Hi there all, Jacob Austin here, and welcome to episode 166 of the Subcontractors Blueprint, the show where subcontractors learn how to ensure profitability, improve cash flow and grow their business.
For today's episode, we're covering why you lose the argument about what a variation is worth, and why the quantity surveyor on the other side of the table almost always wins, and what they're actually doing that you aren't. And of course, there's one document that can change the whole conversation. So I think we'll cover that too. Let's dig in.
Right, picture this meeting. You've probably been in a similar one yourself. You've put in for a variation, this one's a reasonable size one, about 18 grand worth, for additional partitioning on the second floor. It's instructed in writing and nobody disputes that the work has actually been done, but the quantity surveyor opens his file and he's measured it and he takes out this measured valuation of it and he makes it £11,200. But you argue with him that the £18,000 is right and he asks you how you've built your price up. And at this point you probably say something like, that's what it costs us, that's the price. Because that's true and it's also the only answer that you've got.
He then puts a sheet of paper in front of you with quantities measured off the drawing rates that he's derived from your own tender or tallied up and totalled £11,200.
Now just think about what's happening in that situation. It's not because the man across the table is tougher than you are or that he's pulling a fast one. He's broken down your price, brought a method of valuing that change and you've just brought a number. The contract says how varied work gets valued and he's followed that prescriptive method whereas you just come up with a figure.
Just take a step back from that scenario and just think about how an adjudicator might feel about that scenario. He's got your quotation, one number on a page, some additional partitioning, eighteen thousand whatever. Then he's got the QS's full build-up derived from your tender price demonstrating how he's arrived at the price. Ask yourself which one the adjudicator is likely to prefer.
That's what we're talking about here, not measurement as a technical subject, but their imbalance commercially that that measurement creates. That's the single biggest reason subcontractors lose money on variations that were properly instructed. They're never in dispute, they just weren't valued properly. The thing here that closes the gap, it's a proper build up behind your price. Not a bill of quantities, not a measurement qualification, but a sheet of paper showing how your tender was made up, which you keep, and which a lot of people don't bother doing because people don't ask for it. But it's absolutely invaluable in these situations.
This is important because it supports the valuation methods of your subcontract. Under the Joint Contracts Tribunal forms, the JCT forms, this flows down from the main contract into the subcontract in the following hierarchy for valuing varied works. Four steps that you need to listen to the language in them.
Step one. Where the varied work is of similar character to work set out in the price document, it's executed under similar conditions and doesn't significantly change the quantity, you value that work at the rates and prices in the price document.
Step two, where it's of similar character, but it's executed under different conditions or the quantity has changed significantly, you can use those rates and prices as the basis with fair adjustments made to take into account the changes. And that means if you've put a silly price against one square meter of something and the contractor suddenly, off the back of a client instruction, asks you to do a thousand square metres of it, They can revalue that to take into account the increased efficiency. Or conversely, if the original scope didn't contain a constraint that then got introduced later.
Let's say you're doing a pretty big new build extension, but whilst you're there on site, somebody has the great idea to, oh let's block up the window on this elevation and create a new opening over here. The blocking up work is similar to the brick work that you're doing elsewhere, but you're accessing a small area of work. It's quite a tall, thin window, so you're accessing a small part at a time, waiting for the scaffolder to erect another lift and accessing the next bit. It's completely different, characteristically, so you start with the valuation on the basis of your measured rate, but then you change it to show the extra labour, extra time it's taking because of the conditions that you're working under.
Step three would be where the work isn't of similar character at all, and in this scenario you use fair rates and fair prices that are likely built up from first principles on a labour plant and materials basis completely from scratch.
Step four, where it can't properly be valued by measurement, you value it on a day work basis. We covered that recently in its own episode. This is the fallback mechanism for ad hoc piecemeal bits of work. It shouldn't be the starting point of valuing a change.
If you listened back to those four steps just to see what they're made of, it's similar character, similar condition, significant change in quantities, rates and prices in the price document, fair rates and prices. Each one of these is a measurement concept. The entire valuation mechanism is built around the assumption that somebody's measuring something and pricing it and that there's a document you can go back to and that's the problem in one sentence. The contract assumes that your price has a structure whereas in a lot of subcontract packages it doesn't or at least not one that anybody wrote down. So when the valuation happens and there's a discrepancy the contractor's quantity surveyor is operating that mechanism and and you're working on instinct. He isn't cheating, he's doing what the subcontract tells him to do. You're actually the one that's turned up without the document, without the calculation that the subcontract assumes you have.
A common misconception, one that I've heard plenty of times, is that when you're on a lump sum there are no rates. We need to kill that idea.
Say a subcontractor tenders a lump sum. 320 grand for a complete package, no bills of quants, no schedule of rates, just a number and a scope. He concludes from that that there's no rates in his contract, so step one and two of that hierarchy don't apply to him, therefore everything must be fair rates and prices or day work. That's wrong, there absolutely are rates. You didn't arrive at a precise price of the £320,000 by a gut feeling. Somebody in your business has worked out how much labour plant materials and so on has gone into that job. Let's stick with the partitioning. They've worked out what it costs you per square meter, how many door openings there are, how many windows to trim around, how much framing they need, how much dot and dab there might be, and what your access and prelims costs come to. The rates are all there. You just didn't write them down in a form anyone can look at.
The second way it's wrong is that just because the price document is absent, that everything goes to fair rates and prices. Instead, it goes to whatever the Contractor's QS can construct. If he can derive a rate from your tender, from your pricing schedule, from a breakdown you sent him during the negotiation, from anything, he will, and is entitled to it. So what actually happens when you say well lump sum, there are no rates. It's not that you escape the mechanism, it's now that the contractor's QS gets to make some assumptions and build the rates up himself and he could get to react to them. And he's likely got the time, the tools to do all of that. That's his job. Whereas you've got to do that alongside a site to run, a business to manage.
But here's the bit that should change how you feel about all of that. If there's a price document and it contains your rates, those rates are extremely powerful. They're the basis for valuing all the changes on the job. There's more power in that document than there is in any other document in your contract when it comes to valuing change.
There's a case worth knowing about that supports that point which is Henry Boot Construction against Alstom Combined Cycles. This went to the Court of Appeal in 2000 And the case was about civil engineering work being done at a power station. And Henry Boot's price for temporary sheet piling was incorrect in the contract. Variations were then instructed that increased the amount of sheet piling considerably. And Henry Boot had got its rate wrong, but it was wrong in its own favour, so applying that rate to a much larger quantity produced a very large profit for that piece of work. Alstom, probably feeling a little bit hard done by, said that that couldn't be right and they were arguing for a fair valuation, and the court disagreed. At first instance the judge described the contract rates as sacrosanct, immutable, not subject to correction, and when it went to court of appeal they upheld the same approach. An error in pricing in a rate doesn't entitle anybody to go behind it.
There are two things to take from that and they point in complete opposite directions.
The first is the good news. If you've got a rate, and it's a good rate in your pricing document, then that's worth real money when a variation uses that rate. The contractor's quantity surveyor simply can't decide to use a different rate just because he thinks one's particularly generous. He has to apply the valuation rules. And the first rule sends him to your rates.
Now think about what that means for you as a subcontractor. Most people assume that if they've priced something really well and they're making good money on that item then the contractor will just refuse to pay it on a variation, and other than adjusting for significant increase in quantity, generally he can't.
The second is the bad news, and it's that point in reverse. If you've priced a job really keenly and there are some silly keen rates in there, even if they were in a small section to start with. If that section gets varied upwards, you're stuck with the number you wrote originally. So a price document is not neutral, it's a commercial instrument. And that means that the way you build it and which rates you put in where, it is a decision worth making. It's one that you need to think about deliberately rather than rushing through at 11 o'clock at night with the tender due the following morning.
One thing to be clear about that case whilst it supports this argument was decided on a civil engineering contract form that had its own wording about correcting errors. The principle that contract rates govern the valuation of varied work is a general one and applies to all contracts, including the JCT, but there is room for argument depending on the contract form in front of you. That includes, of course, the contractors amendments, and for that reason you have to read your contract and understand those amendments.
There are a couple of escape hatches out of a bad rate. Because even where a rate exists and it applies, the rules don't apply that rate blindly. There are two situations where the rate stops being the automatic answer, and they're the two things that you should be looking for on every variation. The first is the condition. The rate applies to work executed in a similar condition to the work it was priced for. If you change the conditions, you're into step two where the rate is a basis for valuation, making fair adjustments for the difference in the way of working.
You've got to think of condition quite broadly. This could be things like working in an occupied building rather than an empty one, working nights, working behind the floor contractor whose finished floors now need protecting. Working in winter for something that was clearly programmed and priced for in the summer prior to a major contract delay. It could mean working in an area where lifts are restricted rather than having free use of a telehandler or working in small isolated pockets rather than in a continuous run of the same work.
Some of these aren't completely obvious. Think about a piece of work and having to do 12 separate visits to install four partitions. That's a completely different operation from visiting once to install 48 partitions. It's the same quantity overall, the same specification, the same rate probably in the document, but actually it's going to cost you a completely different amount. If you don't raise the conditions whilst you're pricing the change nobody's going to raise that for you. The quantity surveyor is going to pay you the same rate across a lot and move on.
A second trapdoor is a significant change in quantity. If a variation takes a small item and makes it into a larger one or the reverse, the rate might not be appropriate anymore because the rate carried initial assumptions about how much of it there was. There's your prelims spread over it. They set up a mobilisation, getting the equipment to the work face. There's buying power on the materials. There's the learning curve for your site operatives doing that particular piece of work.
Now you'll notice that this will cut sometimes in your favour and sometimes it'll be against you. A keen rate blown up over a much larger quantity is a real argument for you to adjust it and if you're feeling like you're exposed then absolutely run that argument. But equally when a contractor tries to use it in reverse against your strong rate on a quantity that's now 10 times what you priced he's right to make that argument is entitled to, and he'll be making the same arguments back to you.
The point, though, is that these are both measurement arguments. You can't run either of those discussions without being able to say what was in your price, in what quantity, and in what conditions.
So that then takes us back to that all-important pricing document. Because if you don't have it, you've got no retained build-up of your price. Perhaps You've looked at the job and said, this is how much this contract cost me. This one's a bit bigger. I'll add 20%. It's no real basis for estimating. You've got no basis to value any changes. Maybe it's even worse than that. Maybe you've priced it via an estimator that you don't use very much. They've not sent you the buildup. Maybe the files got deleted or overwritten and 18 months later, nobody in your business can say what was in the price to start with. That kind of failure is going to cost you real money when it comes to valuing change. And that is the first of a few things that can catch you out.
The second would be not measuring the variation yourself. The contractor's QS hands you his measure and you argue about the rate, but the quantity itself is half the answer. And if you haven't measured it, then you've got no idea whether his takeoff is right, wrong or otherwise. In my experience, there's always a difference on measure. Sometimes it's measuring work off a superceded drawing Or just not appreciating it properly rather than out and out dishonesty. But if you haven't measured yourself, you simply don't know the answer. You could be leaving money on the table without even knowing about it.
The third way would be accepting a rate derived from your tender without checking what that included. The contractor could be picking a rate from a lump sum by making assumptions about what was in it. Those assumptions will tend to be the ones that produced a lower rate. If you can't contradict them with your own build-up, then his argument is going to win. All for the sake of not doing the work yourself in advance.
Fourth would be pricing the variation rather than valuing it. This one is a subtle difference, and it's a habit. You've been asked for a price for extra partitioning, so you price it like it's a new job, cost plus margin, and then send your number in. But that is not what the contract asks for. The contractor is asking for a valuation under the variation rules. Sometimes pricing is going to give you more, sometimes a lot less. But if you never run the valuation to work it out for yourself, you're never going to know which one that is.
Five, letting omissions go through at your contract rates without commenting on it. Contractors are really happy to use the valuation rules when they're taking a work away from you. but think about how an omission of say 200 square metres from your package we have already mobilized, you've already bought the materials and already started your premium cost. Omitting that work isn't going to save you the full rate and it potentially changes either the significant quantity argument or the conditions. Those arguments can be made on an omission just as much as on an addition.
Six, treating the valuation as if it's a negotiation. If you're going to a meeting to negotiate with the view of splitting the difference, then you'll come out splitting the difference. The difference will probably be measured from the contractor's number because his is the only one with some method behind it. And the argument becomes haggling, really, rather than an argument about how much something's actually worth.
What you need to do in that scenario is go in with a proper valuation and debate the details. defend the way that you've put your rates together, the way that you've put your measure together. If you're arguing with details, with facts, you've got a much stronger hand.
Now, when you start boxing clever with some of these valuation rule arguments, you're going to get some pushback, and some of these are arguments that I've made from the other side of the table.
First, that's not what you tendered, meaning your build-up doesn't match the lump sum you submitted, usually because you took some money out negotiation stage. You need to deal with that honestly and in advance. If you discounted the price by say 4% to win the job, then say so. Apply the same adjustment to the rates you're relying on. This is going to make your build up open, consistent, credible. If you ignore it, then the contractor is going to find out and he'll discount everything you give him afterwards, whether it's the right answer or not.
Second, your rate is too high. I'm gonna use a fair rate instead. Go back to the hierarchy. Fair rates is step three in the process and it only applies where the work isn't the same and it's not of similar character. If extra partitioning is the same partitioning as the one that you're measuring in the change, it doesn't just get to skip that because he doesn't like the outcome. So challenge it. Ask him to identify what makes it dissimilar in character. What are his reasons for ignoring the first two valuation rules?
Third, the conditions are the same. It's the same product. Conditions aren't the product. They're the circumstance of the execution. This is your access, your sequence, your location, your timing, continuity, the working hours that you're doing the work in. Describe the actual difference in the operational terms. Then you can make the argument and make it robustly so it's harder to brush off.
You need to lead the contractor down the route of why it's going to be different. If you've priced work to carry out in one visit, to carry out in continuity, and the change introduces something different, different timescales, different working pattern, explain it to him so that he can be brought down the same path that you're on.
Argument four. I've measured it. Here's my take-off. Excellent. This is where you say good, thank you, and you go away and measure it too. Then you can have a conversation about two measures, which is a narrow factual debate that you'll be able to resolve quickly, instead of a conversation about your number versus his detailed method, with all of his working out. What looks more credible? What is more likely to win?
There's one more factor that's really important in all of this, and that is tone. Tone matters more than people think. The quantity surveyor on the other side of the table is not your enemy, and treating evaluation as if it's some kind of fight is what makes him defensive and slow. What you're doing when you make those kind of arguments is showing him that you're not in the same room making the same arguments and operating the same mechanisms that he is.
But when you start using proper calculations, building rates up, changing the debate not just from a horse trading scenario over a couple of numbers to something to discuss from a measure to compare from labour constants to compare, from arguing the practicalities of how long this is going to take and this is why I've built it up like this. This is how the scenario has changed. Those are arguments that you as a subcontractor with all of your practical knowledge of doing the work day in day out on a specific package. You've got those in your back pocket. You can make all of those arguments, make them convincingly and use your experience to make adjustments to your prices and do it in a compelling fashion that the contractor is going to find really hard to argue with.
Finally, to close out today's show, five things that you can do to protect yourself.
First, keep the build up to every tender and every order. Save it, date it, lock it down in a job file and if the job converts, that file becomes a contract document in all but name and you should treat it that way. That discipline is going to make you money.
Two, offer a schedule of rates at tender stage, wherever you sensibly can. You don't have to give a full bill, but a single sheet of principal rates that cover your main items submitted alongside your lump sum and referred to in your quotation, a lot of contractors are going to accept that without a lot of thought, because it looks like you've been helpful. And then it's there, in the contract, in a pricing document, and that argument from the Henry Boot case is there working for you.
Three, measure every variation before you submit it. Send your take off with evaluation, not after an argument. Attaching a measure changes how your submission is read. It means I've done my due diligence on this. It sells credibility in what you're producing and it makes the argument one about checking the quantities and the working out instead of one of starting from scratch and horse trading over a final price.
Four, ask the same two questions on every single variation. Are the conditions different from what the rate was originally priced for? And has the quantity changed significantly? A lot of the time, the answer to these is going to be no and asking takes about 30 seconds. But it's the times that it's a yes that pay for the habit of asking that question. When you catch the anomalies and you adjust your rates properly and protect your profit margin.
Fifth and finally, if nobody in your business can measure, then you've got a huge capability gap. You need to treat that like you would treat not having any other tradesmen. Somebody needs to be able to take off a drawing properly. That could be a training course away or a part-time quantity surveyor, maybe a day a month from a consultant. Whatever that costs you is a small cost against what it's costing you now. And the thing is, you won't know how big that gap is because it's invisible. You can never challenge the valuation gap if you didn't see that there was one.
I hope that helps. My mission with this podcast is to help the million SME contractors working out there in our industry. If you've taken some value away from today's episode, then I really need your help to share the show and pass that value on to somebody else who'd benefit from hearing it, so that I can help as many people as possible.
And thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.subcontractorsblueprint.uk. And we're also on all your favourite socials, again at Subcontractors Blueprint. And remember, miss the contract detail and the commercial risk falls on you. Thanks all. I've been Jacob Austin and you've been awesome.
