London Borough of Lewisham v Luis Rey-Ordieres & ors [2013] UKUT 014 (LC): Part II

Preliminaries included the site set up in Lewisham, and the management and administration of the works required for leasehold and tenanted properties. The Lands Chamber observed that preliminaries are a recognised cost for any building project such as that covered by the PFI contract.

The LVT reduced the recoverable percentage of the preliminaries on the basis that the ratio of tenanted to long leasehold properties subject to the major works was 2:1.

The Lands Chamber held that there was no justification for allocating the costs that way. The LVT’s decision arbitrarily reduced the preliminaries figure by two thirds. There was no evidence to support such a reduction.

Having heard from witnesses for Lewisham, the Lands Chamber determined that, with two exceptions, the claimed rate of 10.52% was reasonable for both Decent Homes and leasehold work. The actual work involved for each was different, but Lewisham had reasonably estimated that the cost of that work was the same.

Further, in all but two cases, the actual cost of the leasehold works and the amount demanded for preliminaries was less than the amount shown for the corresponding property in the PFI contract.

In the remaining two cases, the actual costs were higher than the corresponding PFI contract figure. The Lands Chamber held that the amount in the PFI contract was the amount reasonably incurred, and the amount charged to the lessees must therefore not exceed that figure.

This element comprised allowances for sub-contractors’ (ie primarily Higgins’s) own overheads and profit. The LVT decided that 12% was “excessive given that other fees are being charged”.

The expert evidence before the Lands Chamber

Lewisham’s expert witness relied upon extracts from Spons 2005 and the BCIS Building Maintenance Price Book 2008 when considering the issue of overheads and profit. Spons 2005 contained the following:

“The general overheads of the Contractor’s business, the head office overheads and any profit sought on capital and turnover employed, is usually covered under a general item of overheads and profit which is applied either to all measured rates as a percentage, or alternatively added to the tender summary or included within Preliminaries (site specific overhead costs).  At the present time, we are including an allowance of 2% for profit and 5.5% for overheads on Major Works measured rates and 7.5% for profit and 5% for overheads on Minor Works measured rates to reflect the current market.”

Lewisham sought to argue that the minor works percentages were applicable in this case.

The BCIS Building Price Book 2008 stated:

“Additions of 20% on labour all-in hourly rates and 10% on material prices have been made for overheads and profit.  These amounts are thought to be reasonable rates that a prudent contractor would allow to cover the actual overhead costs involved and to allow for a reasonable profit.”

Lewisham’s expert witness considered that these percentages probably represented the peak of any additions before the impact of any downward pressure on prices after 2008.

He thought that the 12% allowance for overheads and profit was reasonable in the circumstances and argued for 13.75% for overheads and profit, which was the average of the figures from Spons (12.5%) and BCIS (taken at 15%).

The Land’s Chamber’s decision: overheads

The Lands Chamber’s view was that there was no evidence of duplication of overheads between this item and the preliminaries: the former related to general overheads such as head office expenses, and the latter to site specific expenses. It held that a 5% allowance for general overheads was reasonable.

The Land’s Chamber’s decision: profit

In the Lands Chamber’s opinion Higgins would have approached the PFI contract as a single project rather than a series of individual projects.

Lewisham’s expert witness’s opinion that Higgins would have treated the works as a series of minor projects was rejected because in many of the cost breakdowns, Higgins had in fact analysed the works at block level and the cost of the works exceeded the £100,000 cut off point for minor works.

The Tribunal preferred the figures from the 2005 edition of Spons because it gave a more precise breakdown of the component parts of the figure for overheads and profit as between major and minor works, and because quarter 1 of 2005 was broadly the mid-point of the period March 2002 (the date of the OJEC advertisement) to June 2007 (the date the PFI contract was signed). By contrast the BCIS 2008 figures were taken from a period of peak pricing.

Having reviewed the various figures and expert evidence, the Lands Chamber went on to determine that the profit rate of 7% claimed by Lewisham was too high. It upheld the LVT’s reduction of 2% and allowed a 5% profit rate. That rate recognised the major nature of the refurbishment contract as a whole, while allowing for the possibility of sub-contractors seeking a higher profit on the works awarded to them.

An allowance of 10% was therefore made for overheads and profit together.

The LVT said that:

“it would not be reasonable for the respondent to add 10% onto the PFI contract charges to account for the landlord’s management of the contract, as this function is undertaken by the liaison officers in [the major works site office], the costs of which are covered in the [professional fees].”

Lewisham’s case was that the work for which a management fee was charged included the preparation and service of the requisite notices under the 1985 Act, the administration of bills and payments, queries and complaints and matters of general liaison. The management fee was therefore separate and distinct from any part of the 26% professional fees.

The leaseholders argued that the management fees were “profit on profit”.

Pinnacle, to whom leasehold management had been sub-contracted, employed a dedicated leaseholder team. Lewisham Homes, the arms length management organisation (ALMO) that was responsible for the management of other leasehold properties in Lewisham but not on the Brockley Estate, charged a flat 10% management fee for providing that service.

The fees charged to leaseholders under the PFI contract were therefore the same, ie 10%, as those charged to other leaseholders outside of the contract.

The Lands Chamber determined that the LVT was wrong to disallow the management fee.

The primary issue having been whether the management fee was a duplication of the professional fees, the Lands Chamber was rather hampered in determining the reasonableness of the amount of the management fee in percentage terms. It did not consider that management figures in the PFI contract could be used because they represented an average cost per leasehold property per year, spread over the 20 year life of the PFI contract. They did not reflect the particular circumstances of individual properties, and there was a significant variation in the cost of the major works as between the respondents’ properties.

Having reviewed the evidence, the Lands Chamber concluded that “an allowance of 10% of total costs for management is a fair reflection of the costs reasonably incurred by Lewisham…the 10% management fee should be charged on the total of the base costs plus the [professional fees].”

The majority of the appeal was allowed. The only reduction was in the professional fees, which were decreased by 2% to reflect the Lands Chamber’s decision to bring down the subcontractors overheads and profit from 12% to 10%. The final figures were:

• Professional fees: 24% of the base costs – 3.48% fees, 10.52% preliminaries and 10% overheads and profit.
• Management fee: 10% of total costs including professional fees.

I have included more detail as to the evidence put forward by Lewisham than I would normally consider relevant. It struck me however that it may well be of interest to look at the elements constituting what can appear to be nebulous, think-of-a-number-and-multiply-it-by-two/three/ten-and-add-it-on items at the bottom of major works invoices.

These items are generally variously described as “fees”, “preliminaries” or “management”, and I think that it is fair to say that they can be rather opaque on their face.  This case therefore casts some light onto how the fees here fed into Lewisham’s major works costs.

The decision is also a handy example of expert evidence on costings. Note to self: remember the two reference texts relied on by the expert: Spons Price Books and the BCIS Building Price Books.