| Date | 23 August 2000 |
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| Judgment | Weldon Plant Limited -v- The Commission for the New Towns TCC 14 July 2000 |
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| The Issue | Inclusion of overheads and profit in "fair valuation" for varied works. |
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| Implication |
Under clause 52 of the ICE Conditions, a fair valuation will normally include cost plus an appropriate allowance for overheads and profit. |
printThe recent case of Weldon Plant Limited -v- The Commission for the New Towns considered the manner of which a "fair valuation" should be established in respect of varied work. Weldon Plant entered into a contract with The Commission for the New Towns for the construction of Duston Mill Reservoir based on ICE 6th Edition form of contract. The contract included for the excavation of clay and gravel. Since Weldon were to be able to sell the gravel, the contract rate for gravel removal was a negative sum of minus £3.60/m³. The clay however was to be carted to an off-site tip for which the rate was £3.66/m³. The contract made provisions for Weldon, at its own risk, to excavate below the design level for the bed of the reservoir to obtain more gravel which it would also be entitled to sell. The Engineer however issued an instruction which required Weldon to excavate all the gravel below the bed and to back fill with clay to the design level. Weldon notified that this instruction would give rise to a claim. In the event disputes arose when the Engineer valued the additional gravel extraction and clay back fill at the bill rates. Weldon argued that these rates were inappropriate having regard to the rules set out in clause 52 (1) of the ICE Conditions. I reviewed these rules when I reported the recent case of Henry Boot Construction -v- Alstom Combined Cycles. For convenience the Court broke the clause down into three rules. Rule 1 - Where work is of similar character and executed under similar conditions to work priced in the Bill of Quantities, it shall be valued at such rates and prices contained therein as may be applicable. Rule 2 - Where work is not of a similar character or is not executed under similar conditions or is ordered during the defects correction period, the rates and prices in the Bill of Quantities shall be used as the basis for valuation so far as may be reasonable. Rule 3 -Failing which a fair valuation shall be made. The matter came before an arbitrator who concluded that the instruction was to be treated as a variation under clause 51 of the ICE Conditions, for which a "fair valuation" under clause 52 should be made. In arriving at this decision the arbitrator did not however agree with Weldon's approach to the inclusion of amounts for overheads and profit. The Commission for the New Towns argued that Weldon was not entitled to any additional overheads. They argued that an overhead allowance was not evident elsewhere in the tender and hence it must be assumed that the contractor's rates and prices were gross and that it would have recovered its overheads on other work. The arbitrator agreed with this argument and refused to include any sum in respect of additional overheads. He took the same approach when it came to considering profit. These matters came before the Court on appeal. Weldon submitted that the arbitrator's reasoning was erroneous in law. The arbitrator had approached the valuation of overheads and profit as if they had been part of a claim for loss and expense under the JCT form of contract. Weldon argued that the claim was for a fair valuation of varied work carried out within the contract period and no prolongation element was sought. Relying upon the Henry Boot case, Weldon noted that a fair valuation "generally means a valuation which will not give the contractor more than his actual costs reasonably and necessarily incurred plus similar allowances for overheads and profit". Weldon also made a compelling argument as to the operation of clause 52. It was submitted that the use of contract rates and prices for the purposes of valuing variations under rules 1 and 2 necessarily meant that the contractor would recover overheads and profit since they would be an integral part of the contract rates and prices. Weldon argued that a fair valuation under rule 3 could not omit any element which would be a necessary part of the compilation of a contract rate or price such as overheads and profit. A valuation under rule 3 which did not include such elements would not be a fair valuation for the purposes of the contract. In the judgment of his Honour Judge Humphrey Lloyd QC, Weldon were correct in this submission. Any other interpretation of clause 52 would be inconsistent with the many other provisions of the ICE Conditions where the clear intention is that in circumstances for which the contractor is not responsible, the contractor is entitled to additional payment inclusive of profit. Moreover, clause 1(5) specifically determines that cost should include overheads. Judge Lloyd considered that in most cases it is to be assumed that expenditure of costs inevitably attracts ordinary overhead charges, since such expenditure cannot be made by a contractor without ancillary work being done or office and other resources being deployed. In his judgment a fair valuation must include something on account of each of the elements which are ordinarily to be found in a contract rate or price; elements for the cost of labour, the cost of plant, the cost of materials, and the cost of overheads and profit. Whilst time related overheads might require to be proved, Judge Lloyd considered that it would not always be necessary to prove that other overheads were actually incurred for the purposes of a "fair valuation".
CJ-0033
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