Reconciliation of Materials in a Construction Contract

Reconciliation is a very tricky topic to deal with.

Most people will tell you that reconciliation is essential for a "free issue" or "client issue" contract. In my opinion reconciliation is very important for all types of construction contracts.

The reason for my opinion is that I have had the good fortune to work with multiple types of contracts in the course of my career and invariably I find that it becomes essential to know what has/is going into your building and an effective method for a QS is by doing the material reconciliation, this certainly does not disregard the roles of the PM & the QA/QC Engineers, it is but a means of cross checking, as the close out figures will have actual consumption coefficients' that can be utilized to ascertain the connection with the initial design coefficients'.

Also, reconciliation will always keep a check on the contractor and the wastage components.

Coming to the process of material reconciliation:

- Identify the materials that have to be reconciled
- The inflow of said materials to be monitored for quantity (at this point rate can also be monitored to ascertain escalation)

- The Contractor/Store Keeper is to ensure that the registers to monitor issue of material (outflow register) and stock at site are maintained.

- The Contractor has to ensure that receipt of material register is maintained.

- Work in progress has to be determined based on the progress at site and the quantities billed.

The above mentioned is a list of basic data that is required for reconciliation.

There are essentially two types of reconciliation that can be carried out based on the type of contract or the way the contract dictates the issue/purchase of material to be handled.

Type 1 and the most common is FREE ISSUE of material:

Free issue of material, as the name indicates is when the issue of material is done directly by the Client to the Contractor

Contractual rate: The rate quoted by the Contractor will be only for laying but inclusive off all handling charges, it is important that outflow register of the Client and the inflow register of the Contractor match.

Basis of reconciliation:  The steps to be followed are similar to the points listed above, I will try to mention the nitty-gritties here, so the concept is better understood.

• The major task at the running bill is to check that the registers for outflow of the Client and inflow of the Contractor, unless these are well maintained or automated there are bound to be differences, these differences need to be validated and justified by either party so that a concurrence is reached.
• Once the supply quantity is confirmed, the billed quantity is to be checked, this is easy where direct consumption is in place, however when derived consumption is to be calculated it is essential that the coefficients of consumption is either defined in the contract or mutually agreed upon and recorded, this will not only save time by setting necessary precedence but will also clarify on the coefficients in comparison to the standard coefficients used in the market (which can turn out to be a cost control measure as well).
• Once the consumption quantities are fixed, the next would be to arrive the work in progress quantities and the stock at site quantities, these 2 form a pivotal role in reconciliations since it aids the determination of the recoverable. The work in progress needs to be counter signed by the site team to ensure that there is no overlap in claim. The stock at site quantities will have to be countersigned by the QS, the SPOC from site, the store keeper and the Contractor representative to avoid any confusion. Since construction sites are always changing it is important that the date of these records be accurately mentioned.

Calculation:

ΣA is total of supplied quantity

ΣB is total of billed quantity

Σb is allowable wastage on ΣB as per contract terms

ΣC is total of unbilled (work in progress) quantity

ΣD is total of quantity as stock at site

ΣR is Total recoverable quantity = ΣA-(ΣB+Σb+ΣC+ΣD)

Once the quantity for recovery is arrived, the rate of recovery is to be determined from the contractual terms, some of the cases of recovery that I have come across are as follows:

Case 1 - ΣR is recovered at the basic price mentioned in the contract

Case 2 - ΣR is recovered at the average market price

Case 3 - ΣR is recovered at the average market price and Σb is recovered at basic price

Case 4 - ΣR is recovered at the average market price + 15% and Σb is recovered at the average market price

Type 2 SALE ISSUE of Material:

Sale issue of material is a less common type of operation for material supply, this is generally considered in a scenario where the contractor has been shortlisted and the contractor is NOT comfortable to have the value of the material reduced from their Contract Value.

Contractual rate: The rate quoted by the Contractor will be inclusive of basic price of material, laying, all handling charges.

Basis of reconciliation:  The steps as mentioned under free issue for data collection will be followed to the T, the difference will arise on how the recoveries will be handled.

Calculation: The steps for calculation will remain the same, however coming to the recoveries we must note that necessary tax invoices to the tune of the recovery amount are issued to the contractor as part of the billing cycle, hence following cases may come to light:

Case 1 - ΣB is recovered at basic price and ΣR is recovered at average market price.

Case 2 - ΣB and Σb are recovered at basic price and ΣR is recovered at average market price.

Case 3 - ΣB is recovered at basic price, Σb is recovered at basic price + 15%, and ΣR is recovered at average market price.

Case 4 - ΣB is recovered at basic price, Σb is recovered at market price and ΣR is recovered at average market price.

Case 5 - ΣB is recovered at basic price, Σb and ΣR are recovered at average market price + 15%.

IMPORTANT NOTE ON STEEL:

Rolling margin (the difference between the actual and theoretical weight) can play a very tricky part in steel reconciliations, I have personally come across cases where the recovery is pushed to a negative due to the rolling margin calculations, in which case it will have to be concluded based on a mutual agreement between the Client and the Contractor.

The process of reconciliation is time consuming, yes, there is no denying that, but if the process is diligently followed bill on bill, the final bill reconciliation will be quick and simple.