Settling the Final Account

Two accounts of the same twenty-two weeks

The loft has a bed in it. The scaffold came down a fortnight ago, the building control certificate arrived by email on a Friday, and the builder has sent through a final invoice with a covering note that begins pleasantly. Beside it on the table is the client's own tally, kept in a spreadsheet since March, and the two documents disagree by a sum in five figures. Neither person at the table is being dishonest, and neither can currently say which lines account for the gap.

That is the ordinary shape of it. Very few final accounts fail on one large disputed item; most fail on thirty small ones nobody reconciled while they could still be remembered. A provisional sum spent but never omitted. Three daywork sheets signed by a labourer at the end of a wet week. A run of tiling the client bought direct and the builder also carried in a variation. An interim certificate paid in two instalments a month apart, one of them from a different account. Retention deducted at five valuations and released at none. Every one of those is a legitimate entry belonging to somebody; the problem is only that the two documents count them differently.

So this page is the reconciliation rather than the negotiation. How the job got here — what the deposit bought, what each stage payment was tied to, how retention was set up — belongs to the guide on agreeing stage payments, and how any single change should have been authorised and valued belongs to the two variation guides. What follows starts on the last day: six streams of paper, one number, and an order of operations that decides whether the number is still defensible in a year.

The account is an adjustment, never a fresh total

One discipline sits underneath everything else here, and departing from it is what turns a two-evening job into a six-month correspondence. A final account is the contract sum with named adjustments applied to it, each traceable to a specific document, and nothing else. The moment either party opens a blank sheet and starts adding up what the work ought to have cost, the exercise has become a second tender for a building that already exists, and there is no route back to the contract from there.

Order matters as much as content, because several rungs are percentages of the rungs above them. Retention is a percentage of a gross valuation, so it cannot be computed until additions and omissions are settled — which is why a retention figure worked out at practical completion on the pre-variation contract sum is almost always wrong on a job that grew. Tax sits on a net figure and therefore comes last. And a set-off is applied to what is due rather than folded into the valuation of the work, because a deduction hidden inside a measured rate is invisible to everybody, including whoever made it.

So state the account in two blocks that meet only at the end. The first values the work, running from the contract sum to an adjusted contract sum, exclusive of tax and before retention; it is a statement about the building. The second values the payments: what was certified, what actually left the client's bank, what is held, what is being withheld, what tax has been accounted for. Keeping them apart is what lets one side accept the first block while still arguing about the second, which is usually where an agreement turns out to be available.

Omit the sum, then insert what it actually cost

A provisional sum is a placeholder for work known to be coming and impossible to measure when the contract was priced: the drainage connection nobody had exposed, the making good to the stair after the trimmers went in. At settlement it behaves in a way that is obvious once stated and gets done wrong constantly. The sum is omitted in full and the measured or agreed value of what was actually done is inserted in its place, so only the difference moves the account. A sum carried at four thousand against work that came to five thousand two hundred moves the contract sum by twelve hundred — not by five thousand two hundred, and not by four thousand either. Illustrative figures for the sign convention, nothing more.

Both mirror errors are worth hunting by name before anything else. Insert without omitting and the account overstates by the whole placeholder, which is the version the client's spreadsheet catches. Omit without inserting and it understates by the whole actual value, which is the version that catches the builder, usually on a sum spent early by a subcontractor whose invoice arrived while the roof was going on. The check is mechanical: every provisional and prime cost sum in the contract should appear exactly twice in the account, once as a minus and once as a plus, and one that appears once is wrong whichever way it points.

How much a provisional sum carries with it depends on how well it was described, and the RICS New Rules of Measurement 2 make that a formal distinction rather than a judgement. A defined provisional sum is one where the contractor was given the nature and construction of the work, its place in the building, quantities indicating its scope and any constraint on when it can be done — from which it is taken to have made allowance in its programme and preliminaries. An undefined sum gives none of that, and no such allowance is deemed. The consequence at settlement is that expenditure of an undefined sum can properly carry an adjustment to preliminaries and to the completion date as well as to the measured value, where a defined one ordinarily cannot. That distinction settles a large share of the arguments about time-related cost at the end of a small job.

Prime cost sums adjust the same way and take two further lines with them, and the reason is a definition worth getting right before the arithmetic starts. Under RICS New Rules of Measurement 2 a prime cost sum is money set against materials or goods bought in from a supplier — the ironmongery schedule, the wall tile, the sanitaryware — and it deliberately stops at the goods themselves. Fixing them, the main contractor's profit on them and the attendance they require are each priced as items of their own beside the sum rather than folded inside it. So when the sum gives way to what the supplier actually invoiced, the profit line is recomputed as the same percentage against the new figure, and attendance moves only where what had to be provided for those goods changed. Two adjustments follow one, which is why a prime cost sum settled by swapping a single number is nearly always short.

The American allowance is narrower than either and worth reading exactly, because the boundary is where the argument lands: under Section 3.8 of AIA Document A201 the allowance carries the delivered cost of the materials and equipment themselves, with the taxes on them and trade discounts taken off. Everything that gets the item from the kerb into the building — unloading it, handling it about the site, the labour to fix it, and the overhead and profit riding on that labour — is priced elsewhere, outside the allowance. At settlement the contract sum then moves by the difference between what the item actually cost and the figure allowed for it, plus any justified change to those surrounding costs.

What was certified is not what was banked

The payment block is the half people expect to be easy. Start it from the bank rather than the ledger: every payment that actually left the client's account, with its date and the certificate or invoice it was against. Reconciling to a ledger reproduces whatever mistake the ledger already holds, and on a small job the ledger is a folder of PDFs. Two mismatches show up almost every time — an interim payment made in two instalments and recorded once, and a payment from a second account, often a card, that never reached the spreadsheet at all.

Then the items that are payments in substance without looking like payments: money the client paid a merchant or specialist direct, materials the client bought and handed over, which the trade calls free issue, and statutory fees paid by whichever party actually paid them. Each must appear exactly once, and which side it appears on matters enormously — either the corresponding work comes out of the contract sum as an omission, or the money goes in as a payment on account. Doing both is the commonest way a client concludes the builder has overcharged by a large round number; doing neither is how a builder ends up funding somebody's tile order.

Credit notes and returns belong here too — materials over-ordered and taken back, plant hired for four weeks and returned in three, a rooflight replaced free after arriving damaged. Anything that generated a credit against a supplier account has to reach the final account if the original cost did. On a cost-reimbursable line that is the difference between a fair figure and a fictional one; on a lump sum row it usually moves nothing, and knowing which you are looking at saves an hour.

Tax is where certified and banked most reliably diverge, and the gap is arithmetic rather than a discrepancy. Where the payer is a contractor within the Construction Industry Scheme, a deduction comes off the labour element of a payment to a subcontractor and goes to HMRC under the rules in HMRC's CIS340 guide; the subcontractor's account correctly shows gross while the bank shows net. VAT is its own question rather than a percentage to be assumed — which rate applies to a given piece of building work in the United Kingdom is governed by HMRC VAT Notice 708, Buildings and construction, where the zero-rated and reduced-rated categories are defined, and no domestic final account should carry a rate that has not been checked against it. Between VAT-registered businesses inside the CIS the domestic reverse charge in VAT Notice 735 changes who accounts for the tax, and it does not apply where the customer is an end user — which is exactly what a homeowner is.

One tax point catches both parties on the last invoice: VAT on a retention follows the release of that retention rather than the certificate that first held it. The retained money and the tax on it move together, months after the work was valued, so an account charging tax on the full gross figure at practical completion has moved it early.

Retention is released in two halves and one of them goes missing

The usual mechanism holds a percentage of each interim valuation, halves the amount held at practical completion, and releases the balance at the end of the rectification period against a certificate confirming the defects have been made good. Two numbers govern it and both have to be read off the contract rather than assumed: the percentage, and the limit — the ceiling beyond which no further retention accrues however large the account grows. NEC4 does not hold retention at all unless the parties have adopted secondary Option X16, which is a live trap for anyone who has arrived at that form from a JCT background and expects a deduction to be waiting there.

Two things go wrong reliably. The first is a release computed at practical completion against the original contract sum on a job whose account grew by a fifth: retention accrues on varied work at the same percentage, so the halving has to be done on the final adjusted figure rather than the signed one. The second is that nobody diarises the second release — the rectification period runs out quietly, the certificate that would trigger the balance is never issued because no one asks, and a real debt becomes a write-off on one side and a windfall on the other. Put both dates in a calendar at practical completion, name who issues the certificate, and state in the account what remains held and when it falls due. A final account that ends without saying where the retention is has not finished.

A set-off is a statement, not a subtraction

There will be things the client wants to take off: a completion date that slipped, a floor laid over an unlevel screed, a section of render another trade has since redone. Any of those may be a perfectly good claim, and taking it off by simply paying less is how a good claim becomes a bad one. State the deduction — what is being withheld, why, how the amount was arrived at, against which item — because an unexplained short payment gives the other side nothing to answer and turns a specific disagreement into a general one.

Two mechanisms carry their own procedure and are routinely short-circuited. Liquidated damages are usually conditional on the contract's steps being taken in order: any extension of time assessed first, the non-completion position certified or notified as required, and a written notice of intention to deduct served before the money is withheld. Skip a step and the deduction is frequently ineffective even where the delay was real. Defects are the other: most contracts give the contractor a right to return and remedy within the rectification period, and a client who engages somebody else first and presents the invoice afterwards has converted a free repair into a contested cost. On a commercial contract in the United Kingdom a further layer applies — the payment notice and pay less notice regime with statutory deadlines under Part II of the Housing Grants, Construction and Regeneration Act 1996 — and that machinery is covered in full by the guide on applying for payment, which is the commercial job where it actually bites; why a residential occupier sits outside it belongs to the guide on agreeing stage payments instead.

Where a third party administers the contract, the same discipline appears in the standard forms as a power to withhold with reasons. AIA Document A201 lets the architect withhold certification, or nullify a certificate already issued, on listed grounds: defective work not remedied, third-party claims, reasonable evidence that the work cannot be completed for the unpaid balance, damage to another contractor, persistent failure to carry out the work in accordance with the contract. What makes the provision work is not the power but the requirement to name the ground relied on, and that is the habit worth borrowing on a job with no architect on it.

What signing it closes

A final account is not merely the last invoice. In most contractual systems agreeing it extinguishes claims on both sides, and more completely than either party expects while they are still arguing about a tiling row. Under the JCT forms the Final Certificate is conclusive evidence about specified matters — the adjustment of the contract sum among them, and the quality of materials or standards of workmanship expressly stated to be for the architect's approval — unless proceedings are commenced within the period the contract states. That period is short, it runs from the certificate, and it does not wait for anybody to notice.

The American mechanism is a set of documents rather than a certificate, and the documents are the point. Section 9.10 of AIA Document A201 makes the owner's final payment a waiver of claims but for those reserved, and the contractor's acceptance of it a waiver of every claim except those already identified in writing as unsettled at the time of the final application. The paperwork is standardised: an affidavit of payment of debts and claims on AIA Document G706, an affidavit of release of liens on G706A, the surety's consent on G707. In the lien states the release is statutory too, California's unconditional waiver and release on final payment at Civil Code section 8138 being the clearest drafted example. The international forms run the same idea as a sequence — FIDIC's Clause 14 moves from a statement at completion through a final statement and a written discharge to the final payment certificate, after which the employer's liability is at an end save for what was reserved, and NEC4 reaches it through a project manager's final assessment after the defects certificate, conclusive unless challenged in time.

Behind all of it sits the outer limit, longer than people assume and shorter than they hope. In England and Wales an action on a simple contract must be brought within six years under section 5 of the Limitation Act 1980, and within twelve where the contract was executed as a deed, under section 8. Those periods take no interest in whether the account was settled well; they run from when the cause of action accrued. Which reduces this whole section to one instruction: before signing, ask what the document is being conclusive about, and reserve anything unresolved in writing on the face of it rather than in the covering email.