Dispute in BQ Rate 23-5

3/6/2014
Disputes Relating to
BQ Rate
By Harrison Cheung
Barrister & MHKIE
[email protected]
Pricing Strategy
Competitive Tendering - How to make profit
Tender Stage:
Estimator to spot under-estimate or over-estimate BQ items
Erratic Pricing
Construction Stage:
Quantity turns out to be substantially greater than or less than
the BQ quantity
• Contractor would insist on adopting BQ rate for the
adjustment
• Could make a windfall out of it
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GCC Cl.59
• 59. (1) Except where any statement in the Bills of Quantities
expressly shows to the contrary the Bills of Quantities shall be
deemed to have been prepared and measurements shall be made
according to the procedures set forth in the Method of
Measurement stated in the Preamble to the Bills of Quantities.
• (2) The quantities set out in the Bills of Quantities are estimated
quantities and they are not to be taken as the actual and correct
quantities of the work to be executed.
• (3) Any error in description in the Bills of Quantities or item omitted
therefrom shall not vitiate the Contract nor release the Contractor
from the execution of the whole or any part of the Works according
to the Drawings and Specification or from any of his obligations or
liabilities under the Contract. The Engineer shall correct any such
error or omission, shall ascertain the value of the work actually
carried out in accordance with Clause 61, and shall certify in
accordance with Clause 79
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GCC Cl.59
• Provided that there shall be no rectification of any error, omission or
wrong estimate in any description, quantity or rate inserted by the
Contractor in the Bills of Quantities.
• (4) (a) For the purpose of calculating the Final Contract Sum the
Engineer shall ascertain and determine by measurement the quantity of
work executed in accordance with the Contract. Subject to (b) of this
sub-clause such work shall be valued at the rates set out in the Bills of
Quantities or if there are no appropriate rates in the Bills of Quantities
then at other rates determined in accordance with the Contract.
• (b) Should the actual quantity of work executed in respect of any item
be substantially greater or less than that stated in the Bills of Quantities
(other than an item included in the daywork schedule if any) and if in
the opinion of the Engineer such increase or decrease of itself shall
render the rate for such item unreasonable or inapplicable, the Engineer
shall determine an appropriate increase or decrease of the rate for the
item using the Bills of Quantities rate as the basis for such
determination and shall notify the Contractor accordingly.
HCCT 94/1997
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Secretary For Justice v Sun Fook Kong (Civil) Limited
Unreported, 24th November 1997
Facts:
Contract with DSD to construct a sewage disposal scheme
Excavation in rock
BQ Quantity appeared in various bill numbers:
70 m3 - $ 5,000
20 m3 - $ 8,000
100 m3 - $ 5,000
1 m3 - $ 3,000 (appeared in 4 bill numbers)
Actual Quantity: 7,048 m3
HCCT 94/1997
• Engineer invoked Cl. 59(4) and re-fixed the rate
• Result: A difference of HK$ 31,000,000
• Dispute brought to Arbitration
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Issues for arbitrator
• (1) Has the actual quantity of work executed in respect of any
of the 7 BQ items in question been substantially greater than
that stated in the bills of quantities?
• (2) If so, for any such item, in the factual circumstances of this
case, did the Engineer a reasonably and correctly conclude
that such increase in quantities, of itself, has rendered the rate
for any such item, unreasonable or inapplicable?
• (3) In determining an appropriate increase or decrease in any
such rates, should the a Engineer take account of how and to
what extent the rate for such item has been rendered
unreasonable or inapplicable?
• (4) In general, how should the Engineer determined an
appropriate increase or decrease of the rate for any such item,
using the BQ rate as the basis for such determination?
Arbitrator’s Decision
• Substantially increase of Quantity? Yes
• S.59(4)-increase of itself: applies to a change in quantity which
itself changes the method of working or the economics of a
working method
• Fact finding: No change in method from that contemplated at
tender stage
• Ruling: Not a case for re-fixing the rate
Govt’ challenges at Appeal
Government not satisfied with the Arbitrator’s Decision
Went to court for leave to appeal
Challenges:
1) Too narrow interpretation of Cl.59(4)(b)
Court: there may be some other basis to render the rate
unreasonable, but not the present case
• 2) Arbitrator did not consider economies of scale & effects of
overhead costs
• Court: Did not agree arbitrator did exclude. Main contractor
used sub-contractor. Evidence showed that main contractor
did not pay less
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Govt’ challenges at Appeal
• Could not be correct to alter a contractor’s profit percentage
on a re-rate
• 3) Arbitrator was wrong to rule the “one cubic metre items”
were not genuine estimates and was there for obtaining a rate
only . Therefore, it would not be fair to subject them to a rerate.
• Court: Did not agree with the Arbitrator. Literally
interpretation leads to “substantially increase”. However, since
the difference in these 4 items only amounted to $ 140,000.
Exercised discretion not to grant leave
Maeda Corp v HKSAR
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[2014] 1 HKLRD 1
Judgment redacted – not knowing the full story
Actual Quantity >>>>> Estimated Quantity
Contractor made a windfall
Engineer re-fixed the rate
Dispute referred to arbitration
Arbitrator’s Decision:
Increase in quantity rendered BQ rate unreasonable &
inapplicable
Contractor appealed to CFI for leave to appeal
Refused
Contractor appealed to CA , refused
CFA, Refused again
Maeda Corp – Arbitrator’s Decision
• Factual Finding: Contractor built up the rate by transfer some
money from another BQ item
• Arbitrator’s approach of s.59(4)(b):
• three-stage process.
• 1) establishing any increase or decrease in quantities
• 2)the formation by the Engineer of his opinion as to whether
the change in quantity has caused the rate for the relevant
item to become ‘unreasonable or inapplicable’, and
• 3)f the Engineer decides that the rate is unreasonably high or
unreasonably low when applied to the changed quantity, to fix
a new rate using the Bill rate as the basis for deriving the new
rate.”
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Maeda Corp – Arbitrator’s Decision
• Parties agreed “substantially increase in quantity”
• 2nd Stage:
• “In order to understand the effect that a significant alteration
in the quantity of work has on the rate, it is necessary to
understand firstly, whether the rate is a composite rate, in the
sense that it covers a number of individual activities, or one
which involves a single activity. If the rate is a composite rate,
then it may well be necessary to understand how the
Contractor priced that rate in order to identify which elements
of cost are fixed and which are variable in order to understand
the effect of the increased or decreased quantity on the
applicability or reasonableness of the rate. It is clear from the
description of ( ) in ( ) that it covers not only ( ), but also ( ).”
Maeda Corp – Arbitrator’s Decision
• “In the case of an activity with a large element of fixed cost,
the marginal cost of executing a greater quantity of work may
be relatively low. To apply such a rate to a significant increase
or decrease in quantity of work will be unreasonable since it
will either over-reimburse the Contractor in the case of an
increase in quantity or under-reimburse the Contractor in the
case of a decrease in quantity. If, on the other hand, there is
no reason to suppose from the nature of the work undertaken,
particularly where it involves a single activity, that any
increase or decrease in quantities will of itself make any
difference to the Contractor’s incremental cost in executing
increased or decreased quantities of work, then there may
well be no reason to make any further enquiry as to the buildup of the rate.”
Maeda Corp – Arbitrator’s Decision
• Since the Arbitrator found this item did comprise composite
activities, the Engineer was therefore required to look at the
contractor’s build up to assess a reasonable rate.
• Contractor refused to provide
• Engineer therefore re-fixed the rate based on his own
assessment
• Arbitrator agreed with the Engineer
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Maeda’s Challenges
• 1) the arbitrator was fundamentally wrong, as a matter of law,
in having regard to the build-up of the rate inserted in Item ( )
in order to determine if it was unreasonable or inapplicable by
reason of the increased quantity of work. Maeda relied on
Wates Construction (Wates Construction (South) Ltd v Bredero
Fleet Ltd (1993) 63 BLR 133
• Held:
• Nothing in the contract prohibits the use of tender build up
• Wates distinguished. Wates was a case on the admissibility of
extrinsic evidence for the interpretation of a contract term.
• Now it is concerned with admissibility of build-up of a rate for
examination of reasonabeness
Maeda’s Challenges
2) the build-up rate was confidential commercial data
Held:
That was the contractor’s choice
If refused to disclose, the consequence would then be for the
Engineer to carry out his own re-rating without making
reference to the contractor’s tender build-up
• If Maeda wished to challenge Engineer’s assessment, it had to
submit contemporary records including details of tender buildup
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Maeda’s Challenges
• 3)the rate itself was not relevant in deciding the question of
reasonableness. The rate was simply the price for the work
activity and so, it was submitted, the arbitrator should instead
have asked whether, as a matter of objective assessment,
there was any increase in the work activities and it was only if
there was such an increase in the work activity that the
question of re-rating under the clause arose.
• the arbitrator was entitled only to look at the final rate and
then make an assessment of how the changed work required
that rate to be altered, so that how the rate was originally
built up was irrelevant
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Maeda’s Challenges
• Held:
• Court simply agreed with the Arbitrator’s reasoning about the
composite rate approach. If the build-up is relevant in
determining whether a rate is reasonable, it ought to be
disclosed.
• Sun Fook Kong case was distinguished.
• Nothing in the wording of Cl. 59(4)(b) indicating the increase
must involve a change in the work activities
• The wordings of Cl. 59 (4)(B) should be construed widely
instead of narrowly
Maeda’s Challenges
• 4) the arbitrator had wrongly distinguished the case of Henry
Boot Construction Ltd v Alstom Combined Cycles Ltd [1999]
BLR 123 (and on appeal [2000] CLC 1147) which was authority
for the requirement to use the stipulated contract rates when
measuring the value of work done
• Doctrine from Henry Boot: BQ rate is sacrosanct or immutable
even if it contains error
• Arbitrator ought to have followed this doctrine and adopted
the rate, even if contains error, in his assessment whether the
rate was reasonable
Maeda’s Challenges
• Held:
• Distinguished Henry Boot
• 1) there was a known error which was sought to be applied to
VO in that case. The rate was subject to Cl.59(3) which says:
“Provided that there shall be no rectification of any errors,
omissions or wrong estimates in the descriptions, rates and
prices inserted by the contractor in the Bill of Quantities.” The
rate was therefore not open to challenge on the basis of error.
• 2) the case involved valuation of VO, so the relevant wording
of Cl.61 was at issue, not Cl.59
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Maeda’s Challenges
• 5) If the Engineer is allowed to look at the build-up, he ought
to distinguish the fixed component to 2 parts, i.e one related
to the work activity and one unrelated.
• By doing so, the part unrelated to the work activity ought not
be disturbed as it is tantamount to a profit element
• Held:
• reject this distinction as being artificial and not based on any
logical rationale.
Equity/Policy Concern?
• Court also held:
• “the unusual facts of the case and the very significant
additional amount that would inure to the appellant, in effect
as a windfall, by the application of the original rate to the
changed quantity of work (as reflected in the figures I have set
out in the introduction above) demonstrate why, simply as a
matter of fairness, GCC 59(4)(b) ought to be applied in the
way the arbitrator did.”
BQ Error Case
• If a tenderer spots some mistakes in BQ during the tender
stage, most of the tenderers may keep quiet and hopefully
one would be able to get some benefits out of it
• A case concerning “design and build” item which contains an
error in description of the quantity of the area
• Hung Wan Construction Co Ltd v Hong Kong Housing Authority,
HCCT 21/2010, unreported, 29th July 2010
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Hung Wan v HKHA
Description
Quantit
Uni
Rat
y
t
e
$
Metal Main Roof
........
Design, supply and installation of metal
main roof including..... to meet all
requirements as stated in Specification
section STE, section APQ – Appendix
“Q”,
other
relevant
Specification
sections
and
Drawing
Nos.
KL32/7/CC/A/L0-07......KL32/7/CC/S/
902....
(detail omitted)
A General; (Type MF/1) (approximate
area on plan 2,048 m²)
Ite
$14,900,0
m
00
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Hung Wan v HKHA
Hong Kong Government’s General Conditions of Contract
Building Works (1993 edition) (GCC)
GCC 59(4)(a) provides:
“Variations ordered in accordance with Clause 60, work shown
on the Drawings or described in the Specification but not
measured in the Bills of Quantities or the rectification of any
error in firm quantities shall be valued in accordance with
Clause 61. Provisional quantities shall, subject to (b) of this
sub-clause, be valued at the rates stated in the Bills of
Quantities.”
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Hung Wan v HKHA
GCC 5(2)(a) provides:
“errors in firm quantities or work shown on the Drawings or
described in the Specification but not measured in the Bills
Quantities shall be dealt with in accordance with clause 59;”
Clause 59(3) provides:
“The quantities in the Bills of Quantities are firm except where
described as provisional. Only provisional quantities,
variations ordered in accordance with Clause 60, work
required by the Architect to be carried out which is shown on
the Drawings or described in the Specification but not
measured in the Bills of Quantities and errors discovered in
firm quantities shall be measured.
Provided that there shall be no rectification of any error,
omission or wrong estimate in any description, quantity or
rate inserted by the Contractor in the Bills of Quantities.”
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Hung Wan v HKHA
BQ Area: Approx. 2048m2
Actual area: 4300 m2
Contractor argued there was a BQ error which ought to be
rectified and be paid on a pro-rata basis
Prior to the substantive hearing, HKHA sought interlocutory
application for discovery of the contractor’s tender
correspondences with its sub-contractor s
Arbitrator held: Pre-contractual negotiations including those
between Hung Wan and its sub-contractors were not
admissible as they were irrelevant. Subjective mind of Hung
Wan at the time of the tender stage was not important.
Contract ought to be interpreted objectively.
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Hung Wan v HKHA
Substantive Hearing:
Held:
The real issue for consideration by the arbitrator was a question
of “description”, and not a question of “quantity”.
When the estimator came to prepare the tender he would know
that he had to design and build and price for the entirety of
the metal main roof works because the expression “Item” in
the “Unit” column of BQ 9.6/75A plainly referred to the
roof itself, and there was no need to look for any quantity.
No issue of an error in quantity arose.
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The End of Pricing Strategy?
Since mid 2014, Development Bureau had rolled out a new
tender assessment method:
Price Proposal Assessment Method (PPA)
Instead of 60% price 40% Performance tender assessment
Now PPA proposes 50% price 10% Rate reasonableness 40%
Performance assessment method
Effect: Erratic Pricing may have less chance of being awarded
the tender
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The End of Pricing Strategy?
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New Engineering Contract NEC3 is getting more and more
widely used
Option B and D are the ones using BQ
But BQ in NEC3 is now far less important than the Govt’
GCC
Cl. 60.4: A difference between final total quantity of work
done and the quantity stated for an item in BQ is a
compensation event if:
Difference does not result from a change to Works
Information
Difference causes Defined Cost per unit of quantity to
change and
The rate in BQ for the item multiplied by the final total
quantity of work done is >0.5% of the total of the Prices at
the Contract Data
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The End of Pricing Strategy?
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If the Defined Cost per unit of quantity is reduced, the
affected rate is reduced
Option B Defined Cost: is the cost of the components in
the Shorter Schedule of Cost Components (i.e. labour, plant,
equipment, materials, insurance, design etc..)
Option D Defined Cost: amount of payments due to
subcontractors …… and the cost of components in the
Schedule of Cost Components for other works less
Disallowed Cost
63.13 Assessing compensation events, If the Project
Manager and the Contractor agree, rates and lump sums may
be used to assess a compensation event instead of Defined
Cost
Effect: If rates not reasonable, PM will never agree
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Q&A
END
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