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"Let the Profit Margin be" - The Principles of Valuation

Updated: Sep 30, 2023

The Beatles - Let it be, cover redesigned by Exclusive Vector

The Principles of Valuing the Contract Works

“When I find myself in times of trouble, Mother Mary comes to me, speaking words of wisdom, let it be.” [Paul McCartney]. But when Covid-19 times of trouble come, who is telling the engineers to the contract to let the profit margin be? Is it wisdom to argue Off-site Overheads and Profit should not be applied in any particular circumstance?

Maybe it is time we amend NZS3910:2013 to expressly extend and strengthen the application of the principles for valuation of variations [9.3] to the requirement for the Contractor’s and Engineer’s valuation of Contract Works carried out, [12.1.3 & 12.2.1] when calculating the amount to be claimed and then Certified for a Progress or Final Payment Schedule?

For a lump sum contract [2.2] detailed principles of valuation are only covered in section 9.3 which is limited to the valuation of variations to be added to or deducted from the Contract Sum. With the exception of a variation with a Base Value of a Negative figure, the valuation of a variation will always address the valuation principle that a value must include;

1. a Base Value to which there is applied;

2. On site Overheads value and together, these are applied with;

3. either a specified or reasonable percentage for Off-site Overheads and Profit;

Valuation of (any component of) the Contract Works =

(Base Value + P&G Value) + OH+Profit Value

The Engineer is required to calculate their own valuation of the work carried out before relying upon this to amend the Contractors payment claim [12.2.1]. Prior to this, the Contractor is required to identify the manner in which the claimed amount has been calculated [12.1.3] and in particular for the Contract Work completed to date, to estimate;

(i) The value of Contract work excluding Variations;

(ii) The value of Variations;

(iii) The value of materials on site;

(iv) The reasonable value of materials off site [Schedule 14];

(v) The value of cost fluctuations;

(vi) The amount of any bonus (for early completion).

NZS3910:2013 states: OFF-SITE OVERHEADS AND PROFIT means the following expense or loss not incurred on the Site which are required for the general overall running of the Contractor's business, and which are not required for the carrying out of the Contract Works or for off-Site manufacturing or fabrication work by the Contractor:

(a) General administrative, financial and overhead expenses incurred in the Contractor's head office or other established offices;

(b) Executive direction and supervision by principal officers of the Contractor not assigned in the ordinary way to the contract;

(c) Profit, other than return on investment on Plant which would normally be recovered in hire rates for Plant.

"Let the Profit Margin Be"

The Contractors financial and overhead expenses include the fluctuating reserve assets needed to honour the cost of non-recoverable delays to the project, slow or non-payment of amounts due, insurance excess, guarantee obligations and any number of risks that frequently arise including the financial impact of Covid-19.

It defies good reason why the valuation of any component of the Contact Works, with a positive figured base value, is not attributed with a proportionate application of Off-site Overheads and Profit, yet it happens frequently when there is creative play with the principles of valuation.

By Matthew Ensoll

Life Member NZIQS Reg.QS.

Editor The New Zealand Building Economist (NZBE).


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