Final Accounts

Final accounts are an important commercial milestone in any construction project. They signify the agreement of the final amount to be paid between the client and the contractor or contractor and subcontractor and so on.

In construction contracts there are clauses and processes on how to vary the works, including the timescales to adhere too. Final accounts should be straightforward to close out, as once you reach completion there should be no outstanding items, but in reality there are usually contentious points to work through, such as variations that have been rejected in principle or where they have been agreed in principle but there is disagreement as to their value.

It is for these reasons that reaching such an agreement can be a time consuming and often adversarial process to complete. Also, whilst efficient contract administration through the works will no doubt reap rewards at the final account stage, there may still be a number of other issues to work through before you can move to close the account, such as:

• Provisional sums
• Liquidated and ascertained damages
• Retention amounts
• Price adjustment factors
• Loss and expense claims
• Outstanding client instructions
• Prime cost sums
• Closing out costs associated with any nominated suppliers

Notwithstanding the standard contract operating mechanisms above, there are usually ‘contra-charges’ to be applied. If you are a management contractor or client there might be instances where you have paid for something that later proves to be the responsibility of the supply chain. For example, a third party has damaged the works out of hours, but as you were better placed to react you mobilised a team and repaired the damage. However, as this is not your risk or responsibility under the terms of the contract these costs will have to be deducted from the suppliers account.

The form of contract chosen will also dictate what action needs to be taken to close the account e.g. if it is a priced contract with a bill of quantities using a client retained design, a full re-measure will be required to ascertain the final value of the works. It is good practice if this is done jointly. However, if the works are contracted via an ECC Option C Target Cost arrangement then auditing accounts and records such as staff salaries and salary burdens will be required, as well as auditing that costs claimed are permissible in accordance with the contract.

From a timing perspective, contractors will typically seek to reach an amicable and timely agreement with the client on the final account shortly after completion, as they will want to be paid any outstanding amounts as soon as possible and free up resources onto other projects. However, from a client’s perspective, they will want to ensure the works are defect free, notwithstanding any latent defects that may arise, and that a final account has been substantiated, as in the case they are subject to audit they can provide the relevant details as to how they arrived at the final sum due.

Despite the effort into agreeing final accounts, some contracts do not contain express provisions for agreeing final accounts and closing them out in a certain timeframe. For example, in the JCT forms of contracts there is a defined process with differing timeframes for the Standard Form and for the Design and Build contract e.g. under the JCT design and build form it also states that after two months, and if no final account has been received, the employer can make their own assessment.

Contrast this to the NEC ECC forms of contract where there is no defined final account procedure, as it relies upon the processes set down to agree compensation events. For example, under NEC3 ECC Clause 61.7, it states, “a compensation event is not issued after the defects date,” which therefore limits the clients ability to continue instructing additional works. This means that after you have valued all current compensation events and added these to the original contract sum at the defects date, you should have arrived at the final account.

What are the best practices for concluding a final account?

In an ideal world, a ‘rolling’ final account will be in place each month between the parties, which depicts the original contract sum plus any agreed variations and the other points listed above.

This is best practice as there will be no surprises once completion is achieved and the final account is submitted, enabling a quick and amicable agreement. To make this scenario a success, defects should have been identified throughout the works and corrected without delay.

Most contracts contain condition precedents as to the notification period for submitting claims regarding loss and expense and extensions of time, therefore in the event a contractor does submit a final account with new items that relate to historic events, they may be struck out on the basis they are time barred from claiming entitlement.

In situations where the above does not occur, following the actions below is standard practice:

1. Formally request the final account, including making reference to the relevant contract clauses where applicable. Where it is advantageous (on a measurement contract for example) suggest jointly valuing the works.
2. Establish any entitlement and value of loss and expense and extension of time claims. In order to do so, this will need to include copies of all relevant instructions, quotation submissions and acceptances clearly demonstrating how, in accordance with the contract, they are due additional monies.
3. As per the usual process you would go through in terms of issuing a payment assessment, you will need to establish the sum claimed versus the sum payable and then list the reasons why, in accordance with the contract, there are any differences.
4. Once an assessment has been made, move to set up a final account meeting, ensuring the appropriate personnel are available from all parties.
5. Upon making the assessment, be prepared to present it including detailed assessments as to how you arrived at the amount due, being able to demonstrate that you have considered all available information.
6. There may be issues to negotiate on but these should be minimised through joint assessment or robust account assessment.
7. Preparation of the final account statement, which will include words to the effect of full and final agreement in terms of all demands, claims for time and cost or otherwise, liabilities, costs etc. This will need to be signed by suitably authorised representatives of both parties.

Note that if the contract payment mechanism involves direct costs plus fee arrangement, undertaking detailed audits of costs claimed will involve the following:

1. Granted direct access to the suppliers financial systems
2. Audit of the suppliers quality management systems to establish that costs booked to a particular contract are correct and can be traced back to source.
3. Review the costs to satisfy yourself they are allowable in accordance with the contract.
4. Any costs that are deemed to be included in other fees will need to be set aside e.g. finance charges.
5. Check that sub-contract costs have been paid in accordance with their subcontracts or else these could fall into the category of disallowed costs.

In the event there are differences in terms of a measured final account, cost plus fee basis or other disagreements such as the length of time extension and delay damages, the parties have can seek a resolution through adjudication, but it is always more desirable to reach an amicable agreement via mediation or conciliation. The option of an independent third party to review the final account submission and client’s assessment is appealing, especially if both parties agree on the third party.

Remember that if you incur costs in preparing, assessing and administering your supply chains accounts as they have failed to provide a final account, or providing one that is not in accordance with the contract, then you should deduct this cost incurred from the value of their works. Whilst some may view this as unreasonable, it is an additional cost that you will incur due to another party’s malpractice, therefore you have performed this duty on their behalf and should be put into a cost neutral position accordingly.

What happens if you get it wrong?

Administering a final account is no different to any other payment assessment in that you will need to administer it within the contractual timescales. Failing to do so means it will be taken as the default payment notice with the full amount becoming due as per the housing grants construction and regeneration act.

The timing of payment notices regarding final accounts is not the only issue concerning timing when preparing a final account. For example, if a subcontract final account is settled with the main contractor and subsequently passed over within the main contractor’s final account to the client, what happens if the client is not happy with this assessment? Essentially this is the contractor’s risk and should there be a deficit between the client’s assessment and the subcontractors then, with no recourse between the contractor and subcontractor, they could be left with picking up any shortfall.

Careful management between the flow of information and the timing of agreements is imperative so that back to back agreements are reached. However, remember that ‘pay when paid’ clauses and general practice is outlawed by the construction act, so you will need to ensure that all parties are committed to present and review information within the timescales for assessment so that any queries can be resolved in good time.

Ensure that with any agreement to close an account, you do not leave the door open for further claims but you remain able to hold those liable should defects occur during the defect liability period. For example, in the case of YJL London Ltd v Roswin Estates LLP (2009) a dispute arose as to what one party considered was a full and final settlement versus what the other party considered to be a typical final account statement, leaving the usual defect provision in force. Subsequent defects arose and one party believed they were relinquished from liability due the wording in the final account statement. Such occurrences should be covered off with a suitably worded final account statement.

In agreeing the final account, if you cannot find common agreement you will need to consider the use of mediation or more formal dispute resolution proceedings such as adjudication, arbitration, and even litigation.

Interesting case law

In the case of Systems Pipework Ltd v Rotary Building Services Ltd, Systems Pipework submitted a final account and, upon Rotary presenting their final account assessment, Systems Pipework argued that this did not constitute a proper payment notice in accordance with the construction act. The courts were asked to decide whether it amounted to proper notification of the amount due and therefore whether it was binding.

The Technology and Construction Court took the view that proper notification had to include the amount due for payment in respect of the final account. They stated that what was received did not include details of previous amounts paid, on-going retention, and all works carried out.

They noted the documents provided by Rotary Building did not state the amount due and were instead described as a ‘final account assessment,’ but did not state a particular sum due or under which clause the assessment was made. As the court found in the case of Systems Pipework and the court deemed no valid payment notice had been issued, they instructed Rotary Building to make payment.

This case highlights an uncollaborative approach to final accounts, which, through a lack of communication leads to the entire final account assessment being effectively set aside.

In the case of Kilker Projects Ltd v Purton (t/a Richwood Interiors) (2016), Purton argued that as no payment notice was received their final account was due for payment in full. Kilker subsequently issued adjudication proceedings stating that this was the case with regards interim payments, but it could not apply for final accounts. Purton argued the adjudicator had no jurisdiction, as the amount was not in dispute having been deemed payable in full by the absence of a payment certificate.

The courts found in favour of Kilker in that interim applications are a means to support cash flow and could not be seen as to affect the ultimate value of the works. This is interesting as it ruled the construction act provisions did not apply for final accounts, therefore Purton’s account is capable of being revalued.

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About Dean Suttling

A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.