Final Account Procedures 1st Edition PGguidance 2015

RICS guidance note
RICS professional guidance, UK
Final account procedures

1st edition, December 2015
rics.org/guidance
rics.org
RICS guidance note, UK
1st edition
Published by the Royal Institution of Chartered Surveyors (RICS)

Parliament Square
London
SW1P 3AD
www.rics.org
No responsibility for loss or damage caused to any person acting or

refraining from action as a result of the material included in this publication
can be accepted by the authors or RICS.
Produced by the RICS QS and Construction Group of the Royal Institution

of Chartered Surveyors.
ISBN 978 1 78321 132 6
© Royal Institution of Chartered Surveyors (RICS) December 2015.

Copyright in all or part of this publication rests with RICS. No part of this
work may be reproduced or used in any form or by any means including
graphic, electronic, or mechanical, including photocopying, recording,
taping or web distribution, without the written permission of RICS or in line
with the rules of an existing licence.
Acknowledgments
RICS would like to thank for the following for their contributions to this
guidance note:
Lead author: James Garner FRICS (Gleeds)
Working group
Chair: Andrew Smith FRICS (Laing O’Rourke)
Stuart Earl FRICS (Gleeds)
Roland Finch FRICS (NBS)
Christopher Green FRICS (Capita Property and Infrastructure)
Roy Morledge FRICS (Nottingham Trent University)
Michelle Murray MRICS (DBK)
Alan Muse FRICS (RICS)
Michael T O’Connor FRICS (Carillion Construction Ltd)
Martin Stubbington FRICS (RICS)
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Contents
Acknowledgments ii
RICS professional guidance 1
1 Introduction 3
1.1 Minimum level of service .................................................. 3
2 General principles (Level 1: knowing) 4
2.1 What is a final account.......................................................4

2.2 Contractual definitions of final account..............................4
2.3 Rolling final accounts.........................................................4
3 Practical application (Level 2: doing) 5
3.1 Preparing for final account.................................................5

3.2 Linking the last formal cost report to final account ...........5
3.3 Importance of change control............................................5
3.4 Final account meetings - preparation and procedure .......6
3.5 Structure of the final account.............................................6
3.6 Final account adjustments.................................................8
3.7 Release of retention...........................................................8
3.8 Dealing with defects as part of the final account ..............9
3.9 Defects during the defects/rectification period .................9
3.10 Loss and expenses and liquidated damages.....................9
3.11 Set-off/contra charging......................................................9
3.12 Timescales – contractual and non-contractual................10
4 Practical considerations (Level 3: doing/advising) 11
4.1 Disputes (adjudication/arbitration/litigation).....................11

4.2 Negotiation as an alternative to dispute resolution..........11
4.3 Dealing with items not formally instructed...................... 12
4.4 Agreeing the final account............................................... 12
4.5 Adjustment of the final account ..................................... 12
4.6 Bespoke and amended contracts .................................. 13
4.7 NEC procedures (early warnings, etc.)............................ 13
4.8 Patent and latent defects................................................ 13
4.9 Settlement agreements................................................... 13
4.11 Items that the QS may be asked to advise on................ 15
Effective from 14 March 2016 RICS guidance note iii

4.12 Possibility of the agreed final account being used in

disputes........................................................................... 15
4.13 VAT on final payments and interim valuations when
damages/contra charges have been applied ................. 16
4.14 Insurance recovery ......................................................... 16
4.15 Full development costs................................................... 17
4.16 ‘Notional’ final accounts caused by the contractor
going into liquidation or administrative receivership....... 17
Appendix A: Example statement of final account 18
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RICS professional guidance
International standards It is for each member to decide on the appropriate

procedure to follow in any professional task. However,
where members do not comply with the practice
RICS is at the forefront of developing international
recommended in this guidance note, they should do so
standards, working in coalitions with organisations
only for good reason. In the event of a legal dispute, a
around the world, acting in the public interest to raise
court or tribunal may require them to explain why they
standards and increase transparency within markets.
decided not to adopt the recommended practice.
International Property Measurement Standards (IPMS
- ipmsc.org), International Construction Measurement Also, if members have not followed this guidance, and
Standards (ICMS), International Ethics Standards (IES) their actions are questioned in an RICS disciplinary case,
and others will be published and will be mandatory for they will be asked to explain the actions they did take and
RICS members. This guidance note links directly to this may be taken into account by the Panel.
these standards and underpins them. RICS members are
advised to make themselves aware of the international In some cases there may be existing national standards
standards (see www.rics.org) and the overarching which may take precedence over this guidance note.
principles with which this guidance note complies. National standards can be defined as professional
Members of RICS are uniquely placed in the market standards that are either prescribed in law or federal/
by being trained, qualified and regulated by working to local legislation, or developed in collaboration with other
international standards and complying with this guidance relevant bodies.
note.
In addition, guidance notes are relevant to professional
competence in that each member should be up to date
RICS guidance notes and should have knowledge of guidance notes within a
reasonable time of their coming into effect.
This is a guidance note. Where recommendations are
made for specific professional tasks, these are intended This guidance note is believed to reflect case law and
to represent ‘best practice’, i.e. recommendations that in legislation applicable at its date of publication. It is the
the opinion of RICS meet a high standard of professional member’s responsibility to establish if any changes in
competence. case law or legislation after the publication date have an
impact on the guidance or information in this document.
Although members are not required to follow the
recommendations contained in the guidance note, they
should take into account the following points.
When an allegation of professional negligence is made

against a surveyor, a court or tribunal may take account
of the contents of any relevant guidance notes published
by RICS in deciding whether or not the member acted
with reasonable competence.
In the opinion of RICS, a member conforming to

the practices recommended in this guidance note
should have at least a partial defence to an allegation
of negligence if they have followed those practices.
However, members have the responsibility of deciding
when it is inappropriate to follow the guidance.
Effective from 14 March 2016 RICS guidance note 1

Document status defined

RICS produces a range of professional guidance and standards documents. These have been defined in the table
below. This document is a guidance note.
Type of document Definition Status

Standard
International standard An international high-level principle-based standard Mandatory. RICS has adopted
developed in collaboration with other relevant bodies. these and they apply to the
profession.
Professional statement
Professional statement A document that provides the profession with Mandatory on the basis of ‘comply
mandatory requirements in the form of technical or explain’.
requirements or conduct rules that members
Professional statements set out
and firms are expected to adhere to. An RICS
how the profession is expected
professional statement sets out the expectations of
to meet the requirements of the
the profession. RICS-qualified professionals must
international standards.
comply with the professional statement applicable
to their area of practice or be able to explain
any departure from it. The relevant professional
statement will be used by RICS and other legal and
regulatory authorities in judging complaints and
claims against RICS-qualified professionals.
This category may include documents approved
by RICS but created by another professional body/
stakeholder, such as industry codes of practice.
Guidance and information
RICS guidance note (GN) Document that provides users with Recommended best practice
recommendations or approaches for accepted good but not deemed by RICS to be in
practice as followed by competent and conscientious category of ‘mandatory’ for all
practitioners. practitioners.
RICS protocol Information and best practice framework, which Information and/or recommended
stakeholders may sign up to and comply with, to best practice.
assist the operation of the market in the public
interest.
RICS information paper (IP) Practice-based information that provides users Information only.
with the latest technical information, knowledge or
common findings from regulatory reviews.
RICS insights Issues-based input that provides users with the Information only.
latest information. This term encompasses Thought
Leadership papers, market updates, topical items of
interest, reports and news alerts.
RICS economic/market reports A document usually based on a survey of members, Information only.
or a document highlighting economic trends.
RICS consumer guides A document designed solely for use by consumers, Information only
providing some limited technical advice.
Research An independent peer-reviewed arm’s-length research Information only.
document designed to inform members, market
professionals, end users and other stakeholders.
2 RICS guidance note Effective from 14 March 2016

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1 Introduction
This guidance note summarises what a final account is
and how they are used to establish a final adjustment
to the contract price. The practical issues of how to
prepare a final account in accordance with the contract
and the process of cooperation between the parties and
negotiation will also be discussed.
Practical consideration such as advising on the structure

of a final account and how to prepare a statement for final
account (including examples) will also be considered.
This guidance note does not provide a detailed guide

to disputes, although they can sometimes be a feature
of a final account process. This guidance note deals
with the practical issues of agreeing a final account and
some of the important issues that may emerge as part
of that process. For the purposes of giving guidance,
the employer is referred to as the ‘employer’ and the
main contractor as ‘contractor.’ However, much of
the guidance can equally be applied to a contractor/
subcontractor or supplier arrangement.
Guidance is given in relation to the main forms of contract

and main procurement routes, under the following
headings, which map to the Assessment of Professional
Competence (APC):
• General principles (level 1: knowing)
• Practical application (Level 2: doing)
• Practical considerations (Level 3: doing/advising).
1.1 Minimum level of service

The quantity surveyor (or any consultant fulfilling the
role of administering the contract with regards to final
accounts) is expected to fulfil the following duties,
notwithstanding the de-tailed terms of any appointment
or contractual obligation:
• preparing the final account and reporting against the
last cost/financial report
• engaging in final account meetings with contractors
• valuing variations to the contract with the contractor to
enable agreement of the final account
• advising on the cost implications of loss and expense
claims - when so instructed
• preparing the statement of final account
• advising on costs associated with any defects
• engaging in any meetings relating to the agreement of
the final account
• advising the employer on calculations for withholding
liquidated damages – when so instructed and
• preparing final account documentation for auditing
purposes.

2 General principles (Level 1: knowing)

Guidance is given in this section about what a final
account is. It explains the common definitions within the
2.3 Rolling final accounts
major contracts and how the contractual procedures may
The term ‘rolling final accounts’ is often used, but it is
differ.
not always properly adhered to. Rolling final accounts
will ensure that all instructions and cost effects to a
2.1 What is a final account project are agreed and up-to-date at the point of the
latest financial report. This relies on an organised quantity
The final account is the conclusion of the contract sum surveyor and contractor and willingness of the parties to
(including all necessary adjustments) and signifies the make agreements on a regular on-going basis.
agreed amount that the employer will pay the contractor.
It includes any works that are paid to the contractor The NEC contracts put more emphasis on the timescales
through the main contract. related to agreeing individual variations (known as
compensation events). Time bar penalties are also
Typically, the final account includes any loss and expense included for not agreeing compensation events within the
associated with any extensions of time and any other contractual timescales. In theory this forces a rolling final
claims the contractor feels he or she is due under the account to be maintained but unfortunately, this does not
contract. It also indicates the finalisation of any disputes necessarily mean that all NEC contracts are used as they
that may have arisen and in that sense draws a line under should be. The NEC is designed to agree cost and time
the financial obligations of both parties, save in respect simultaneously.
of defects. The final account will not typically include
items such as liquidated damages, VAT or interest on Conversely it doesn’t necessarily mean that other
overdue payments. contracts don’t have a long final account process. The
reality is that the contract can only provide the framework
for final accounts to be agreed throughout the contract
2.2 Contractual definitions of period. It still relies on the hard work, organisation and
willingness by both parties to make agreements as they
final account go along.
The procedures, as set out in the various forms of Remember that it is not the role of the QS to agree
contract, contain slight differences in terminology and variations or final accounts. The QS’s role is to value
procedure (i.e. between the JCT and the NEC contracts), variations in accordance with the contract and adjust the
but essentially they produce the same result. Most final account as necessary.
contracts require the contractor to substantiate their
accounts to the employer so it can be properly assessed. Appendix A shows an example statement of final
account.
The NEC forms of contract do not refer to final accounts
as it is assumed that the final account is adjusted as the
project proceeds on the basis that the compensation
event procedure is followed.
The JCT defines the process for final accounts and final
payments under clause 4.12 of the Design and Build
Contract or Clause 4.5 of the JCT Standard Form. Note
that the timelines are different between the Standard
Building Contract and the Design and Build Contract.
The FIDIC suite of contracts, which are mainly used for

the international market all have their own timescales.
Clause 14 refers to payment and subclause 14.11 spells
out the final account process and timescales.

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3 Practical application (Level 2: doing)

This section covers how general principles are put into
practice to satisfy the ‘doing’ requirements of the Level 2
3.2 Linking the last formal cost
APC competency. It looks in more detail at the practical report to final account
issues relating to final accounts and how to prepare a
final account statement. The last formal cost report presented by the PQS should
provide a very good indication of where the final account
3.1 Preparing for final account is likely to be settled. If costs have been tracked properly
throughout the duration of the project then the only
difference between the last formal costs report in the
The preparation of the final account occurs throughout
final account should be any changes or variations in
the contract period. Financial statements prepared by the
the period between the last forecast reports in the final
quantity surveyor will generally serve as the starting point
account.
for final account discussions. As a matter of preparation,
the professional quantity surveyor (PQS) should ensure Suitable project documentation and well-followed
that all contracts instructions have been accounted contract administration procedures should make the task
for and that all other potential cost-related items are of preparing a final account more straightforward in the
scheduled out. This may include, but not be limited to: long run. Good documentation is easily auditable and the
importance of this is highlighted when proper records are
•• provisional sums (which can only be expended by
not available.
issue of a contact instruction)
•• agreeing prime cost sums (where applicable) Disputes can occur where key members of either the
employer’s or contractor’s team changes throughout the
•• any loss and expense associated with extensions of project duration.
time
At the commencement of the project, the project
•• adjustment of provisional/approximate quantities manager should produce a project execution plan
(PEP), and within this plan, there should be a procedure
•• fluctuations
set out for contract administration of the project. This
•• any set-off/contra charges (typically a subcontractor should include the change control mechanism and the
issue) or procedure for contract instructions. This helps to provide
a framework for auditability to keep good contract
•• any other items affecting total cost. documentation, which can be referred to during the final
account negotiations.
Note that standard building contracts do not contain
any express provision for dealing with contra charges,
therefore, if agreed between the contractor and employer 3.3 Importance of change
they should be instructed as a variation to the contract.
If the contractor does not agree then any off-sets/contra control
charges must go through the ‘pay less notice’ process
outlined in the Local Democracy, Economic Development Change control is the administrative process that
and Construction Act 2009 (which will be referenced as implements the contract mechanisms for instructing
‘The Construction Act’ in this guidance note). change. The process must adhere to the contract
requirements for notification and approval of change by
From the contractor’s perspective, they will also go the identified parties.
through a similar exercise in preparation for the final
account, but also ensuring that all possible variations Change control is also a critical part of a well-run and
from subcontractors and suppliers are picked up and audited project. Any potential changes should go through
reported to the employer. The contractor will not want to this process before an instruction is given so that the
enter final account negotiations without having accurate employer feels they are able to make informed decisions.
costs from their supply chain, although there may be It also ensures that the contractor is not going ahead
no direct contractual link between the contractor’s and acting on changes that they believe they’ve been
entitlement to be paid by the employer when compared instructed to do, only to find out that they were not
with an obligation to pay their subcontractors. actually communicated to the employer.

The change control system should not be too Variable costs

cumbersome so that it deters the project team from
Variable costs are sums included within the contract sum
using it. All parties should want to use it, as it will provide
that may be subject to change. These may be included
security, auditability and clarifications of any changes
because the extent of the work was not entirely known at
or rejections of any changes. Without a well-managed
the contract stage or perhaps because the specifications
change control process, the final account negotiations
were not at an advanced enough level for a fixed price
may be more difficult. There may be a difference of
to be ascertained. There are four main types of variable
opinion between what the contractor believes they
costs:
were instructed compared to what they were actually
instructed. 1. Provisional sums
3.4 Final account meetings - Provisional sums are often included within a contract for
elements of the works that have not been fully designed.
preparation and procedure Provisional sums can be split into two main categories:
• defined provisional sums and
The final account meetings are generally held between
the contractor and the quantity surveyor, although it • undefined provisional sums
is not unusual for the project manager, the designer, The definition of defined and undefined provisional sums
or a representative from the employer to also attend. can be found in the RICS New rules of measurement 2:
It is an opportunity to exchange information and Detailed measurement for building works (NRM 2).
present methodologies for valuation of each variation in
accordance with the contract. It is not a forum to make Technically the NEC suite of contracts does not recognise
agreements on the valuation of variations beyond the provisional sums, although it is not uncommon for ‘Z’
contract conditions. clauses to be included to allow for their inclusions.
Most of the preparatory work should have been carried Provisional sums should be distinguished from prime
out ahead of time so that the final account meeting can cost.
focus on agreeing the few outstanding items that may
be still in abeyance. If there is a difference of opinion It is good practice that any provisional sums have a
between the contractor and the employer’s quantity design deliverables date agreed so that they can be
surveyor then it is suggested that further work is done to converted into fixed prices at an opportune time during
close the gap using telephone calls and more informal the contract period. If this happens properly, then at final
meetings between the employer and contractor. The final account stage most of the provisional sums should have
account meeting should certainly not be the first time already been converted into fixed prices and instructed
that parties have seen each other’s positions; this would as such.
indicate that the change control process has not been
working properly. There may be a few provisional sums outstanding at the
conclusion of the contract; these can often be items such
as statutory utilities, provisional sums associated with
3.5 Structure of the final external works, provisional sums associated with furniture
fittings and equipment. In these instances, the agreement
account of these provides provisional sums that may be a part of
the final account process. Any unused provisional sums
There are no firm rules about how a final account should should be formally omitted by instruction.
be structured and as long as both parties agree, then a
structure for the final account can take whatever form It is crucial that earlier provisional sums agreed
is sensible for the contract. The structure may also be throughout the contract period and are reported and
dictated by employer requirements, particularly when communicated to the employer in the monthly financial
seeking to apportion costs between different cost centres reports.
or departments.
2. Approximate quantities
The document may follow the original pricing document
– so if, for example, there was a bill of quantities it might If the contract is a remeasurable contract then the final
be adjusted section by section or it might be more account should deal with changes in quantities. This
appropriate to deal with variations in total. This would should be an academic exercise, as the bills of quantities
depend on what the changes are, and how they are would have already prescribed which quantities are to be
instructed. remeasured.
Summarised in this subsection are a list of typical final Remeasures should generally be taken from drawings or
account headings and descriptions: a digital model. Only in exceptional circumstances should
quantities be remeasured from site works.

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Approximate quantities should be avoided if possible as consulted for full understanding of variations. In terms of
they provide a greater uncertainty to the employer. the final account, the only contractually entitled change to
the contract sum will be for variations, which have been
3. Prime cost sums formally instructed under the contract.
Prime cost sums may be included for items of work There are different procedures in terms of instructing
when the final specification of the work item has not variations depending on the contract type but the
been decided at contract stage. An example of a prime principles remain the same. If there are any changes,
cost sum might be a carpet (i.e. the cost of the material), which are agreed by both parties but have not been
the contract may allow for the laying of a carpet to the formally instructed then strictly contract instruction
designated areas at a prime cost sum of £25/m2. The should be issued for that particular change to ensure
laying of the carpet cost is usually fixed irrespective of all the necessary paperwork is in place so that that the
the cost of the carpet (although this might also change relevant monies can formally be paid.
if the prime cost is for ‘flooring’ and the choice is made
between, for example, carpet or vinyl). Care is needed to Contract instructions
understand the basis of the prime cost sum.
All agreed changes should have a contract instruction,
When a final specification of the carpet is decided any which formally records that change. It is not unusual at
variants to a prime cost sum will be reflected in the final final account stage to have a number of items, which
account, so for example, if the final selected carpet is are either being claimed by the contractor, which they
£30/m2, but the contract states a prime costs sum of consider being a variation but have not formally been
£25/m2 then the £5/m2 difference over the designated instructed, or for new variations, which has only recently
area will be the adjustment to the contract sum. been agreed but have not been formally instructed.
4. Daywork allowances As a part of the final account procedure, it is good

practice to ensure all variations claimed by the contractor
Daywork allowances are monetary allowances made for have been considered by the architect/contract
the costs of labour, plant and materials, against which administrator.
percentage uplifts are priced against the base rates of
labour and prime cost of materials and plant. These Loss and expense
allowances are for work for which the quantity and Loss and expense associated with any delay or disruption
specification is unknown and whose instruction is likely to to the contract is the subject of the RICS guidance
be on an ad-hoc basis, where the valuing of the work by note Ascertaining loss and expense, 1st edition (2015)
reference to contract rates would be inappropriate. This however, it is still appropriate to have an understanding
is, in effect, a contingency allowance for any ad-hoc work of the contractual procedures for agreeing any loss and
that may be required throughout the contract. It is not expense and the mechanisms for awarding them.
uncommon for daywork clauses in contracts to be struck
out or non-existent. If the contract administrator has awarded an extension
of time for a relevant matter, which would entitle the
At final account stage, the contractor will be entitled contractor to loss and expense, then that loss and
to an element of the daywork allowance that equates expense should be formerly recorded as part of the final
to the signed daywork sheets. Daywork sheets must account settlements, when so instructed formally by the
be signed off by the contract administrator. Progress employer.
on the status of the dayworks allowance should be
reported via monthly financial reports at regular intervals. Often the extension of time and associated loss and
Therefore, the final account should be just picking up expense has been agreed earlier in the contract and the
the worksheets that haven’t been reflected in the latest final account statement will simply formalise this process.
financial report. It is also not unusual for the entitlement to an extension
of time and associated loss and expense to be delayed
It would not be acceptable to reach final account stage until the end of the contract.
and only then be presented with the extent of the day
worksheets for the project. Once the entitlement to an extension of time is agreed
and instructed then the costs associated with loss
Variations and expense can sometimes become part of the final
The definition of a variation in terms of final accounts is negotiations.
any change to the contract specifications or drawings
(whether that be a set of employer’s requirements or
Fluctuations
traditional specification and drawings). Fluctuations are financial adjustments made to the
original contract prices to compensate for changes in
Adjustments for contract variations should be calculated pricing levels at a macro-economic level by reference to
using bill rates and star rates wherever possible. The input costs, price indices and price adjustment formulae.
RICS guidance note Valuing change, 1st edition (2010)
deals with variations in more detail and should be The contractor may be expected to include for all necessary
inflation allowances on smaller or shorter duration projects,

but on large projects contracts may allow for uplifts to the

contract sum based on the following:
3.6 Final account adjustments
•• changes in taxation and Statement of final accounts
•• changes in the cost of labour, transport and materials. There is no standard ‘statement of final account’ form.
Most forms will follow a similar format. Appendix A shows
The contractor is usually not entitled to fluctuations after an example statement of final account. The principle
the completion date. information to include in a statement of final account is:
Calculation for fluctuations will be based on agreed •• adjustment of provisional sums

programme dates and industry data for calculating
inflation (or labour rates etc.). •• adjustment of prime cost sums
•• adjustment of provisional quantities

As with all other changes to the contract sum any
fluctuations should be communicated by the monthly •• contract instructions
cost report to the employer at regular intervals. The
final account should be the formalisation of fluctuation •• anticipated instructions (which must be formalised
calculations under the contract. before agreeing the final account)
It is not unusual for the fluctuation clauses to be struck •• fluctuations and

out of construction contracts. •• loss and/or expense.
Risk allowances The statement will also include clear information as to
There are three main methods for dealing with risk within limitations of the agreement and any caveats that may
a construction contact: be included. It will often include words similar to ‘full and
final settlement’ to ensure that the statement cannot be
1 Risk fully owned by employer: opened up at a later date. There may also be spaces for
both parties to sign the agreement.
The risk allowance is identified and maintained by the
employer and controlled by the PQS. This is then offset Legal professionals in the construction industry may
against valid variations throughout the construction draw up a robust statement of final account or settlement
period. This is the usual method of dealing with risk on agreement. However, this is only normally necessary
traditional contracts. where there has been a complicated conclusion
to the final account. If the final account has been
2 Risk owned and bought by contractor: straightforward and within the terms of the contract then
Fixed risk allowances, which have been identified as a more straightforward statement of final account may
being owned by the contractor, and paid for upfront as suffice.
part of the overall contract sum (usually on a Design Note that the statement of final account might not include
and Build contract). With this method it is still advisable any deductions for liquidated damages (delay damages)
to have some risk allowance on the employer’s side that are due. The employer can deduct these from the
(although usually at a reduced amount compared to the final payment certificate, in line with the Construction Act
first method). provisions for pay less notices.
3 A transparent variable risk allowance within the If it is agreed that the final account statement should
contract sum include a deduction for liquidated damages then the
Some contracts may include a risk allowance within the wording should very clearly state that the signed
contract sum for any unforeseen events these may be statements concludes the employer’s entitlement to
linked to a risk register. These may often be used in open deduct any further liquidated damages.
book transparent contracts where the level of employer’s
contingency is included within the contract so that parties
will understand the amounts available on the project.
3.7 Release of retention
The advantages of a transparent risk allowance are that The issue of the practical completion or the completion
all parties are fully aware of the overall financial position certificate dictates the release of retention in most
of the project and will work in a mutually beneficial way standard forms of contracts.
to ensure that the project is delivered within the contract
If the final account has been agreed at the point of
sum. However, the disadvantage is that the contractor
practical completion then the employer can release ‘the
may see this risk allowance as an entitlement and find
part of the retention (typically a percentage) stated in the
reasons (spurious variations etc.) for offsetting against
contract up to the final account settlement figure.
it. It is therefore relatively uncommon for contracts to
include transparent risk allowance.

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However, if the final account has not been agreed and defects at his or her own cost. Various contracts have
a difference of opinion remains then the employer is different timescales and mechanisms for dealing with
entitled to release retention only up to the amount he or them but, in essence, the contractor should be notified of
she believes is payable under the contract. When the the defect and then have a set amount of time to rectify
final account is agreed it is not uncommon for another that defect. If they are not dealt with in the allocated
payment certificate to be issued. timeframe, then the employer will become entitled to
make good the works at their own cost and deduct the
Final certificate cost from the retention still held.
The second release of retention occurs at the end of the
Difficulties emerge when there is a dispute about the
defects liability period. In the event that the final account
liability of the defect and whether it is actually a defect.
is still not agreed at this point in time then a similar
principle applies, full retention can be released on the
amount agreed between the two parties but the value of 3.10 Loss and expenses and
disputed items is not released. The final certificate cannot
be issued until the final account is agreed. liquidated damages
For the purposes of the agreement of the final account
3.8 Dealing with defects as part it is important to understand that loss and expense is
of the final account instructed and included within the final account statement
but the employer deducts liquidated damages.
Most standard forms of contract are prescriptive about If during the course of the project any relevant matters
how to deal with defects in the works. The difference affect the contractor then they may be due loss and
between patent and latent defects must also be expense. It is good practice to ensure that the amount
understood: due to the contractor is agreed between the contractor
and PQS as soon as possible following the event.
•• Patent defects can be discovered by reasonable
inspection. The subject of ascertaining loss and expense claims
•• Latent defects cannot be discovered by reasonable is beyond the scope of this guidance note (see the
inspection. RICS guidance note Ascertaining loss and expense, 1st
edition (2015)). In the scenario that the amount has been
It is good practice to alert the contractor to the defect agreed, then this simply gets added to the final account
and allow them the opportunity to make good the defect. calculation. As both parties had previously agreed, this
If this is carried out to the employer’s satisfaction then should create no major surprises.
the final account can be agreed as if the defect had not
occurred, however, if the defect is either not fixed to the Unfortunately, it is common in the industry for any
employer’s satisfaction or not carried out at all by the potential loss and expense to not be agreed at practical
contractor then most standard forms of contract enable completion. This complicates matters as the very factual
the employer to engage another contractor to make good part of the agreeing the final account based on instructed
the defect and deduct that value from the contractor’s variations becomes confused with a sometimes more
final account. This can be a sensitive issue and it will be subjective view when dealing with loss and expense.
common for a difference of opinion to occur.
Good practice would suggest that the best course of
If this difference of opinion cannot be settled amicably, action would be isolate the loss and expense calculation
then some form of dispute resolution maybe necessary. from the remainder of the account, ensuring that it is
For the purposes of the final account it would not be agreed in a fair and reasonable manner and then turn the
possible to agree the final account while a dispute is attention towards the rest of the account. The previously
apparent. agreed loss and expense figure can then be included at
the end.
Where a defect is rectified by an alternative contractor
and is accepted by the contractor then the value of the Note that one of the major advantages of the NEC suite
adjustment to the final account must be agreed between of contracts is that it dictates that all associated loss and
the employer and the contractor and will form part the expenses is agreed as part of the compensation event as
statement of final account. the project proceeds. If the NEC contract is used properly
then, in theory, it should lead to fewer disputes at final
account stage, but this is on the understanding that all
3.9 Defects during the defects/ parties actually engage in the NEC process.
rectification period If the contractor has finished late on the project and
missed the completion date (with a certificate of non-
If the final account is agreed at practical completion and completion issued by the contract administrator), then
then a defect emerges during the defects period, then liquidated damages (delay damages) become due, this
the contractor is entitled to attempt to make good those should not impact the final account procedure as the

damages are deducted from the agreed final account by The type of information that should be presented by the
the employer (by use of a pay less notice). contractor should include the following:
However, in reality if a contractor knows that liquidated •• substantiation to variation figures

damages are going to be deducted from their final
account then it will almost certainly affect their judgment •• subcontractor quotations where applicable
and negotiating position in the final account discussions. •• daywork sheets
•• loss and expense claims made with relevant heads of

3.11 Set-off/contra charging claim and
Contra charging can be described as where the employer •• build up to fluctuations.

recovers costs from the contractor, that the contractor
In essence the contractor should include any information,
has caused the employer to incur. This could equally
which will help the contractor substantiate his or her
apply in a main contractor subcontractor relationship
claims for additional monies under the contract.
also.
Conversely, the NEC suite of contracts expects that
The latest Construction Act (2011) makes it very clear
all issues related to the final account be agreed on an
that any contra charging must comply with the pay less
on-going basis. Therefore, there is no need for a final
mechanisms of the contract.
account period as such. The final account should be
The official advice from the National Specialist agreed by the time the timescales for the last instructed
Contractors Council (NSCC) is as follows: compensation event has elapsed.
‘… the Pay Less Notice has to state the amount It must be recognised that each form of contract and
that will be paid as well as what will be withheld. The variant form will have different timescales. Furthermore,
benefit of this is that you will now know whether an solicitors’ amendments may change the timescales. It is
underpayment is because of a dispute over valuation, therefore important that the timescales associated with
a claim for contra charges or both.’ the particular contract being used are understood and
adhered to.
© NSCC Ltd
It should be recognised that adherence to the timescales
So in terms of the final account it is the employer’s within a contract is also important to employers and
responsibility to deduct the amount that is being contra contractors as a measure and a key performance
charged from the final account settlement. indicator (KPI). Sign-off of the final account can
sometimes be more important to the employer or
contractor than arguing over any minimal remaining
3.12 Timescales – contractual costs.
and non-contractual
It is a critical issue to understand what information
should be in the adjustment of the final account and the
timescales involved. If the timescales are not adhered to
then there is a risk of this leading to a formal dispute.
Timescales related to the agreement of the final account

vary from contract to contract with some being very
prescriptive and others less so.
The standard JCT contract (for example) states that

the final account should be ascertained no later
than 3 months after receipt by the architect/contract
administrator of information supplied by the contractor
(which itself should not arrive any later than 6 months
after issue of the practical completion certificate).
However, each individual contract should be checked for
their specific timeframes (and note that some contract
amendments may change these timescales).

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4 Practical considerations (Level 3: doing/

advising)
This section covers the more common difficulties or

complexities, which may influence advice regarding
4.2 Negotiation as an alternative
final account procedures. A chartered surveyor to dispute resolution
should consider the following when advising about
final accounts, and, in particular, when making The process of agreeing a final account inevitably
recommendations about settlements for final accounts. involves some degree of cooperation and negotiation.
Even if a project has been well set up with agreed rates or
Any adjustment to the final account should be in change control mechanisms there is usually an element
accordance with the contract terms. However, where of outstanding items that need to be agreed. It should be
complicated final accounts are being handled a degree remembered that all parties involved in the negotiation of
of negotiation or co-operation may be preferable to the the final account are merely protecting their company’s
employer rather than entering a formal dispute. financial position.
Negotiation or agreements outside of the contract terms Where the employer has instructed negotiation, to avoid
should only be carried out where formally instructed to by a lengthy formal dispute, the process should be carried
the employer. out professionally and calmly and not become personal
between the parties involved. This usually increases the
4.1 Disputes (adjudication/ chances of any dispute becoming legal.
arbitration/litigation) Relationships are key to a successful outcome, and the

principles of fairness and reasonableness should always
In the event that a final account cannot be settled apply. Above all else, parties must act ethically.
amicably and only once all other options have been
exhausted, then it could be stated that the parties are in Any negotiation will be aided by the preparation of both
dispute. Most construction contracts will have necessary parties. When both parties arrive at the negotiating table,
provisions for settling disputes, and there is also the the due process of preparation should have been done.
Housing Grants, Construction and Regeneration Act This will aid a successful and meaningful discussion.
1996, amended by the Local Democracy, Economic As part of the preparation for the negotiation, both
Development and Construction Act 2009 which governs parties should clarify the goals. Ultimately this will be a
the procedures for statutory adjudication. settlement that both parties are content with but there will
A typical first formal step is adjudication but there are be other specific goals from each party, and these should
other alternative dispute resolution options such as be understood before full negotiation begins. Both parties
mediation and conciliation. To explain each type of should feel as though they have a reasonable outcome.
dispute resolution is beyond the scope of this guidance This does not mean there needs to be a ‘loser’ in the
note but more information on this topic can be found in negotiation. It is perfectly possible for both parties to win
the RICS guidance note Conflict avoidance and dispute as their specific goals maybe different.
resolution in construction, 1st edition (2012). For example, the employer may have a maximum figure
It is strongly advised that if a resolution to the final that they are prepared to extend to – that may be their
account cannot be reached then mediation or conciliation goal, however, the contractor’s most pressing concern
may be effective – the presence of a third party can may be the liquidated damages that may be deducted
sometimes help and enable people to put perspective on from the agreed final account. It is by understanding
issues. If a resolution is still not reached then adjudication these concerns that a reasonable settlement can be
will require both parties to submit all their information made. In this example, the contractor may be prepared to
to the adjudicator in accordance with the relevant accept a lesser figure if there is an agreement that only a
timescales. This is where keeping a proper audit trail of all portion of the due liquidated damages are taken.
variations and changes are vital. Successful negotiation will only be achieved if there is
It would be almost impossible to pull together all willingness on both sides to try and reach an agreement.
necessary backup and evidence in the tight timescales Whatever happens once an agreement is reached it must
of adjudication if it is not already in a good order. All be formalised with a course of action to arrive at a final
companies should ensure that their documentation and account.
files are ‘audit ready.’

4.3 Dealing with items not be part of the negotiation. It is likely that they would only
need to be there for the part of the meeting that concerns
formally instructed them.
One of the common reasons that items aren’t agreed is Both parties in the negotiating process should avoid
because they haven’t been formally instructed. This is being a ‘post box.’ For a smooth negotiation, the work of
also relevant for loss and expense claims (which may discussing with upstream or downstream parties should
not have a formal extension of time issued) as it is for be done beforehand.
variations. Just because a subcontractor or supplier has a claim or
The reason for items not being formally instructed may be variation with the contractor that does not necessarily
because they were in dispute for a period of time, or there mean that the contractor has a claim with the employer.
might be some late changes, (sometimes even occurring The word of the contract cannot be forgotten during
post-practical completion). For a well-run project, this the negotiating process. Each party should listen to the
will be straightforward to deal with by issuing a ‘wrap- others point of view, but it is not always the cast that the
up’ instruction to formalise these few outstanding items. contractors are back to back.
These should be clearly categorised as subsections Remember that although the QS may be negotiating the
within one instruction. final account figure, the final agreement is between the
However, if a contract is more problematic with lots of parties to the contract (i.e. employer and contractor).
variations that have not been formally instructed then it This needs to be recorded as do any other terms of the
is even more important that the contract administrator is settlement (such as the inclusion of LADs etc.).
present at the final account negotiations to ensure that
values being agreed are for real and agreed variations. 4.5 Adjustment of the final
There is little point in spending time agreeing final
account figures and a proposed settlement only for the account
contract administrator or employer to maintain that the
items are not true variations. Each form of contract has different timescales related to
the provision and timing of information. For example, the
If the difference of opinions is so fundamental then a NEC is very prescriptive about timing of information and
separate meeting to discuss the validity of the variations doesn’t define a final account period, with the date of the
should be held before the final account can be discussed. last variation and the timescales governing that being the
This doesn’t need to change the advice included in status of the final account. However, the JCT sets down
financial report as they can still be dealt with as potential very specific timeframes for receipt of information from
variations or early warnings but the final account cannot the contractor (six months) and if it is not provided in a
agree until these have been formally instructed. timely manner then the employer can issue the necessary
information. The PQS then has three months to respond
The JCT contract enables verbal instructions to be issued and issue the final account.
using confirmation of verbal instructions (CVI’s) under
clause 4.3.2 of the JCT contract. If the information is not provided within the defined
timescales then by the contract the obligation falls to
However, it is suggested that all verbal instruction are the employer (by the PQS on their behalf) to ascertain
backed up with a formal written instruction. the final account based on the information provided. The
different forms of contract deal with this differently and
4.4 Agreeing the final account the timescales involved:
•• JCT Design and Build Contract states that two

It should be remembered that other parties could affect
months after the three-month period the employer
the final account discussions as this may affect one of the
can make their own assessment
negotiating party’s positions. For example, a contractor’s
QS would in some circumstances be dependent upon •• NEC sees that the final compensation events
their subcontractor and suppliers before any agreements timescales govern and
can be reached. Conversely, the professional quantity
surveyor (PQS) may have to consult with other members •• FIDIC states that 56 days after receiving the
of the design team or employer team. performance certificate the contractors submits their
draft final account to the engineer.
However, to enable a swift resolution to a final account
the parties should be prepared to make decisions where If the contractor disagrees at this stage then they would
they are able to and to seek permission where necessary have to go through formal dispute resolution in theory
to act on their behalf and given appropriate delegated but it is still suggested that a period of discussion and
powers. cooperation is carried out first, even if the contractor
has indeed weakened their position by not issuing their
If there are some big items or issues that involve a third information in line with the agreed timescales.
party, then the suggestion is that they are invited in to

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4.6 Bespoke and amended There is no such thing as a final account application
under NEC contracts. The final payment has to be
contracts certified within four weeks of the supervisor’s defects
certificate (clause 11.2(6)).
It is not uncommon in the construction industry for
bespoke contracts to be used or heavily amended The time and cost impact of compensation events are
standard forms. These may include amendments of deemed to be included in the agreed compensation
differences to the way that standard forms deal with final event, therefore there is no additional final account time
account procedures. allowance post completion for agreeing for final account,
as it is assumed that all compensation events have been
The most important point to understand is that any agreed as the contract proceeded.
amendments or bespoke contracts cannot and must not
contradict the common law position and especially that
of the Construction Act. It is therefore not permissible
4.8 Patent and latent defects
to introduce ‘pay when paid’ clauses or withholding
unreasonable amounts. In any event, this shouldn’t be Patent defects
done as it is would not be within the spirit of the contract. Any patent defects (which were observed before the final
certificate), are usually rectified by the contractor within
Bespoke contracts and amendments may also be made a reasonable period (dictated by the form of contract). If
to reinforce a partnering approach and may include the contractor does not carry them out then they can be
provisions for shared savings, which may be dependent carried out by another contractor and contra-charged as
upon the final account figure. Therefore a bespoke or part of the final account settlement.
amended contract may include a more detailed process
arrangement of how this might be dealt with. For Latent defects
example, a contractor may be entitled to a bonus should
The agreement of the final account does not affect either
they complete within a certain timeframe or within a
party’s rights under the contract when it comes to latent
certain cost envelope. This will affect the final account
defects.
and should be set out.
If the defect occurs during the defects liability period then
Any specific changes to the final account procedures
the defects liability period then the contractor should be
should be properly communicated to the contractor at
given the opportunity to rectify the defect.
the tender stage so they understand the implications
of the contract, as contractors can be apprehensive of Once the defects liability period has expired then any
bespoke or heavily amended contracts. further defects will be subject to a separate claim for
damages and for breach of contract, or for negligence.
Due to their nature, bespoke contracts are also untested
in court and, therefore, should any disputes arise the These are usually time barred anytime up to six years
legal position would be less clear. from the date of breach, see section 5 of the Limitation
Act 1980.
4.7 NEC procedures (early For a contract under seal, the period is extended to 12
warnings, etc.) years (see section 12 of the Limitation Act 1980).
Therefore, it is advisable that all contracts are made

The method of valuing variations, which make up the final
under seal.
account, is governed by the use of a schedule of cost
components (or shorter schedule). The added benefit of Latent defect insurance can be taken out for extra peace
the NEC is that all loss and expense and extensions of of mind if the employer wishes.
time (and other claims) are dealt with as compensation
events and should be included within the final account.
4.9 Settlement agreements
It should be remembered that the latest Construction
Act states that the contract shall contain an ‘adequate It is inevitable that occasionally final account negotiations
mechanism’ showing how stage payments and final will get to a point where the two parties are still some way
account are to be calculated and when payment is to be off agreement. This might be for a number of reasons:
made. For the JCT and FIDIC contracts, this process is
clearly set out. The NEC contract runs on the assumption •• Validity of claimed variations disputed – the contractor/
that the final account will be agreed by the completion subcontractor may claim for an item they deem to be a
date if the timescales covering compensation events are variation, but the employer’s surveyor does not deem it
adhered to. a variation to the contract and therefore not payable.
The NEC contract contains many processes designed to •• Value of variation – while the validity of the variation
avoid or resolve disputes as the works proceed but does may agree the parties cannot come to an agreement
not have a final account or final statement type process. on the value of that variation.

•• Loss and expense – even if the principle of loss and It is also very important to check the maths and carry
expense has been agreed there may still be a dispute out adequate computation checks as soon as the draft
over the value and the heads of claim used. final account is received and before the final version is
presented for conclusion.
•• Extension of time – If an extension of time has
been claimed for there may be a dispute as to the An example of a type of audit checklist:
entitlement of the employer to claim liquidated
damages. •• project control plan
Rather than enter into legal proceedings (which can be •• contract documents examined to determine:
time consuming and costly to both parties) they may
–– the period for final measurement of the works
agree on a settlement. However, the quantity surveyor
is not empowered to negotiate unless instructed the –– responsibility for preparing the final account
employer.
–– if not specified, agreed with the contractor
Whatever is agreed must be a ‘full and final’ settlement
and the payment thereof in full to ensure the deal is •• staff resources to prepare final account agreed with
binding and all parties’ written agreement to the final team manager/partner
certificate before it is issued. The full and final settlement •• register maintained of architect/contract
should contain as few caveats/conditions as possible administrator
as they increase the chance of a further dispute arising
in the future. If there are any outstanding defects or •• instructions
maintenance issues, they should be wrapped up in the
final account. •• final account calculation assembled
•• including, as appropriate:
The final account settlement should not change the
parties’ obligations to each other in terms of the contract –– the summary page
conditions in respect of issues such as latent defects,
warranties and bonds. –– adjustment of prime cost and provisional sums
For larger contracts or particularly complicated accounts, –– adjustment of provisional items

it is suggested that a construction solicitor draws up –– adjustment of approximate quantities
an agreement, which spells out exactly the terms of the
agreement. –– valuation of variations, dayworks
Settlement agreements should not be treated as standard –– fluctuations

practice and are not without risk, final accounts should be
–– loss and expense incurred by the contractor
agreed using the terms and mechanisms of the contract.
They may also affect the employer’s ability to take legal –– adjustment of overheads and profit
proceedings against members of their design team, as
the defendant would simply state that they didn’t agree or –– adjustment of any other amount required by the
were party to the final account settlement. contract.
•• before the summary and statement were printed,

4.10 Auditing of accounts were the following checked:
–– pages numbered correctly

Auditing of final accounts should be a standard part of
the final account process, especially if the companies –– pricing document rates and references correct
want to comply with the management systems standards
of ISO 9001:2008, which some public sector employers –– were pencil figures inked in
will insist on. However, there is more to auditing than –– were all calculations arithmetically checked
just ticking a box. Internal audits of accounts provide the
company with some comfort that their assessment and •• statement of final account prepared:
agreement of final account is fair and reasonable and that
–– submitted by the contractor for agreement and
there are no obvious errors. Peer reviews by other qualified
signature
professionals reduce the risk of oversights or errors.
–– checked on its return to ensure no amendments
Most large companies have a quality management system
made prior to signature
(QMS) in place that contains detailed instructions on
how the final account should be audited and processes •• statement of final account approved by partner/
for dealing with non-conformance or errors. Smaller director before the issue, approval recorded by
companies or sole practitioners, therefore, need to ensure partner initialling office copy
they are providing their employers with a similar level of
protection even if it means outsourcing the audit checks. •• signed statement of final account issued to architect

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or contract administrator under a covering letter up by offsetting against the construction budget, so
it is important that this is reviewed throughout the
•• disputes regarding the final account resolved, course of the contract, otherwise when it comes to
disputed points recorded the final account stage there could be a significant
•• where the contractor prepared the final account discrepancy.
sufficient checks carried out to ensure its •• Section 106/278: any section 106 or 278
correctness, all checks recorded on office copy contributions are often subsumed into the contract,
•• necessary deductions made (when permitted by the but they may also be provided by means of a
form of contract) if defective or non-compliant work separate contract. Therefore, this must be reviewed.
identified •• CIL (Community Infrastructure Levy): where
•• any variations issued after practical completion CIL applies the PQS may have to advise on the
evaluated and included under a separate heading implications for the budget and ensure that any
charges are included within the overall project
•• if the employer required final account to be audited, budget.
was the auditor supplied with a copy of all backup
information required. •• VAT: this is a complex issue and the amount of
VAT liable on any project should be calculated and
As well as internal audits some employers will demand an advised by a VAT specialist. However, the PQS may
audit of the final account, sometimes by an independent have to report these figures and ensure they are up-
auditor. to-date.
It is advised that audits are carried out before the final •• Employer internal costs: some employers will have
account is agreed and a statement of final account their own internal costs (such as finance costs, legal
signed. This way if any discrepancies are found they can costs, etc.). These can vary a great deal and are
be addressed with the other party before the account is obviously not a part of the contractor’s final account,
agreed. but they should still be included in the overall
financial report.
Audits are a powerful tool and should be encouraged
both internally and externally. They provide accountability
and a safety net. They should not be seen as a criticism 4.12 Possibility of the agreed
of work carried out but simply as a way to reduce
mistakes, misunderstandings and crucially to learn to
final account being used in
ensure weaknesses or shortcoming are addressed. disputes
When a project doesn’t go according to plan, the
4.11 Items that the QS may be employer can often suffer a financial setback. The
asked to advise on reasons for a project not going as planned can vary
enormously and can include the following:
There are often items, which form part of the overall
•• the contractor is overrunning due to being badly
project budget but are not part of the contractor’s final
resourced
account. However, it is not uncommon for a final account
report to be issued at the same time as the final account. •• employer-owned risks coming to fruition
The PQS may, therefore, need to advise on items or
costs, which sit outside of the contractor’s account. •• significant variations due to design development or
These may include (but are not limited to the following): employer change or
•• Loose furniture, fittings and equipment: it is not •• errors in the design (particularly on traditional
unusual for fixed goods to be included within the contracts).
building contract (i.e. fixed wardrobes or shelves) Where the employer considers that the problems in the
but any loose furniture (i.e. chairs, beds, tables etc.) project were caused by the design team (i.e. errors in the
are not usually part of the contractor’s contract. The initial design requiring significant variations) then they
loose furniture, fittings and equipment budget may may choose to take this up with the member(s) of the
be a separate contract (administered in its own way) design team that they view to be responsible for these
or may be a direct order from the employer. Either issues.
way the PQS needs to understand how this relates to
the overall budget. Initially, this may be informally but can sometimes lead
to legal action. In these instances of dispute, the final
•• Professional fees: while the professional fees budget account documentation can be an important forensic
may not be administered by the PQS, they will often tool if it has been ordered properly. From the final
need to have a good understanding of the budget account information the employer (or dispute resolution
and ensure it is tracked throughout the course of the practitioner) may be able to ascertain the value of works
contract. Any shortfall in this budget is often made

over and above the contract sum, which they consider If you receive liquidated damages, you are not
to be the fault of the design team. However, on the other receiving payment for a supply by you and no VAT is
hand, a badly organised and recorded final account can due on that amount.
weaken the employer’s position (and could implicate the
quantity surveyor in the dispute). If you are due to make a payment for liquidated
damages and due to receive from the other party
While most employers and contractors do not set out for a payment for a supply made by you, you cannot
a dispute at the beginning of a project all final account reduce the value of your supply (and therefore cannot
documentation should be treated as though it could be reduce the amount of VAT chargeable) even if you set
used as evidence in a court of law. the amounts off against each other.’
Issues become a little more difficult where a deal has The guidance is, therefore, clear that VAT is not to be paid
been reached as the member of the design team involved on liquidated damages and the same principle applies to
in the dispute could simply state that their opinion does any contra charge. See the RICS guidance note Interim
not represent a good deal and as there is a degree of valuations and payment, 1st edition (2015).
subjectivity it makes things difficult. It is therefore vital
that the build-up to the deal, demonstrating that it does
represent the employer’s liability to the contractor (and 4.14 Insurance recovery
that they could have paid more if the dispute continued)
must be kept to counter any of these sorts of criticisms. It is important that risks in the contract are owned by the
party best able to manage that risk and they will usually
attempt to take out insurances to cover this risk. In a
4.13 VAT on final payments construction contract, the most common insured risks
and interim valuations when are all-risk insurance for the works on site, insurance
of the works, public liability insurance and professional
damages/contra charges have indemnity insurance.
been applied These insurances will sit outside of the final account
negotiations and should not affect the methodology
In most normal circumstances, VAT is applied at the previously discussed to arrive at the agreed figure. If
standard rate. However, there are some circumstances liquidated damages are to be applied, then the contractor
when VAT is either exempt of zero-rated and even more may have taken out an insurance policy against this.
confusingly there are plenty of circumstances where there While this is not a concern for the employer who will levy
is a partial exemption. damages in accordance with the terms of the contract
it is a concern for the contractor, as their insurers may
The topic of VAT on construction projects is a complex want to see justification for the claim. This, therefore,
issue and outside the scope of this guidance note but, as goes back to the rationale of ensuring that accounts
a general principle, surveyors should be aware that final are properly kept and audited as it is protection for both
account decisions can impact VAT paid on a project and, parties to the contract.
therefore, the overall project budget.
If there are any variations in the contract, which were
As an example, if a building is partially VAT exempt and as a result of an insured risk on the employer’s site (i.e.
VAT is calculated based on the proportions of the building if there was a flood which caused damage), then the
used for a given purpose, then how do variations to the employer’s insurers may not pay unless their specific
building contract affect that calculation? If a variation procedures are followed. In this circumstance, it is
impacts the entire building (i.e. if a new heating system is crucial that the contractor, employer and insurance
instructed for the entire building) then the logical effect is company representative liaise to make sure the insurance
a pro-rata update to the VAT calculation. company’s provisions are being followed. The contractor
will still be paid by the employer (as if it were normal
However, a surveyor needs to be alert to whether a variations) and included in the final account statement but
variation only impacts the proportion of the building the specific cost should be identified so that the employer
that is liable for VAT (e.g. the ground floor retail unit in can then recover this cost from their insurers.
a student accommodation scheme). In this case, the
surveyor should advise their employer to seek expert VAT
advice to review the implications of the change. 4.15 Full development costs
There is also the question of VAT on damages. VAT Notice The agreement of the final account of the main contract is
708: buildings and construction states that: only part of the overall budget for the employer. They will
be interested in the full development costs and how that
‘Liquidated damages are agreed pre-estimated sums
translates into their budget.
to be paid in the event of a breach of contract by one
of the parties. The amount is either a set figure or
determined by a formula.

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This will be different depending on the type of project, The insolvency practitioner will be a party to the
but it may be made up of a number of different accounts negotiations, and it will be in their interests to agree the
such as an enabling works contract, furniture, fittings and highest value possible on the works carried out to protect
equipment contract, or landscaping contract. the creditors to the company in administration.
There will also be other cost centres to tie up, such as There is also likely to be a premium to be paid to the
agreement of all fees (including any fee claims submitted contractor stepping in to take over the works, to be
for prolongation, etc.), it is therefore very important that deducted from the contractor. The final account should
before the development cost final account is submitted also clarify the scope of work remaining to complete the
to the employer that those responsible for other cost work to the contractual obligations. The final account
centres have closed out their accounts. must also take into account any pay less notices issued
by the client.
For example, the main contract final account may show
that not all of the contingency was spent. However, If the contract is terminated due to a reason outlined
before this is reported it is important to check that there in the contract then the rules in most forms of contract
is not another cost centre (such as professional fees) are clear and will stipulate the types of loss that can be
which has been overspent (perhaps due to fee claims claimed and, possibly, the limits on recovery.
etc.) which will need to offset some of those savings.
If the contract isn’t prescriptive then the common law
The final VAT calculation will also have an important remedies are wider, and will look to put the innocent party
impact and often this cannot be fully calculated until all into a position they were in prior to the termination and
the other elements have been closed out. It should also this may include loss of profit.
be the VAT specialist that does this calculation as there is
always a risk associated with VAT calculations. If an employer terminates before the end of the contract
then they must realise the implications and that they may
Before any remaining risk allowance is returned to the be forgoing any liquidated damages that are owed.
employer’s budget, all cost centres must be closed down.
If the contract is terminated due to force majeure (i.e.
if it is neither party’s fault) then the same procedures
4.16 ‘Notional’ final accounts apply but there will be more of a willingness from both
caused by the contractor going parties to reach an acceptable agreement due to the
circumstances.
into liquidation or administrative
receivership
In most cases, final accounts represent the end of
a project and occur when the employer is taking
possession of their new building. However, there are
also occasions when final accounts have to be settled
in the middle of a project. This can be due to one of the
following reasons:
1 the contractor or employer going into liquidation or

administration
2 the contract being terminated due to performance or

other reasons in accordance with the contract by the
employer or
3 the contract being terminated by the contractor.
The issues surrounding liquidation and administration

are covered more extensively in the RICS guidance
note Termination of contract, corporate recovery and
insolvency, 1st edition (2013), but in terms of final
account it is important that the agreed value of works
carried out at the date of termination is determined
as soon as possible so that negotiations with the new
contractor ‘stepping in’ can begin. This is why it is vital
that interim valuations are as accurate as possible, if a
contractor does go into administration it may be very
difficult to reclaim for any over payment.

Appendix A: Example statement of final account
Statement of final account for the contract
Dated: …................................…………………….................................................
Between: …................................……………………............................................
For: The design and construction of: …................................…………………….
At: …................................…………………….......................................................
£
1 Contract sum 10,000,000
2 LESS risk allowances 0
SUBTOTAL 10,000,000
3 Net omissions/additions (compensation events, early warning notices and adjustment to provisional
50,000
sums up to and including the project manager’s instruction (PMI))
Final account TOTAL (exclusive of VAT) 10,050,000
We hereby agree to accept the sum of £10,050,000 (ten million and fifty thousand pounds) (excluding VAT) in full and
final settlement of the final account for the above contract.
This sum is in full and final settlement of the amount claimable under the final account including all sums claimable by
the main contractor ConBuild or by any subcontractor engaged by a contractor or any suppliers to ConBuild or their
subcontractors.
This settlement does not in any way affect the contractual obligations of either party in relation to other matters that
might arise under the terms of the contract including but not limited to defects, warranties and retention.
Signed: …................................……………………...............................................
Position: …................................…………………….............................................
Dated: …................................…………………….................................................
For and on behalf of: …................................…………………….........................

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RICS guidance note

RICS professional guidance, UK

Final account procedures

Final account procedures

RICS guidance note, UK

Published by the Royal Institution of Chartered Surveyors (RICS)

No responsibility for loss or damage caused to any person acting or

Produced by the RICS QS and Construction Group of the Royal Institution

ISBN 978 1 78321 132 6

© Royal Institution of Chartered Surveyors (RICS) December 2015.

Lead author: James Garner FRICS (Gleeds)

Chair: Andrew Smith FRICS (Laing O’Rourke)

Stuart Earl FRICS (Gleeds)

Roland Finch FRICS (NBS)

Christopher Green FRICS (Capita Property and Infrastructure)

Roy Morledge FRICS (Nottingham Trent University)

Michelle Murray MRICS (DBK)

Alan Muse FRICS (RICS)

Michael T O’Connor FRICS (Carillion Construction Ltd)

Martin Stubbington FRICS (RICS)

ii RICS guidance note Effective from 14 March 2016

RICS professional guidance 1

1.1 Minimum level of service .................................................. 3

2 General principles (Level 1: knowing) 4

2.1 What is a final account.......................................................4

3 Practical application (Level 2: doing) 5

3.1 Preparing for final account.................................................5

4 Practical considerations (Level 3: doing/advising) 11

4.1 Disputes (adjudication/arbitration/litigation).....................11

Effective from 14 March 2016 RICS guidance note iii

4.12 Possibility of the agreed final account being used in

Appendix A: Example statement of final account 18

iv RICS guidance note Effective from 14 March 2016

RICS professional guidance

International standards It is for each member to decide on the appropriate

When an allegation of professional negligence is made

In the opinion of RICS, a member conforming to

Effective from 14 March 2016 RICS guidance note 1

Document status defined

Type of document Definition Status

2 RICS guidance note Effective from 14 March 2016

Practical consideration such as advising on the structure

This guidance note does not provide a detailed guide

Guidance is given in relation to the main forms of contract

1.1 Minimum level of service

Effective from 14 March 2016 RICS guidance note 3

2 General principles (Level 1: knowing)

The FIDIC suite of contracts, which are mainly used for

4 RICS guidance note Effective from 14 March 2016

3 Practical application (Level 2: doing)

Effective from 14 March 2016 RICS guidance note 5

The change control system should not be too Variable costs

6 RICS guidance note Effective from 14 March 2016

4. Daywork allowances As a part of the final account procedure, it is good

Effective from 14 March 2016 RICS guidance note 7

but on large projects contracts may allow for uplifts to the