Valuing variations with a Schedule of Rates | C-Link

Valuing variations with a Schedule of Rates

by Dean Suttling

Consider that a bill of quantities reflects the project requirements through identification of the works, as described in the specification or illustrated on the contract drawings, and complies them into a list of measurable items. By contrast, a schedule of rates is used to value the scope of works where the final nature or quantities are not yet known, or perhaps the final specifications remains at large.

There are differences in the approach when using a schedule of rates. They can simply be labour, plant, and material rates used to price incidental variations. Alternatively, a schedule of rates can be used for the measurement of works packages on term maintenance contracts whereby a schedule of rates is used to price works e.g. blockwork, brickwork, roofing etc. Notwithstanding these types of schedules, there are also standard rate books that can be used to value works, such as the BCIS Schedule of Rates, CECA Rates, or the PSA Schedule of Rates for Building Works.

Dependent on your intended use of the schedule of rates will determine your preferred method of valuation. For example, if you have a bill of quantities, you might also include contract rates for incidental ‘dayworks’ in the event you instruct works that cannot be priced using the existing rates. The benefit of agreeing rates that can be inserted into the contract is that you negotiate them during a competitive tender situation, as opposed to post contract where you could be exposed to above market rates.

What are the advantages and disadvantages of a Schedule of Rates?

When considering the best way to price the works, think about the benefits of using a schedule of rates compared to using a standard building contract with or without quantities. The advantages are:

  • If you have a list of pre-agreed priced work rates, you will be able to estimate the value of works yourself before issuing to your supply chain, which only leaves you with any ‘non-standard’ rates to negotiate and agree.
  • You may be able to generate cost plans and commercially manage your supply chain through rates from multiple suppliers, as the cost for them to tender a schedule of rates is fairly nominal.
  • If you agree library rates for measurable works, once you have measured and valued the works using the schedule, your supply chain should only need to review your quantities, as the value will be based on their tendered rates.
  • From a supplier’s perspective, there is less risk if work packages are valued using a pre-agreed schedule, making it possible for you to mutually agree to start works ahead of any final price agreement for the whole of the works.
  • You can benchmark works between suppliers. By updating these rates as your portfolio of projects increases, you’ll gain a better market intelligence for cost planning of future developments.
  • For simple labour, plant, material, and preliminary rates, agreeing these upfront before the contract is awarded will save time in negotiating, auditing, and agreeing rates post contract.

However, there are some significant disadvantages with using a schedule of rates, which are as follows:

  • When it comes to agreeing a valuation of works based on a schedule of rates, more resources are required. This is because in the case of labour, plant, and materials rates, you’ll need to ascertain, through records and other substantiation, the costs were reasonably incurred and that you are not paying for items such as re-work. Although the works are essentially cost reimbursable, under this example, you should still seek to filter out any hours claimed for defective workmanship or re-work etc.
  • Dependent on when and how you commission the works, you may be unsighted as to the final value of the works e.g. you are measuring and paying for the works completed on an hourly basis, therefore it’ll be difficult to forecast what the final cost will be.
  • The biggest downside of paying for works using a schedule of rates is that the contractor doesn’t have a real incentive to complete the works at pace e.g. the longer the works take, the more revenue and profit the contractor will generate.

Schedule of Rate and Item Coverage

As with a bill of quantities, where item coverage dictates what is allowed for within a specific rate, a schedule of rates for labour and plant can also include coverage for what is included in a rate. If you receive such a schedule from your suppliers, check to ensure what is included e.g. fuel, overtime, how many hours per day does it cover as standard, what is the uplift for working outside of these hours, etc. For plant, does the rate include the driver, depreciation, maintenance, plus who holds the risks of plant breakdown etc.

It is because of these nuances that people tend to rely on standard schedule of rates books that are clear on what the rate includes, as opposed to getting into the detail as to what is or is not included for each supplier on a contract-by-contract basis.

Also, as well as the typical checks to make if someone has issued you a schedule of rates, check how long the prices are held for. This may only be for a period of twelve months, but if your contract is likely to extend beyond this, you might want to agree upfront the mechanism for adjustment.

What happens when there are pre-defined rates in a subcontractor’s quotation that were not agreed in the contract – what takes precedence?

If there is a schedule of rates for additional items listed in a contract specifically for the purpose of pricing variations, but you find a subcontractor does not use these, you may be mystified as to why this is happening. Usually, this is because the rates are hinged on the work being of a ‘similar’ nature to the rates description.

Unfortunately the interpretation of this can be a two-way street i.e. if the subcontractor’s rate does not provide him with the desired commercial outcome, they may claim the rate is not suitable and therefore has proposed a new rate. From the clients perspective, they have gone to the effort of agreeing rates pre-contract, therefore they see no reason any variation should not be valued using the schedule.

If the matter should end up in a dispute, the subcontractor will not be on strong ground as the basic purpose of agreeing the rates up front is clearly aimed at managing variations. The client did not add them himself, the subcontractor provided them willingly, therefore the client is not under any obligation to agree additional rates unless there are solid reasons for doing so, such as the works instructed are of an entirely different nature e.g. the build is for domestic housing but you intend to add in infrastructure works.

However, subcontractors might also argue the schedule of rates in the contract are only for use with certain quantities or durations. In such a case, the argument may hinge on whether the contract is based on approximate quantities or a standard building contract with quantities. In the case of the former, the very fact the quantities are approximate means that if a rate was used to measure other works, it was always intended to operate in this way.

However, if it was the latter, the contractor could argue they incorrectly spread the value of works over the rates and therefore they cannot be held for valuing variations. For subcontractors and clients, this is a risk that becomes more apparent if rates are front-loaded.

This is a two way street in that a rate accepted and entered into the contract may prove to give the subcontractor a greater commercial return than current market. Courts generally view the case of what is ‘reasonable’ being the rates entered in the contract as the time to challenge was pre-contract award. This is known as acquiescence or more commonly described as “silence is acceptance” i.e. if the client had an issue with the rate, they should have raised it before, and the fact they did not in the eyes of law means they must have accepted it.

In this example, how would I manage and value this fairly?

Generally speaking, the valuing of variations should operate in such a way that the subcontractor is making a similar level of return as they intended upon making when entering into the contract. If you genuinely know that a rate you are entitled to use will impose a loss, due consideration should be given before using it.

Alternatively, from the subcontractor’s perspective, they will know they entered willingly into the contract and they are obligated to carry out and complete the works in accordance with the terms of that contract. They could seek to try and manoeuvre their way out of the rates, but if the tables were turned and the rate was favourable, would they still have the same approach? Ultimately, this is the nature of contracting, but you should be wary of disputes arising and be mindful the time to argue about the proportionality of rates to variations is pre-contract award.

If you are using a JCT Standard Building Contracts, they state that “where the work is not of a similar character to work set out in the contract documents, it shall be valued at fair rates and prices,” which leans towards that described above i.e. the works are to be valued for a fair return. In the event a subcontractor provides quotations with additional new rates, then as long as you can satisfy yourself they are reasonable market rates utilised correctly, why wouldn’t you use them? If they are not, you can make your own assessment using the prescribed contract mechanism and using what you consider fair rates and prices.

What should I include in a contract around rates?

The form of contract used will, to an extend, decide what to include e.g. with a contract sum analysis this will be supported with a schedule of rates, but other forms will need certain obligations added in that go on to support the operation of a pre-agreed schedule.

In terms of operation, from a client’s perspective, you should consider boiler-plating contracts with wording that gives you ultimate authority as to the final agreement of any rates for variations and omissions. Where wording such as “by measurement and valuation at fair rates and prices, having regard to current market prices,” comes into play, then as a client you are better protected as you retain the power of deciding what is ‘fair’ and ‘current market’.

If you intend on issuing your own prescribed schedule of rates that you intend to use for particular works, in terms of general structure, list out general conditions first before running through the typical series, such as building works and M&E. Ensure that you provide sufficient breakdown for each section e.g. site preliminaries, treatment of overtime, codes of practice, definitions, plus a clear list of what is deemed included.

Should I have a schedule of rates for every contract order?

Dependent on the form of contract, some will have more emphasis on needing a schedule of rates, but for others e.g. approximate quantities, it would make sense to have a list of measured works rates in the event the scope widens.

However, including an agreed list of cost reimbursable rates in each contract such as labour, plant, and materials could save administration time in the event the scope of works should fall outside of all other rates. Any rates in this regard, where not listed in an industry standard price book, should be audited beforehand to ensure they reasonable and based on actual cost.

Image credit: iStock.com/soberve

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.

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