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RIAI Contract : Issue with MCD on PC Sums

  • 29-10-2010 12:36PM
    #1
    igilvarry
    Registered Users, Registered Users 2 Posts: 65 ✭✭


    I am 18 weeks into a new build with a contract in place with a main building contracter under the RIAI. The builder's QS produced a Bill of Quantities which I understand is now being used as a schedule of rates as the form of the contract is RIAI without quantities. The architect is project managing the build. I do not have my own QS and never did for this project.

    An appendix to the contract sets out a number of PC Sums for various items including Windows, Geothermal, Rainwater Harvesting, Green Roof. The amounts associated with those items are based on direct negotiations I undertook with third parties prior to signing the contract.

    A second appendix lists the clauses from the RIAI contract that are to be eliminated which are clauses 1, 4, 13C, 26, 35F and 36.

    In May a contract was signed for a total amount including the total associated with the PC Sums as referred to above.

    Immediately the build commenced in June the Architect issued Architect Instructions to the builder appointing nominated sub-contracters for each of the above four PC Sum related items. Each of those instructions documented the amount and confirmed those amounts as "excluding MCD" to be clear that the builder could not seek MCD subsequently.

    I have now been informed by the builder that he intends to make a claim for MCD on all those 4 items which will total 4,000 euro and refers me to clause 19 of the RIAI contract.

    My interpretation of 19 would be that the contractor would not be entitled to “add MCD” as clause 19. Clause 36 has been deleted and so this is a fixed price contract.

    Do I have a case, or do I take it on the chin and move on?
    Is it too late to bring in a QS now?

    I'm really disappointed to find myself in this situation. I thought the contract was watertight.


Comments

  • #2
    archtech
    Registered Users, Registered Users 2 Posts: 1,046 ✭✭✭archtech


    Without studying the full facts of the case, (tender docs/contract docs etc) it is hard to give a definite answer, however my gut feeling would tell me that the contractor could have a case for his claim.

    It may be worth while getting some advise from someone with experience with contract law, in particular case law relating to the contract.

    As regards bringing in a QS, I'm not sure what s/he will achieve in this instance, in terms of money. However an experienced QS in contact law may be able to offer guidance on the contract.


  • #3
    sinnerboy
    Closed Accounts Posts: 5,433 ✭✭✭sinnerboy


    Very unusual to exclude MCD . It would have to be expressly excluded .

    The AI sounds like a statement of fact i.e. "order these windows as per this quote dated XX/XX/XX for €xxxx excluding MCD" , meaning the price on the quote does not include the MCD . It does not mean the contractor is not getting his MCD .


  • #4
    may2001
    Registered Users, Registered Users 2 Posts: 51 ✭✭may2001


    Clause 19 of RIAI Contract states:

    "The Prime Cost or P.C. sums or rates included in the Contract Documents shall be deemed to include amounts to allow for such discounts for prompt payment."

    Therefore, where the Prime Cost Sums exclude Main Contractor's Discount then this must be added when these amounts are being paid through the Main Contractor. This is standard QS practice.

    Also, you should note that when the Main Contractor's Discount is excluded from Prime Cost Sums then the amount to be added for Main Contractor's Discount is 1/19th i.e. 5.26% rather than 5%. Refer to a book on Quantity Surveying Practice to understand this concept.


  • #5
    igilvarry
    Registered Users, Registered Users 2 Posts: 65 ✭✭igilvarry


    Thanks to all for replies. In response to May2001 :

    the extract in clause 19 you refer to:

    "The Prime Cost or P.C. sums or rates included in the Contract Documents shall be deemed to include amounts to allow for such discounts for prompt payment."

    is preceded by :

    "Sums or rates included in the Contracts Document and marked Prime Cost or PC are provisions to meet payments by the Contractor to Nominated Sub-Contractors...such payments shall be net of Value Added Tax and any commission or trade or other discount except a discount for prompt payment by the Contractor calculated at the rate of 5% of the payment".

    In my case there was no mention by anyone (builder, builder's QS or my architect) that the PC Sums payable to nominated sub-contractor would be subject to a MCD prior to signing contract or indeed when the architect instructions were issued immediately after the job began 18 weeks ago.

    So the issues as I see it are:
    - when I read clause 19 which the other party is referring me to, there is no mention of MCD. Why should it be assumed I should now be paying it?
    - Clause 36 has been struck out. Further on in clause 19 it refers to clause 36 and states that "any amount arising under clause 36 for payment to , or allowance by a nominated sub-contractor... shall be increased to make provision for the above discount for prompt payment". So that should be irrelevant.
    - even if an amount was due I don't see why it's 1/19th and not 5%. 5% is a number referred to in clause 19 explicitly. Yes there may be other documents elsewhere for QS practice but if it's not part of the contract then how can it now be applied as an alternative to 5%.
    - if nothing else then I do feel I have been duped. It's poor practice in my view to in effect add 1,000s of euro’s after the contract has been signed. As an ordinary Joe trying to get a house built I wonder where I've made a mistake and have others been impacted in the same why by what I consider is an immoral way of doing business?


  • #6
    atech
    Registered Users, Registered Users 2 Posts: 195 ✭✭atech


    The last post in this thread sums up MCD fairly well.

    http://www.boards.ie/vbulletin/showthread.php?t=2055086702&highlight=builders+discount

    Although it's not mentioned in the contract it is widely recognised by everyone apart from the government.

    As sinnerboy stated it would really have to be expressly agreed that MCD would not be added.

    I do think you should have been informed by either your Architect or Contractor about this beforehand though.

    Edit: Previous link was wrong.


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  • #7
    may2001
    Registered Users, Registered Users 2 Posts: 51 ✭✭may2001


    igilvarry wrote: »
    Thanks to all for replies. In response to May2001 :

    the extract in clause 19 you refer to:

    "The Prime Cost or P.C. sums or rates included in the Contract Documents shall be deemed to include amounts to allow for such discounts for prompt payment."

    is preceded by :

    "Sums or rates included in the Contracts Document and marked Prime Cost or PC are provisions to meet payments by the Contractor to Nominated Sub-Contractors...such payments shall be net of Value Added Tax and any commission or trade or other discount except a discount for prompt payment by the Contractor calculated at the rate of 5% of the payment".

    " ... except a discount for prompt payment by the Contractor calculated at the rate of 5% of the payment". EXCEPT being the operative word here. i.e. Prime Cost Sums exclude VAT and other discounts, but should include for Main Contractor's Discount at 5%.
    igilvarry wrote: »
    In my case there was no mention by anyone (builder, builder's QS or my architect) that the PC Sums payable to nominated sub-contractor would be subject to a MCD prior to signing contract or indeed when the architect instructions were issued immediately after the job began 18 weeks ago.

    The builder and his QS will only seek to protect their interests and may not have spotted that the Prime Cost Sums excluded Main Contractor's Discount at that stage.
    igilvarry wrote: »
    So the issues as I see it are:
    - when I read clause 19 which the other party is referring me to, there is no mention of MCD. Why should it be assumed I should now be paying it?

    Main Contractor's Discount or MCD is the colloquial term for the Prompt Payment discount referred to in Cl 19.
    igilvarry wrote: »
    - Clause 36 has been struck out. Further on in clause 19 it refers to clause 36 and states that "any amount arising under clause 36 for payment to , or allowance by a nominated sub-contractor... shall be increased to make provision for the above discount for prompt payment". So that should be irrelevant.

    Clause 36 deals with increases that may be due to the contractor reslulting from inflation / market increases and is irrelevant in this particular context when Cl 36 has been deleted.
    igilvarry wrote: »
    - even if an amount was due I don't see why it's 1/19th and not 5%. 5% is a number referred to in clause 19 explicitly. Yes there may be other documents elsewhere for QS practice but if it's not part of the contract then how can it now be applied as an alternative to 5%.

    I would refer you to some Quantity Surveying text books on this topic as I'm sure that they will explain it much better than I can. e.g. Quantity Surveying Practice by Seeley or

    Cl 19 states that Prime Cost Sums should be inclusive of the 5% Main Contractor's Discount

    Say Prime Cost Sum = 100 Euro
    Therefore Main Contractor's Discount = 100 x 5% = 5 Euro
    Amount paid to sub-contractor = 95 Euro

    If Prime Cost Sum = 95 Euro and excludes Main Contractor's Discount
    Amount paid to Sub-contractor = 95 Euro as Sub-Contractor will not accept less.
    Main Contractor's Discount = 5 Euro

    5/95 = 1/19th = 5.26%

    Best explanation I can give on that.

    The use of Prime Cost Sums on contracts has been problematic and some of the newer contracts such as the Government Conditions of Contract have moved away from their use. Their main advantage for the client is that they allow control over who is allowed to carry out certain aspects of the work - if you need that control. If you are willing to allow the main contractor use his own Sub-Contractors carry out the work then you do not need the use of Prime Cost Sums.


  • #8
    sinnerboy
    Closed Accounts Posts: 5,433 ✭✭✭sinnerboy


    igilvarry wrote: »
    - if nothing else then I do feel I have been duped. It's poor practice in my view to in effect add 1,000s of euro’s after the contract has been signed. As an ordinary Joe trying to get a house built I wonder where I've made a mistake and have others been impacted in the same why by what I consider is an immoral way of doing business?

    You have not been duped and it's not immoral . Let me explain by a simple example

    You select floor tiles and obtain a requisition scheduling your choices which come to a grand total of €121.00 including VAT

    You give that document to the Architect and he issues an AI to the contractor stating "order these tiles for €121 including VAT but excluding MCD.

    Heres' the good news for you - the 5% MCD is based on the ex VAT amount

    So the contractors claim will comprise of

    Ex Vat amount €100
    MCD €5
    Sub Total € 105
    Add VAt at 13.5 ( not 21% - this gets sorted between the contractor and revenue ) - €14.18
    Total €119.18

    The contractor has to collect or take delivery of "your" tiles now
    He must protect them during the works
    If some of the tiles are defective - his problem to sort , not yours

    He earns his MCD

    Feel better now ?


  • #9
    may2001
    Registered Users, Registered Users 2 Posts: 51 ✭✭may2001


    The example provided by the previous poster is generally true for Prime Cost Sums dealing with the supply of materials such as tiles, sanitary fittings etc. However it is not true for work carried out by Nominated Sub-Contractors as the VAT rate charged for such work whether carried out by Sub-Contractor or main contractor will be 13.5% and accordingly no savings will result in VAT. On most projects, the largest portion of the Prime Cost Sums are for work carried out by Nominated Sub-Contractors.

    It also used to be the case that some work irrespective of who charges for it should be charged at 21% VAT. I'm not completely familiar with current VAT rules, but a situation which used arise involved a solid fuel or oil fired range. Where such a range was purely for cooking purposes then VAT should be charged at 21% by the main contractor. Whereas if the range was fitted with a boiler and was part of the heating system then the lower rate of VAT would apply.


  • #10
    JuniorB
    Registered Users, Registered Users 2 Posts: 379 ✭✭JuniorB


    OP - take it on the chin and move on.
    I would have thought that it should have been cleared up before you started - it was one of the first questions we asked ref PC sums. Not sure if builders attendance/profit is same but that's what we're paying our 5% for.... supposedly.
    I find it highly ironic that the MCD is for prompt payment. From my experience the only way subbies will get prompt payment (if paid at all) these days is from the client directly!!


  • #11
    igilvarry
    Registered Users, Registered Users 2 Posts: 65 ✭✭igilvarry


    To Junior,

    what does OP stand for?

    Also, in your case it sounds like all this was transparent before you got started. In my case it wasn't - as I said at the beginning of the post - it's 18 weeks into the build before this got raised.


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  • #12
    igilvarry
    Registered Users, Registered Users 2 Posts: 65 ✭✭igilvarry


    sinnerboy wrote: »
    You have not been duped and it's not immoral . Let me explain by a simple example

    You select floor tiles and obtain a requisition scheduling your choices which come to a grand total of €121.00 including VAT

    You give that document to the Architect and he issues an AI to the contractor stating "order these tiles for €121 including VAT but excluding MCD.

    Heres' the good news for you - the 5% MCD is based on the ex VAT amount

    So the contractors claim will comprise of

    Ex Vat amount €100
    MCD €5
    Sub Total € 105
    Add VAt at 13.5 ( not 21% - this gets sorted between the contractor and revenue ) - €14.18
    Total €119.18

    The contractor has to collect or take delivery of "your" tiles now
    He must protect them during the works
    If some of the tiles are defective - his problem to sort , not yours

    He earns his MCD

    Feel better now ?

    Sinnerboy, by being duped I mean when I was actually informed of this extra charge being applied which totals to 1,000s of extra euro's above the contract price. I understand the principle of MCD. However in my view, and also the architect, the builder had chosen to forego this to keep their costs competitive (in light of current economic climate). My point is that if a charge is going to be applied it should have been made clear upfront. The fact that it wasn't disclosed is duping and/or immoral.

    On a separate point your exampe above is a good one. But why is MCD being calculated at 5% and not 1/19th?


  • #13
    JuniorB
    Registered Users, Registered Users 2 Posts: 379 ✭✭JuniorB


    OP = Original Poster .... i.e. Thread initiator.. I think :)

    Yes ours was agreed beforehand because we asked. Did you specifically ask the contractor? All our questions\queries etc were via email so we got written proof of what was agreed. And believe you me there are numerous issues that have arisen since, extras etc that drive me mad - some I've paid and some I haven't .. after arguing the point etc.
    Don't be afraid to tell the builder that you are p1ssed etc, keep him on his toes and argue the toss over every € no matter how insignificant it may seem. I'm sure there will be debate about what's included in your PC sums and what's not. Have you detailed them out exactly or are they just windows: 20k, electrics: 10k etc?

    Best of luck anyway. For your own sanity get it sorted. Then move on. What's in the past cannot be changed so there is no use mulling over it and upsetting yourself. We've made some errors that have cost us a few thousand but worrying and being p1ssed about it wont get it back. And just remember that the price no matter how fixed will only go one way.... and that's not down!!


  • #14
    sinnerboy
    Closed Accounts Posts: 5,433 ✭✭✭sinnerboy


    igilvarry wrote: »
    Sinnerboy, by being duped I mean when I was actually informed of this extra charge being applied which totals to 1,000s of extra euro's above the contract price. I understand the principle of MCD. However in my view, and also the architect, the builder had chosen to forego this to keep their costs competitive (in light of current economic climate). My point is that if a charge is going to be applied it should have been made clear upfront. The fact that it wasn't disclosed is duping and/or immoral.

    Fair enough it would have been much better to have known at the outset so I do sympathize
    igilvarry wrote: »
    On a separate point your exampe above is a good one. But why is MCD being calculated at 5% and not 1/19th?

    Ooops . Should be 1/19th mea culpa .


  • #15
    braftery
    Registered Users, Registered Users 2 Posts: 242 ✭✭braftery


    igilvarry,

    I am coming into this thread pretty late and perhaps all that needs to be said has already been;

    I sympathise with your situation, but clause 19 seems to be pretty clear.

    The paragraph prior to the Clause 19 defines the Prompt payment of 5%, clause 19 then states that any PC sums are deemed to include the 5% and if they do not 1/19th will be added to the figures.

    I am a sub contractor and this is a problem we come up against occasionally.
    The market is so fractured now and more often than not we are dealing with and contracting directly with clients that the issue of MCD does not arise.
    We no longer include 5% MCD unless it is expressly stated in the tender documents that we receive. The reason for this is simply that the market is currently so price sensitive, 5% on a price really matters and can often mean the difference between getting to meet a potential client and not.

    Unfortunately, how the law will see this is that, you added the PC sums to the contract, and entering a legal contract is not the same as buying goods in a shop, it is your responsibility to make yourself aware of all aspects of the contract.

    I think you will probably have to accept this 5% and pay the money, however please remember that now it is 100% the responsibility of the Main contractor to see that these contracts are carried out properly. This is what he is being paid for.

    sinnerboy's point is will made, the Main contractor should earn his 5% looking after these sub-contracts for you.


    On a more general note about this whole area;

    If the issue is with PC sums that relate to sub contracts that are supply and fit (13.5% vat), it is possible to exclude these items from the contract entirely and handle the payments direct to the subcontractors.
    This means you do not have to pay the MCD of 5%. Normally there is no down side financially to doing this as the VAT is the same rate to you.

    However this can lead to two other problems.

    1. Your main contractor is now not fully in charge of your job and if things get tense they can use this ambiguity to their advantage.

    2. There is clause 2.5 in the contract, that refers to delay by the client, you are very exposed to the Main contractor hitting you for a price penalty if any of the items excluded from the contract delay the build programme, in short it might end up costing you more than the 5% you are trying to save.


  • #16
    may2001
    Registered Users, Registered Users 2 Posts: 51 ✭✭may2001


    I would be slow to remove Nominated Sub-Contract work whiich is required to be carried out in conjunction with the main contractor's work not only for the reasons outlined by the previous poster, but also because:

    a) It removes the single point responsibility which would rest with the main contractor if there are issues with the Nominated Sub-Contractor's work e.g. if there is a leak in the roof of the vicinity of built in solar panels is it resonsibility of the roofer or the panel installer etc.

    b) There may be problems with insurance and Health & Safety where sub-contractors working on site are not under the control of the main contractor

    Clause 2.5 referred to in the last post refers to the RIAI White Form of Contract, but the discussions here on Main Contractor's Discount have related to the RIAI Blue Form of Contract. However, the point made is still valid as the Blue Form contains similar provisions regarding delay.

    Having said all this, I would consider it safe enough to remove Nominated Sub-Contract work which can be carried out after the completion of the main contractor's work e.g. kitchen installations, tiling etc. as the client would now be responsible for insurances etc


  • #17
    igilvarry
    Registered Users, Registered Users 2 Posts: 65 ✭✭igilvarry


    sinnerboy wrote: »
    You have not been duped and it's not immoral . Let me explain by a simple example

    You select floor tiles and obtain a requisition scheduling your choices which come to a grand total of €121.00 including VAT

    You give that document to the Architect and he issues an AI to the contractor stating "order these tiles for €121 including VAT but excluding MCD.

    Heres' the good news for you - the 5% MCD is based on the ex VAT amount

    So the contractors claim will comprise of

    Ex Vat amount €100
    MCD €5
    Sub Total € 105
    Add VAt at 13.5 ( not 21% - this gets sorted between the contractor and revenue ) - €14.18
    Total €119.18

    The contractor has to collect or take delivery of "your" tiles now
    He must protect them during the works
    If some of the tiles are defective - his problem to sort , not yours

    He earns his MCD

    Feel better now ?

    Just to come back on this to make sure I fully understand how the calc's are done:

    If I take the above scenario then let’s assume that the contract has a PC Sum of €100.00 for tiles (ex VAT).
    I then visit to my local tile supplier and find tiles to the value of €121.00 including VAT and I ask the builder to procure these against that PC Sum:
    • the builder purchases the tiles and pays the tile supplier €121.00.
    • the builder will charge me 1/19th MCD on the amount for tiles (ex VAT) so 1/19th of 100.00 euro.
    • I then pay the builder 121.00 euro, plus the MCD charge, plus 13.5% VAT on the total of 121.00 + MCD.

    Is my understanding of above correct, or should I be paying the builder 100.00 euro, plus the MCD charge, plus 13.5% VAT on the total of 100.00 + MCD.


  • #18
    may2001
    Registered Users, Registered Users 2 Posts: 51 ✭✭may2001


    igilvarry wrote: »
    Just to come back on this to make sure I fully understand how the calc's are done:

    If I take the above scenario then let’s assume that the contract has a PC Sum of €100.00 for tiles (ex VAT).
    I then visit to my local tile supplier and find tiles to the value of €121.00 including VAT and I ask the builder to procure these against that PC Sum:
    • the builder purchases the tiles and pays the tile supplier €121.00.
    • the builder will charge me 1/19th MCD on the amount for tiles (ex VAT) so 1/19th of 100.00 euro.
    • I then pay the builder 121.00 euro, plus the MCD charge, plus 13.5% VAT on the total of 121.00 + MCD.

    Is my understanding of above correct, or should I be paying the builder 100.00 euro, plus the MCD charge, plus 13.5% VAT on the total of 100.00 + MCD.


    Generally, you should be paying 100 + Main Contractor's Discount (Prompt Payment Discount) + 13.5% VAT. In some relatively few cases, the builder may be obliged to charge 21% VAT for portions of the work, as discussed previously in this thread - though I have not seen this for a few years and I am not completely familiar with the current VAT rules. Try the following page http://www.revenue.ie/en/tax/vat/property/index.html on the Revenue web site for more information.

    Generally, in contract accounts all amounts are considered exclusive of VAT and the adjustment for VAT is then added at the end of each payment to the main contractor. This allows for the scenario where the VAT rates change during the course of the contract - maybe a possibility after the next budget?


  • #19
    seamus175
    Closed Accounts Posts: 1 ✭seamus175


    How did u fair on the 4K?

    I don’t understand why the RIAI are so incompetent and stubborn in continuing to use PC sums which are just a complete disaster. There is absolutely no need for them in the RIAI contract. The JCT contracts in the UK no longer provide for nominated sub-contractors or PC Sums, and why the RIAI continue to use them I don’t understand, they just like being awkward.

    All that is required is a list of sub-contractors to be included in or annexed to the bill of quantities which the contractor then selects from that list the sub-contractor to do the work. If you just require the contractor to use a particular sub-contractor, you could consider making modifications to the list to provide for a single named sub-contractor who would then be treated as a domestic sub-contractor in the usual way. Therefore no need for ridiculous clause 19 for PC Sums, MCD of 5%, adding 1/19th crap and no disputes or headaches.

    The deletion of clause 36 for a fixed price contract has no impact on clause 19 PC Sums, thats only for increased cost of labour and materials. Your missing the whole point the builder is entitled under the RIAI contract to his 5% MCD for prompt payment. Your architect made the error of not ensuring that the appropriate discount was included or requesting the sub-contractor to revise his quotation or tender to include the appropriate 5% MCD discount. Your architect can’t exclude discount from the contract without amending the contract in agreement with the builder i.e. clause 19. The alteration or deletion to the contract must be initialled on the clause by both parties at the time of signing the contract, which I know definitely didn’t happen in your case, so you haven’t got a leg to stand on im afraid. MCD is extra profit for the builder and he will not want to exclude it. Where the architect instructs the contractor to place an order against a quotation that includes no discount at all, the builder has a duty to advise the architect and seek instructions on that. If he fails to seek instructions it can be held to be a waiver by the builder of his rights to MCD. But if he does, the architect will instruct him to place the order with the Nom/SC and to allow the appropriate discount as an extra.

    To summaries, yes the builder is correct in claiming for MCD as he is perfectly entitled to it under the terms of the RIAI contract, which in this case was not amended so as to expressly exclude the MCD. All the builder has to do is advise the architect of the error regarding the MCD discount and to seek instructions from him, and he is then covered.

    I'm sorry but your wrong, i'm also a QS....


  • #20
    sinnerboy
    Closed Accounts Posts: 5,433 ✭✭✭sinnerboy


    Moderator advice.

    Welcome here - but please don't "gravedig". this thread has not been active for 6 months.

    Add only to current threads please or - if you see a topic covered a while before - start your own thread please


This discussion has been closed.
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