Jacob Austin 00:00:17 Hi there everybody. Jacob Austin here from QS.Zone. And welcome to episode 58 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode, number 58, is about an absolutely essential topic for every subcontractor to masterthe final adjustment and payment procedures for the final account at the end of your jobs. And for the purpose of this episode, we're going to be referring to the good old JCT Design and Build 2016 contract, being as that is the most prevalent contract used out there in the industry. And I wanted to cover this today because final accounting can be a bit of a minefield. And this is again another area where main contractors will regularly play with the standard terms that you find under the JCT agreement, and adjust the periods and mechanisms for getting the final account agreed. So this is one again, that you're going to want to dig your subcontract out and look at those terms and conditions that you've signed yourself up to, and see what amendments have been made to your standard subcontract, so that you can understand the procedure that you need to follow, how long it's expected to take, and when you can expect to get your hands on your money.
Jacob Austin 00:01:31 And as ever, if you're new to the show. Do subscribe for more user friendly advice on all things subcontracting. So let's face it, construction projects can be a bit of a roller coaster ride from the initial inquiry and your bid through to your agreeing, the final account and the final invoice. There are countless moving parts and the way you handle the final stages of the project, especially the final account, can have a huge impact on your business's financial health. Because it's necessary to get your hands on that money. So what I'm going to cover today is everything from understanding what the final subcontract sum is to navigating that all important timeline for payment, and throw in some practical tips along the way to help you stay on top of your game. Now, I've known a hell of a lot of subcontractors try and treat the final account process exactly the same as their regular application process, and in reality, it is an entirely different mechanism under the subcontract. So let's start with the basics. What is the final subcontract sum? It's probably the most important piece of JCT jargon, because this is the final amount that you're going to be paid for your project, including all adjustments and any other entitlements.
Jacob Austin 00:02:46 And unless there is a post final account agreement for some extra work to be instructed, then that is the final sum that you're going to be paid forever. And it should go without saying, but the final account sum starts very much with the subcontract sum from the start of the job, and that is then adjusted for various factors that crop up during the project. And these adjustments can either increase or decrease the amount that you'll ultimately receive. So let's talk about exactly what can adjust your final payment. These adjustments are based on what's handily called the adjustment basis, which is the most common method of reevaluating a design and build subcontract. There is, of course, a remeasurement basis, but this is only triggered if it's agreed with the contractor at the start of your subcontract. And under that slightly different arrangement, you would start with a blank sheet of paper and build up using the set of contract rates that you've got for your contract or other project, and you will set about measuring out every piece of work that you've completed and then putting it against those original rates.
Jacob Austin 00:03:51 Now, I did do a detailed episode on remeasurement some time ago, and if you need to build up your final account in that fashion, I'd encourage you to go back and listen to it for some important pointers on where to start. But now we'll go back to that adjustment basis, because that is the most common method of agreeing a subcontract. And that is simply because a lot of the contractors out there will work on a lump sum basis. And then the only real mechanism for changing that lump sum on the bits that we're going to mention as follows. And understanding these adjustments is crucial to helping you protect your bottom line and ensuring you are getting fairly compensated for the work that you've done. So first up, we have variations. Now, if you've been in the construction business for any length of time, you know that variations are pretty much inevitable. And these are changes to the work which you've been asked to do after the contract has been signed. Maybe the client decides to add in extra design features, change the materials, or even modify some of the design partway through the job.
Jacob Austin 00:04:52 These changes can be big or small, but they all need to be valued. Which means of course, putting a price to them and agreeing them with the main contractor. And once they're agreed, those are added to your final subcontract sum. And as you're setting it out, I would follow the order that we're going through now. So you've initially got your subcontract sum. And then directly below that you're listing out your variations as your first set of adjustments to that subcontract sum. And of course, depending on the mechanism that is instructed in your subcontract, you may have quotations that have been submitted and agreed with your contractor ahead of time. Your way of saying, sure, I can do this extra work, and this is what it's going to cost you to get that done. But then of course, you have those elements of variations which can't be quantified ahead of time. And I'm thinking here, of the ones that are completed on a day work basis and so on. And when it gets to valuing these, you're going to need your reference to your original instruction, which should include a statement to say that this will be valued on a day work basis.
Jacob Austin 00:05:55 And then your site manager's acknowledged day worksheet, which records the time plant materials and so on that have been used to do that piece of work. Some contractors like to see these split out so that you have variations first, and then De works items underneath it. But for the purposes of the subcontract, all variations, no matter how they're valued, are termed the same and can be presented under variations. But just a thought on that, because some contractors can be picky about how they like things to be presented. Surprise, surprise. And my thoughts are if it makes it easier for you to get paid by separating things out and presenting them in a way that the contractor is happy with. As long as that isn't taking you too much time, then you should very much get on with it and do it that way, because it will make your payment process that much simpler. Now the next on the list is acceleration. This is where the main contractor asks you to speed things up and finish your work earlier than planned.
Jacob Austin 00:06:54 Perhaps this is because the project is behind schedule, or maybe there's a deadline for something to happen that has suddenly become a hell of a lot more urgent. Acceleration can be stressful and costly, so you want to get compensated for the extra effort that you're going to take. Now, there are some norms about what you charge for acceleration based around how you're instructed to accelerate. And sometimes that might be payment for out of hours works, or it might be bringing in an additional supervisor to manage a second set of workforce. But with acceleration, this is one where it's important to agree the principles of what's going to happen up front, which means submitting an acceleration quotation. And similar to a variation quotation, you should be instructed by the contractor for that quotation, and that should tell you how you need to value the work. So it may be that you agree a lump sum to get to the acceleration complete. Or you might agree a mechanism for valuing how many people turn up to do extra shifts, and how you're going to value the additional cost of those shifts.
Jacob Austin 00:07:58 And it's those costs that we're going to collate here and present as part of your final account under acceleration. The next part is something that doesn't get spoken about a lot, which is fluctuations. And now fluctuations are one of those option clauses that are triggered. And the sort of evaluation of fluctuations can be quite complex because it requires splitting down into quite a granular bit of detail, or it gets carried out within what period. And then applying the formula rules that have been selected by the contractor when putting your subcontract together. Now a lot of the time fluctuations get struck out, and that is largely because there are only rarely of any real use if there is a lot of inflation. So thinking back to a couple of years ago, when we had that rampant period of inflation fluctuations, clauses may well have helped you out, but I'll bet a pound to a pinch of salt that there weren't many subcontracts out there that actually featured them. So let's move on and talk about provisional sums. So these are amounts that are set aside in the contract for work that might be needed or might not, or it might not be fully defined when the contract is signed.
Jacob Austin 00:09:08 So you're thinking of this as a bit of a contingency, some for uncertain work, but it's only expended when the contractor gives you an instruction to do that. So when we get to provisional sums, there shouldn't actually be any positive values under this heading. And what we should see is that provisional sums are a negative adjustment from your original subcontract sum, and the proviso is that the negative adjustment is applied. And then the actual cost of completing that work is added back as a variation. So within your previously mentioned variations account you should have a line or two lines whatever for the expenditure of the provisional sums which were set out at the start and under the provisional sums heading. What we should then see is that the original sums that were included as part of that subcontract sum at the start of the job are now being admitted, and that's why it's stated in the subcontract that it's the deduction of all provisional sums, because that is how we're expecting to treat them. The final item that gets included is a bit of a curious one, because this is a simple catchall statement which says any other amount which under this subcontract, may or is required to be taken into account in the calculation of the final subcontract sum.
Jacob Austin 00:10:26 So this will include then things like your loss and expense, things like a main contractor's discount, any interest that's become payable as part of a late payment arrangement and any deductions that might be validly made. So this is the catch all for everything else basically. Now there's obviously quite a lot of work that's got to go into assembling this final account to make sure that you're keeping track of adjustments, you're keeping records of things that have happened. You've got all of your quotations collated alongside emails, photographs, potentially invoices. All of these are things that you're not going to want to be stuck scrabbling around for at the end of the job. And in the case of things like photographs, these are things that you need to make sure that you're on top of at the time. It's no good turning up the day after something has been exposed and patched up again, hoping to demonstrate everything was compliant. So this is a process that you should be starting at the start of the job and following through to completion with a view that by the time you get into final account stage, you've almost got a job file ready with everything you need in it.
Jacob Austin 00:11:32 This way, when practical completion occurs, you're ready to go, and the sooner you can submit your documents, the sooner the contractor can start calculating that final sum with you, and then the sooner you should get paid. And when it gets to timing of that final account calculation, it's crucial to get it right. The timeline kicks off once your work is practically complete, and at this point, you have two months to submit all the necessary documents to the main contractor. And this is a case of don't leave it to chance. So when I say all the documents, I mean everything, all the details of your variations, acceleration agreements, your provisional sums with the supporting paperwork to get it agreed. So the real pro tip is not leaving this to the last minute, not leaving your variations bumbling along until the job's finished. Tackle them as you go, and then save the resulting agreements as records that you can present with your final account. Now, once the contractor receives your documents in the standard form of contract, they then have eight months to prepare a statement of the final subcontract sum.
Jacob Austin 00:12:36 And yes, you heard that right. That was eight months. And this statement should detail all of those adjustments we've spoken about and provide a real final figure. Now, if you miss your deadline, the contractor is still required to prepare a statement on the information they have. But of course, without your input, they might miss key details and you could end up with a lower payment at the end of the job than what you deserve. And now, here's where it gets even more critical. because once you receive the contractor statement, in spite of them having eight months to put that statement together, you have just one month to dispute it. So if there is something you disagree with, you need to put it in writing and include clear grounds for that dispute within that one month period. If you don't, that statement is then considered full and final, which means you lose the opportunity to contest any errors or potential omissions. So by all means, you need to take the time to review it carefully, and perhaps you might even need to get a second opinion on it.
Jacob Austin 00:13:37 But always bear in mind that you have that one month period in which you need to turn round your response, and as I say, you need to put it in writing and include clear grounds for disputing the final statement. So now let's talk about final payment, assuming you all get agreed, the bit we've all been working towards and all waiting for the final transfer of funds that marks the end of your financial involvement in the project. So the due date for that final payment is two months after the last of two key things, either the retention release date and bear in mind that there are a couple of places in the contract that can affect that retention release date, or the date that the final statement is issued by the contractor. And when that due date is on the horizon, you want to submit a final application for payment. This is your formal request for the final amount to be paid, and it should essentially be the difference between the final subcontract sum and the amount paid to you under the most recent interim application for payment, and the contract encourages you to make sure that is made at least four days prior to the due date.
Jacob Austin 00:14:44 This should then prompt the contractor's issuing of the final payment notice, triggering the payment by the final date for payment, which is likely to be seven days later. Now, quite often, the contractor will want you to sign some kind of final account statement and noting in the subcontract that there is no requirement for there to be assigned a final account statement. Essentially, the contractor issues you that final account statement and you have a month to dissent from it, giving your reasons or it's deemed agreed. So you don't want to stray into the gray area of receiving a final account statement from a contractor, refusing to sign it, but not giving any grounds for that, and assuming that your account will continue to be valued. Because basically, if within that month you don't reply in writing with your clear reasons for objecting to that final account statement, then it is deemed agreed and will be the full and final account. And there we have it. That is the final account process. Hopefully, I've explained that in a way that makes it clear, and that sets out the differences between the interim application process and the different final account process, and the timescales that you are expected to work to for that separate process.
Jacob Austin 00:15:56 And good luck final accounting. My mission with this podcast is to help the million SME contractors working out there in our industry. So if you've taken some value away from today's episode, I love it. If you'd share the show and pass on that value to somebody else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already. And thanks for tuning in. If you like what you've heard and you want to learn more, please do find us at QS.Zone where you can subscribe to our training and support system for like minded subcontractors. In there there will be templates, how to videos, interviews and more. It's less than the price of a cup of coffee per day, and you can cancel any time or also on all your favourite socials at QS.Zone. Feel free to reach out, give me some feedback, give me some abuse or tell me what you want to hear about on the podcast next. Thanks again! I've been Jacob Austin and you been awesome.
