An understanding of Contract Final Accounts

The phases of contract management can be divided into the following three categories:
•Pre-Award
•Post Award
•Contract Close-Out

One of the important elements of the contract close-out phase is the final account. The various standard form of construction contracts provide the rights and duties of the respective participants to a construction contract when closing out the contract. The final account is an important component of the contract management process and cannot be overlooked. It serves as a reference document when bringing the contract to a close and summarising the financial obligations of the participants of the construction contract and is often the subject of construction disputes. There is a plethora of literature and case law on this topic and the purpose of this write-up is to provide an overview from the perspective of the JBCC Principal Building Agreement.

The JBCC Principal Building Agreement 6.2 defines the final account as “The document prepared by the principal agent that reflects the final contract value of works at final completion or termination.”

The final account serves as a conclusive financial summary detailing the final amounts to be paid by the employer to the contractor for the works completed. The final account is more than a document. It is a process which, unless disputed, is an agreement between the employer and contractor reflecting an accurate and transparent summary of the financial performance of the works.

The typical elements of a final account include inter alia the following:

•Preliminary and General Costs – This includes time-related costs, overheads and supervision amongst other overheads.
•Valuation of Works Done – Depending on the pricing strategy of the project, this assessment will entail a measurement of works against agreed rates, unit prices and agreed measurement methodologies and standards.
•Variations – Variations occur when there are changes to the original contract scope or specifications. This section accounts for additional work, omissions or modifications, along with its corresponding costs or savings. Variations may also stem from contract instructions.
•Costs incurred – This section highlights costs authorised and incurred by the contractor that is for the account of the employer.

The final account process is laid out in the JBCC Principal Building Agreement 6.2 as follows:
•In terms of clause 26.10, the Principal Agent shall prepare and issue the final account to the contractor within sixty (60) working days of the date of practical completion.
•Clause 26.11 states that the contractor has thirty (30) working days to accept or disagree with the final account and provide reasons. Failure to object to the final account within this time period results in the final account being deemed to be accepted.
•Should the disagreement not be resolved within ten (10) working days, the contractor may give notice of disagreement in terms of clause 26.12.
•In terms of clause 26.13, the principal agent shall issue the final payment certificate within seven (7) calendar days of acceptance of the final account.
•Clause 25.15 states that the principal agent shall issue the final payment certificate to the contractor with a copy to the employer within seven (7) calendar days of acceptance of the final account by the contractor, but not before the issuance of the certificate of final completion, unless on termination.
•And in terms of clause 25.16, where the contractor disputes the correctness of the final account within the time allowed, the principal agent shall issue interim payment certificates to the contractor with a copy to the employer by the due date for the undisputed amount(s).

Following the chronology of the above clauses, it becomes easier to understand the process, rights and obligations of the parties during the final account.

The aspect of final accounts is often the subject matter of disputes. Amongst the proactive steps that contractors and subcontractors can take to ensure a smooth final account process include ensuring that the contract is properly administered during the execution phase. This entails ensuring that instructions are in writing, any variation is properly documented and ensuring compliance with the notice and claims requirements of the contract. There are stringent processes and timelines that apply to these aspects and often a contractor or subcontractor is left out of pocket for variations and claims because of failure to comply during the contract execution period and being time-barred. 

Furthermore, it is important to understand the final account process and the rights and obligations of the parties. In practice, the final account stage is sometimes a stressful component of the contractual process. The unfortunate reality is there are incidents where some parties try to keep costs within budget at the expense of the other party and incidents where parties try to over recover. Isolated as they may be, these issues do arise and may be the subject of disputes. A further tactic that may arise is where, due to unequal bargaining power, parties are coerced into making a compromise to agree to a final account value for the release of funds in order to manage cash flow. These practices stifle growth in the construction industry and could have far reaching consequences for the financial health of construction professionals, service providers and contractors. These practices are strongly discouraged and the recommendation is to stay within the boundaries of the contract and good faith.

Please contact the Association should you require any further advice or assistance with your construction contractual matters. 

Bilaal Dawood
Head: Membership Services