Fair Rates? Whats “Fair” for Him is Not “Reasonable” for Me!
A good proportion of the disputes that we get involved in relate simply to the evaluation of variations and what constitutes fair rates. Quite often the parties are poles apart and we are asked to make some sense of the mess!
As always, the place to start is the contract. Most contracts have evaluation rules contained within them. These “rules” dictate how variations should be priced.
Typically, contract rates are used where the varied work is of a similar nature and character. If these parameters differ from that set out within the contract, then it usually states that variations are to be priced using fair and reasonable rates.
It’s in this area where we encounter considerably different approaches. Some contractors merely use “plug figures” or lump sums with no substantiation, some “rate bash it” – applying for total cost plus or use published industry rates. We have seen all sorts of approaches.
So what does fair rates mean?
This has been the subject of much legal debate and numerous disputes under different contracts have produced slightly differing views. Some courts have held that fair rates should not include profit; should include profit; should be based on actual expenditure and should be based on open market rates of remuneration.
So what should you do?
It’s clear that a subjective view will be taken and therefore we always recommend that the proposed rates reflect the actual circumstances in which the work has been carried out, and further take account of all other factors relevant to the calculation of the rate.
We always recommend, where possible (and it’s not always possible!) that you develop rates based upon the actual costs incurred. Put simply, the starting point is to identify each cost element and price these accordingly, that being the net cost of labour, plant, material plus an allowance for overheads and profit.
But beware, this is not an open cheque book or an opportunity to claim all the costs incurred. The rate should include the reasonable costs incurred in carrying out the work and exclude any costs incurred due to your own inefficiencies or defective work. All costs should be reasonably and properly incurred.
We have found this approach to be a sensible and pragmatic way to attempt to agree rates. From my experience, it is easier to obtain an agreement based on evidence of actual reasonable expenditure, rather than some other purely subjective approach.