Final Account Recovery

A final account in construction can mean different things to different people and varies between contracts. The term is generally used to describe the total amount that the employer pays to the contractor for the contract.

Usually, the final sum will reflect additional claims for extra work or variations, counterclaims for defects, and any financial losses each party may have suffered due to delays.

In practice, there is a great deal of confusion about the meaning of the final account.  It can refer to the final interim application or the final payment and/or account statement. The final interim payment is due directly after practical completion, but the final payment may not be payable until after the certificate of making good of defects is issued.

Sometimes, the final payment is not due until two years after practical completion. It is crucial for a payee to understand the term when making its ‘final account’ application. It may be wise to use the term ‘final interim application’. The correct term will vary from contract to contract.

The final account marks the formal end of the financial relationship between the employer and the contractor, save for any latent defects.

Contractual definitions of final accounts usually vary regarding terminology and procedures. However, whether they are Joint Contracts Tribunal (JCT) or New Engineering (NEC) contracts, the intention is the same in that the contractor prepares final accounts for the employer to review.

The parties need to be aware that the final account or final account statement procedures usually stipulate a short time limit to object to the proposed sum.

Failure to object in time may make the account or statement conclusive and not capable of challenge.

Preparations for the final account begin early and normally continue throughout the contract period. The starting point is the statements prepared by the quantity surveyor for each party as the work progresses.

Issues may first get raised with the interim applications. But all too often, the parties save up additional claims or deductions until the end of the contract, which often makes final accounts difficult.

As a preliminary to the final account, the contract administrator will ensure that all the contract instructions have been carried out and there are no omissions. This acts as a framework within which other variables are included, such as time extensions, delays, adjustment for materials, and set-off or contra charges.

Contractors must also ensure that variations and additional work are captured in the account and that the supply chain submits accurate costs to them as part of the process.

There is no requirement to follow a set format when creating a final account for a construction contract other than those set out by the agreement itself. If the contract does not specify the form and content of a final account, the account should clearly set out the sum due and the basis upon which it is calculated.

The final account will refer to the original form of contract, which dictates how the financial information is collated, who is responsible and any relevant timescales. It is commonplace to see phrases like ‘in full and final settlement’ that attempt to protect the statement from challenge or change. The parties should carefully read the contract to ensure it fully aligns with their intentions.

Even with a final account, the employer can deduct delay damages — also called liquidated damages — from the final payment certificate under the Construction Act provisions for pay less notices.

Defects in the work are virtually inevitable, and most contracts prescribe clearly how these should be dealt with. Defects can delay the final account, so most contractors are asked to repair patent or obvious defects, following which the final account can be agreed upon.

Suppose the defect is not remedied to the employer’s satisfaction. In that case, most construction contracts contain a provision to allow the employer to engage another contractor to correct the defect and deduct this cost from the final account.

If the resolution of a defect is impossible — and a dispute ensues — then it may not be possible to agree on the final account. However, if a third party corrects the defect — and the contractor accepts the charges as valid — the final account may be agreed with this adjustment.

Contra charging refers to a reversal of the process where money flows from the employer to the contractor for work carried out. Sometimes, the employer needs to recover costs from the contractor. This is also called set off.

Section111 of the Construction Act, as amended in 2011, states that contra charging must be made clear. Withholding of money must not be confused with a dispute over valuation. Therefore, any contra charge must comply with the pay less terms of the original contract.

The Pay Less Notice must detail how much the contra charge is, the sum to be withheld, and the amount to be paid. It is the employer's responsibility to make this deduction from the final account.

Timescales for the final account process vary from contract to contract. It is vital to follow the timescales set out in the contract for final account submission —  otherwise, this can lead to a dispute.

A JCT contract gives a timeframe of two or three months after receipt for the final account to be confirmed.

In contrast, NEC contracts do not specify a final account period but anticipate that this matter will be agreed as the contract progresses.

Each contract will have a different process and timescales. Both parties must be aware of the specific timeframes before work begins. Amendments to a standard contract at the negotiation stage could change the timescales.

Contractual final account timescales ensure a mechanism of enforceable compliance for the agreement of the final account.

Some contracts do not stipulate a timescale. Instead, there is an expectation that the final account is being prepared on an ongoing basis during the works. The timing for the final account should be agreed upon by the time the last instructed compensation event has passed.

Non-specific timescales which are not laid out clearly in the construction contract will mean that the parties’ rights concerning the final interim account and/or final payment will likely be governed by the statutory terms implied in the contract by the Scheme for Construction Contract Regulations 1998.

If it becomes clear that the employer and contractor cannot settle the final account informally or amicably, the likely outcome is a dispute situation. A thorough and well-drafted contract will anticipate disputes and set out provisions to resolve them.

There are many options for dispute resolution, including litigation, arbitration, and mediation. If negotiation or mediation using an independent and objective third party fails, the usual next step is adjudication — a formal process.

Adjudication requires both parties to submit all their documentation and information to an adjudicator and agree to specific timescales. The timespan is usually 28 days, so it is always worth staying on top of the audit trail. This simplifies preparation of the final account and ensures that documentation is ready for adjudication if required.

There are many reasons why construction projects don’t go according to plan and disputes arise. The final account can become an essential evidential tool in different types of disputes as it provides a valuation for various elements of the works.

Conversely, a poor final account that is badly ordered and presented can weaken the employer's position in certain dispute situations and suggest poor practices. 

It is always worth managing the final account efficiently as it could be used in a court of law one day. Keep this in mind as security against a future dispute. The final account must accurately reflect the position between the employer and the contractor so it can be used to counter any criticisms later.

Not all construction contracts contain a final account process. Section 110 of the Construction Act requires a mechanism determining when payments fall due and the final payment date. However, a recent court case indicates that not all construction contracts need to include a final account procedure to be considered compliant with the provisions of the Construction Act.

In 2020, JSM Construction Limited v Western Power Distribution (West Midlands) PLC, the court had to rule on whether a contract without a final account mechanism should have a provision implied via The Scheme for Construction Contracts (England and Wales) Regulations 1998, also known as ‘The Scheme’.

Despite the provisions of The Scheme, the Court reached the view that the Construction Act does not require parties to include a separate provision for the final account in their contract. However, if the contract is not compliant with the minimum requirements of the Construction Act, then the terms of The Scheme will be implied.

The Construction Act states that the contract must provide an ‘adequate mechanism’ setting out what payments are due and when. A contract does not need to have a final account mechanism to be statute compliant, but some standard form contracts will contain one, and it is generally deemed advantageous.

It may be beneficial to the contractor to want to imply a final account mechanism if there isn’t one. This might be because the contractor has not adjusted or managed variations very well as they have gone along or because the employer is simply refusing to pay.

However, if a construction contract does not provide a final account process, a contractor cannot rely on a mechanism implied by the Scheme. This is particularly true if the contract does provide for valuations via an interim payment cycle which allows both parties to ensure accuracy and make adjustments for valid claims.

No. In most contracts, either party may change its assessment of amounts agreed on an interim basis when valuing the final account.