Just a few article here at present. One on Open Book Accounting previously published in Construction Manager magazine and the other, on expert witnesses from a legal magazine which we seem to recall was called "The Lawyer".

 

Psst’ …Don’t Tell The Client’ - How to Fiddle Open-Book Accounting

 

Readers of a certain age will remember the classic advert in which a set of visiting robotic aliens view through their telescopes the image of a British housewife making mashed potato by hand. At the site of this they all roll around, holding their metal bellies laughing like fools at the absurd actions of the backward humans. A moment such as this happened recently to me whilst conducting a contractor selection interview and the topic of open-book accounting was raised. The contractor, reacting to a question about the possibility of the open-book accounting (OBA) process being open to abuse, opened his eyes wide and declared himself too naïve to consider such matters. My sides they almost split.

 

With the current prevalence of target cost projects and partnering many more projects will adopt OBA principles particularly as Efficiency Reviews and Gershon bite into public sector works. This is nothing new and is in essence a cost reimbursable or prime contract by another name. To the uninitiated OBA is a system where contractors demonstrate their actual cost of providing the works, by showing receipts, timesheets etc. to which is added an agreed fee, normally a blend of head office overheads and profit that we refer to as HOOP. The theory is off course that they are unable to load the price to the client by including a variable HOOP element to individual items and everything is transparent and above board. Aren’t theories great?

 

So leaving theories aside for one moment let’s look at some of the areas in which an innocent contractor and the trusting client may genuinely overlook a price leakage; or to you and me, a fiddle.

 

One of the first areas we need to keep a close eye on is that other great favourite of all things partnered namely the supply chain. When Mega-Build Inc. (MBI) orders its materials it probably does so from one of its sister companies or a supplier who provides it with a healthy group discount at the end of each year. Such discounts should, under most partnering contracts, be credited to the client not the contractor. The annual group discount can be hard to find and harder to assess as MBI  may deal with this matter wholly outside the cost reporting system used for an individual scheme, and usually argues they cannot work out how much of this discount should be attributed to the individual scheme. During the tender phase it would be nice to identify which suppliers MBI has such arrangements with, or better still in a letter direct to the regional director ask if the company benefits from such agreements? Why not write to your current contractors and ask them the same question?

 

On the same theme is the sister company and the internal arrangements many linked companies have for ordering, invoicing and charging materials and plant hire. Whilst most tender packages require the divulgence of linked companies most clients pay little attention to the fact that Mega-Build Inc. buys all its glue from its sister company Brown & Stiky Ltd. The two companies may have any number of interesting arrangements in place for dealing with such transactions which you can bet involves an accountant, a slide rule and a company registered offshore.

 

Another slippery supply chain item is where the main contractor is working with the same subcontractor on a number of schemes, some of which may involve disputed items. In these situations a quid pro quo approach develops whereby a disputed item on another scheme is paid for through the open book scheme by the submission of elevated rates. Since open book accounting relies on the contractor submitting its receipts, vouchers, labour sheets etc. in its payment submission it can put forward the elevated rates it has agreed with the subcontractor as its actual cost. Unless the clients cost controllers have the time and resources to check on individual receipts or undertake sporadic audits then this kind of problem can easily slip through. The Project Manager with authority under the contract to assess and certify payments must have the power to reject receipts which do not reflect the work required or materials supplied. On a civil engineering project a colleague performing an audit found that the contractor had submitted various invoices for the labourers costs that included a number of glossy magazines normally found on the top-shelf! Even the most devoted partnering client has to draw the line somewhere but when things have gone this far it does sharpen ones interest as to what else has been declared as an ‘actual cost’.

 

 

Cost control staff need to keep an eye on the issue of wastage and credits, since any contractor can happily show you it has paid for 1000 kerb stones but how many have actually been used on this project? Since open book accounting relies upon actual cost being demonstrated rather than full re-measurement of works it can be very difficult on larger projects to assess what has actually been incorporated into the project, what has been wasted and what has found itself a new home! One of the cleverest men I know, an ex-brick layer, recounts the story of how whenever his brick-laying gang started a new housing job one of them would approach the site foreman with the request for ‘just 20 bricks to build a small barbecue’. Every day 20 bricks would be loaded into the van and on that one occasion the security guard enquired about the bricks they would be pointed in the direction of the foreman who would confirm he said they could have them. Many a kitchen extension started life as a 20 brick barbecue.

 

  One of the most difficult areas to address for many OBA projects involves the apparently innocuous definition of ‘cost’. In very simple terms the ‘cost’ is how much a contractor pays to obtain something and the ‘price’ is how much he will then provide that same thing for to the client including his HOOP. Most contracts list what is included in the term, ‘cost’ and will also define ‘disallowed costs’. For example the cost of labour and materials may be allowed but poorly executed work would fall under the disallowed cost heading. There is often a considerable difference between the way in which contractors and client’s systems record and deal with such information. The varying definitions of what are and what are not actual costs must be clearly established within the contract and the compatibility and format of the information provided by the contractor must be consistent with the needs of the clients cost control department.

 

Another area requiring clear definitions are the items contained in the overhead component of HOOP figures where many anomalies can arise e.g. staff that are actually part of the company overhead but then submit timesheets to the scheme. An organisational (organigram) chart is required to see who and what is an overhead and what is not. Similar problems occur when organisational resources which might actually be covered by the overhead are charged to the scheme, or an internal plant hire charge turns out to be in excess of commercial rates. Other elements falling within the overhead element of HOOP can include group resource plant and equipment. When such items are damaged the client may be charged for repairs that are then claimed by the contractor through an insurance scheme. The client rarely if ever sees a credit of the insurance it may actually be paying for. Depreciation rates and maintenance charges for such equipment can also find its way into actual cost and can tend to be heavier than normal or undertaken outside normal cycles.

 

In most OBA projects which tend to be on a target cost basis the information required in the contractors application should include receipts for payments made not invoices due to be paid. These can be considered accruals, or amounts due but not yet paid and individual suppliers or subcontractors may be extending significant payment periods to main contractors. Whilst the contractor may well have had the 1000 kerbs delivered the question to ask is when will he actually pay for and use them? If you allow him the apparent cost of a delivery now, which he will not pay until 60 days later, then you are effectively financing the scheme. This is expressly excluded from many contracts and paying on the basis of delivery sheets can miss the fact that the delivery price, if included on the sheet may not actually be the same as that paid in 60 days time.

 

Many quantity surveyors reading the above will shake their heads and mutter ‘that could never happen on my job’. Well, it is happening whether by design or by accident. There are many methods to combat such practices and initially the client must realise that its own cost control team will need to resource the consideration and investigation of contractors submissions. These will not resemble, or be controlled through bills of quantities or standard methods of measurement which form the cornerstone of many cost control methodologies. Within such contracts it is also commonly a feature that gain/pain sharing is used. However the true advantage of such an incentive cannot be realised if the target cost is continually moving upwards. Any change should not automatically trigger an increase in the target. Similarly and linked to the gain/pain share mechanism is the feature of including a ceiling price, beyond which the client will make no further contribution. The combination of well resourced cost control and a commercially drafted contract including a ceiling price will help to avoid the above examples. For those who raise the all important question of trust in relation to partnering works let us remind ourselves that trust is a two-way street which both parties must clearly demonstrate that they are walking down.

 

Peter Gracia

 

 

Expert Witnesses – Friend or Foe

 

The role of an “Expert Witness” is neatly summarised in Practice Direction 35[1]:

An expert should assist the court by providing objective, unbiased opinion on matters within his expertise, and should not assume the role of an advocate.”

 

The intention is for the expert to assist the court by providing insights which the tribunal might not be able to develop using its everyday knowledge. These insights might be gained by a particular level of experience or from formal study[2]. In a considerable number of cases the weight attributed by the tribunal to the expert’s expressed opinion can, and does, prove vital to the outcome. Should an expert’s submission fail to persuade the tribunal that the burden of proof has been discharged then the party relying upon it will often be unsuccessful.

 

All potential experts (and those appointing them) should acquaint themselves with their duties to the court and the rules governing their input. For civil litigation these include, but are not limited to:

 

  • The Civil Procedure Rules (CPR r.35 in particular)
  • Practice Direction 35
  • The Civil Justice Council Protocol for the Instruction of Experts to give Evidence in Civil Claims. (2005)
  • The Civil Evidence Act 1972 (as amended 95)

 

Individual protocols e.g. the Guide to the Technology and Construction Court section 13, “Expert Evidence” also exist and should be referenced by the case team. Failure to comply with a relevant protocol can result in adverse cost orders.

 

These documents reflect the classic re-statement of an expert’s duties as contained in the case of National Justice Cia Naviera SA v Prudential Assurance Co Ltd, The Ikarian Reefer [1993] 2 Lloyd's Rep 68. Failure to comply with the requirements of the Rules and Protocols can have a severely detrimental impact on one party’s case not least of which is the loss of credibility before the tribunal.

 

In Steven v Gullis (Pile third party) 73 ConLR 42[3] the failure of the Defendant’s expert to comply with the then newly issued Practice Direction 35 meant his evidence was debarred. The original claim, from a builder against the client, was for a modest £8,000.00 however the counterclaim from the Defendant was nearer £127,000.00 with the Architect being named as third party. The “expert” failed to produce reports and supply relevant information regarding his qualifications within a set timescale. There was some also concern that he was being influenced directly by his employer, the Defendant. The debarring of his evidence meant the claim against the Architect had little or no chance of success and was dismissed. The debarring order was appealed. The Appeal Court found little trouble in supporting the decision of the judge at first instance. In addition even though the parties had submitted a consent order requesting the “expert” be allowed to give testimony this was rejected. In the words of Lord Woolf:

 

I consider that it would be wholly wrong to impose Mr. Isaac as an expert upon the judge. The judge has very properly indicated his view that Mr. Isaac is not an appropriate person to give expert evidence in a court having regard to his conduct to which I have referred. That being so, it would be quite wrong for this court, even by consent, to interfere with the judge's judgment. Mr. Isaac lacks the basic knowledge of the responsibilities which an expert has when giving evidence.”

 

Whilst the loss of the expert’s testimony might appear a harsh enough blow equally damaging is the admission from the expert under cross examination that it has not given due consideration to all the facts. In Phillips & Ors v Symes & Ors [2004] EWHC 1887 (Ch) Mr Justice Peter Smith revisited the Ikarian Reefer when dealing with a medical expert who declined to read further evidence that might change his opinion. In essence this particular expert was owed a large sum for professional fees and saw no hope of recovering additional fees for the consideration of new material.

 

The judge commented:

I have, however, some sympathy with Dr X in the sense that he was being required to do work without an instructing solicitor or client and therefore nobody to reimburse him for the time that he would spend. However, he had provided a report to the court and his duty as an expert to the court requires him (amongst other things) to correct or reconsider any report in the light of changed circumstances.”

 

This demonstrates the continuing duty of an expert to the tribunal which transcends their own personal considerations. The expert must consider all of the available information and cannot crystallise their opinion, ignore alternative propositions, and hope to retain the faith of the court. Under cross examination the expert had to admit that he had not read new submissions and hence his testimony was of little value to the court. Whilst the expert clearly needs to be alive to the changing nature of the information available from other sources they must also critically evaluate the basis on which the case is being made by their client.

 

 

In Great Eastern Hotel Co Ltd v John Laing Construction Ltd[4] the tribunal demonstrated its capacity to accept or reject the contentions of experts and to compare their submissions with other factual evidence. In doing so it illustrated the pragmatic stance an expert must adopt when considering the various merits of the case presented by its employer. In this instance the approach of Laing’s delay analyst was rejected on many grounds, amongst which was photographic evidence that contradicted his theoretical model of progress on site. Whilst this was damaging enough to the case being made it was the unquestioning reliance on his client’s version of events which completely undermined the expert. All of those involved with dispute resolution will recognise the dilemma inherent in representing one party particularly when it persists in adopting a position which cannot be fully supported by evidence. However, as noted previously, the expert owes its duty to the court in terms of presenting its findings and must avoid the temptation to fill in the evidentiary gaps or act as advocate.

 

There should be a simple answer to the problem of an overly enthusiastic expert in litigation through the court’s power under the CPR r.35.15 to appoint a Single Joint Expert or assessor. However the fact is in most instances the issues in dispute have been well known to the parties for some time; and before the court is able to exercise its powers, two “opposing” sets of experts have been appointed. Of course the expectation is that the experts will attempt to identify common ground and dispense with issues that can be agreed prior to consideration by the tribunal. Where a Single Joint Expert can be appointed its duty becomes triumvirate in nature as it serves both parties and the court.

 

In the Court of Appeal consideration of Peet v Mid Kent Healthcare NHS Trust (CA)[5] it was affirmed that a meeting between the Joint Experts and one party’s representatives was inappropriate. The CPR requires expert evidence to be presented in writing (CPR r.35.5) and the parties had opportunity under the rules to submit questions, and receive responses in writing. This stance also satisfies the overall objective of minimising costs and reiterates the goal of many Protocol’s that seek to ensure both parties are fully aware of all material under consideration in the case.

 

It has become almost customary for articles dealing with expert’s testimony to admonish those involved for ignoring the freely available guidance on duties to the court, and other tribunals. Whilst not in any way an excuse it has to be recognised that many experts enter the arena from disparate backgrounds and can become very narrowly focused on the issues under consideration. The legal representatives should however, through both their training and familiarity with the court system, be able to ensure experts are fully conversant with their duties to the court. Expert testimony, whether in written or oral form, is vital to many cases and the causes of its failure to deliver the service expected by the court and the parties is too important to leave to chance.

 

Peter Gracia



[1] Practice Direction 35 supports the Civil Procedure Rules part 35 and has annexed to it the Civil Justice Council Protocol for the Instruction of Experts to give Evidence in Civil Claims.

[2] Folkes v Chadd (1782) 3 Doug KB 157

[3] Court of Appeal Civil Division, May & July 1999

[4] [2005] EWHC 181 (TCC) QB Division (Technology and Construction Court)

[5] BLD 0611013599, 5th November 2001

 

 

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