth some Principal representatives have asserted, in recent times, that the Head Contractor Working Day Rate (WDR) nominated in the Specific Conditions is the only recompense available for all time related costs, inclusive of any time related costs claimed by subcontractors.
I have only ever known the Head Contractor to have typically considered their own P&G and their own Head Office Overheads and Profit when formulating their Working Day Rate for nomination in their tender. Also, unsurprisingly, Principal’s representatives have been approving these rates knowing this to be the case, and rejecting Rates higher than the Head Contractor's P&G and Margin Ratios as percentages of the contract sum.
So, have we ALL got it wrong, all this time?
Should the Head Contractor have been making an assessment of all their subtrades P&G and Overheads and Profit proportions of their subcontract values, and added them to their own calculation and submitted a SUPER Working Day Rate, that contemplates ALL subcontractors being delayed equally with the Head Contractor, in all Delay affected variations? (Note that given 80%+ of the contract value is sublet, you would see WDR’s 1.8 times higher than you are seeing them today.) It seems unlikely, so what does NZS3910:2013 say about this?
Variation Pricing Class 101 – P&G + Margin as marked-up percentages.
Let’s dive into NZS3910:2013 valuation of variations, to value Overheads and Profit as marked-up percentages for delay affected variations.
After you have received a variation order you can value the variation on a basis strictly proportional to the tender value, following the base value or net cost methods together with proportional allowances for P&G and Margin, per clauses 9.3.3 to 9.3.10 inclusive. This method delivers a financial outcome reflecting the assumption that the variation value and delay time ratio is equally proportion to the original contract value and original contract period ratio. All variations, without a delay effect on the programme, are priced this way. This is Variation Pricing Class 101.
Variation Pricing Class 102 – P&G + Margin as $ Amount / Working Day.
Then because your variation ‘effect on programme’ includes a delay, the right to consider recovery of P&G and Margin also on a Time-related basis, must be factored into determining a variation value per clauses 9.3.11 and 9.3.12.
Part 9.3.11 says, “To the extent that [Time related] Cost has not been compensated in arriving at the base value of the Variation it shall be determined…” per 9.3.11 (a) (b) (c).
Now this is interesting for a number of reasons;
[1] the Base Value may or may not include Head Contractor P&G and Margin, if it does not, then P&G and Margin must be added to it;
[2] the base value may include subcontractor variation costs, and these costs may include Subcontractor Time-related Costs. As we will soon see, this is the only place where they can be accounted for.
[3] Technically Head Contractor Time-related Cost cannot be included in the base value prior to arriving at clause 9.3.11, so these introductory words can only be referring to ratio applied P&G and Margin to the base Value as being considered as having “Time-related” qualities, not to be totally ignored, before embarking on the quest to determine these fairly, by comparing them to Time-related costs.
“9.3.11 (a) where the schedule of prices nominate a Working Day Rate, it shall be used to and shall be deemed to provide for time-related On-site Overheads and Off-site Overheads and Profit.”
What qualifies for On-site Overheads?
Clause 1.3.7 "Words and phrases [appearing within the terms of contract] that are defined in [clause] 1.2 have capital initial letters." Where Schedule 1 Specific Conditions of Contract clause 9.3.11 refers to an agreed or nominated rate for "On-site Overheads" it is referring to the same words as defined clause 1.2 as "On-site Overheads".
Refer clause 1.2 Definitions page 6. ""On-site Overheads" includes costs incurred by the Head Contractor for the general overall running of the Contract Works. (Excluding those normally covered by Subcontractors or Suppliers) and which are not identified with one particular item of work."
If the Head Contractor’s On-site Overheads excludes Subcontractor’s On-site Overheads, then the Head Contractor’s Working Day rate does not include Subcontractor Time-related costs.
Why the kerfuffle over recovering Time-related Costs for EoT?
When a variation adds 10% more work, that costs 10% more in cost, including P&G and Margin, and this takes 10% longer, no one is crying in their milk about paying for additional Time-related costs.
But when a equal length delay without increase in scope occurs that is a variation, the Contractor and Subcontractors get hammered when they seek to recover unrelenting Project and Company General overhead cost and lost opportunity profit.
Before time-related cost recovery the two scenarios mean the same thing to the Head Contractor, more overhead cost and less profit.
Why the Kerfuffle? If the Contractor has a variation without scope change, they are not at fault for the delay, it is the Principal’s problem, that no one else wants to own, or feels comfortable explaining how an escalation in cost occurs without a corresponding reflection in deliverable value. Surely these types of outcomes are always avoidable, or at least explainable, with good advice?
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“Celebrating 50 years of New Zealand Building Economist 1972 to 2021”
By Matthew Ensoll
FNZIQS. Reg.QS.
Editor New Zealand Building Economist.