Rates have been used in construction and engineering contracts for centuries. Some of the advantages of work being charged for on the basis of particular rates is that it can simplify pricing, and reduce pricing risk (for contractors) if the quantity and duration of work is unknown. However, one of the recurring issues with the use of rates in contracts is what works and costs are and are not included in any particular rate or other item.
Carillion v SP Power Systems
In Carillion v SP Power Systems (for our Law-Now article on a related judgment click here), Carillion entered into a framework agreement to perform various excavation, cable laying, backfilling and reinstatement works for SP Power, primarily on roads in Scotland. The framework agreement contemplated works orders being placed, where Carillion would be paid for the work according to a schedule of rates.
The works that Carillion was required to carry out involved performing initial excavations and laying of cables / ducts, and then leaving the site, after which SP Power engineers would perform electrical cabling works, and then a Carillion team would return to the excavation to fill it in and perform reinstatement works.
Some 35,000 works orders were issued under the framework agreement, and SP Power paid Carillion around £84m for the work performed. But on top of this Carillion brought a claim for over £8m for costs that it said were not covered by the rates in the agreement. The basis of Carillion’s claim was that the rates it was paid for providing lamping and guarding around works areas only applied when its workers were at each work site, not when they were away from the site, e.g. when SP Power was performing its electrical works. Carillion was therefore seeking to recover its ongoing costs for providing and maintaining the lamping and guarding around the excavations.
The question for the court was whether the ongoing costs of providing and maintaining lamping and guarding around excavations in roads were included in the rate Carillion was paid for performing the works. The court held that they were not. The court came to this conclusion by considering what the rates in the contract paid Carillion for. The rates were expressed to apply to time-related costs for Carillion personnel, plant and equipment for the work performed on site. There was no item in the schedule of rates (where, relevantly, the items had been prepared by or on behalf of SP Power, and not by Carillion) which was referable to the indeterminate costs of maintaining lamping and guarding for periods when Carillion staff were not on site.
Furthermore, the framework agreement recognised that there may be work performed under it in respect of which there was no applicable rate. In such cases – as here – the framework agreement provided that Carillion was to be paid a “fair or reasonable price or rate”.
It was entirely foreseeable that Carillion would be required to maintain the barriers and lighting around the various road excavations for extended periods – when Carillion staff were not present. But because the schedule of rates (prepared by or on behalf of SP Power) did not provide for Carillion to be paid for this work, SP Power faced an additional financial liability which presumably it had not anticipated. The lesson from this case is that schedules of rates (and similar contract documents) must be prepared with great care, to ensure that the contractor’s anticipated scope of works is fully covered and priced. If this is not done, there is considerable scope for that parties to become embroiled in a dispute (possibly at great expense) over what work is covered / not covered by the rates, and ultimately how much is payable to the contractor. Even if a dispute does not arise, both the owner and the contractor may face commercial uncertainty over how much is due to the contractor.
There are ways in which the kind of price uncertainty arising in Carillion v SP Power Systems can be controlled or eliminated, including the following:
- By not solely using a schedule of rates, and agreeing (in advance of the works being performed) a lump sum value for work to be performed. This may be possible if a framework agreement incorporates a schedule of rates, which form the basis for determining the lump sum, with any additional items not included in the rates being agreed upon (or determined by a third party) prior to the commencement of the works.
- By the contract providing to the effect that the rates in the contract cover all works that the contractor could reasonably anticipate performing, and therefore include necessarily incidental costs and expenses even if they are not specifically mentioned in the rate. In such cases, the contractor takes the cost risk of work not expressly described in the contract, save where the work is truly of a character that could not have been anticipated by the contractor (i.e. it is in the nature of a variation). However, even if this were done there would still be considerable scope for argument over whether the contractor ought to have anticipated performing particular works.