After termination, a different reckoning

A final account is a familiar exercise. You value the measured work, you add the agreed variations, you settle loss and expense, you deduct what has been paid, and you arrive at the balance owed to the contractor. Both sides know the shape of it.

The account drawn up after an employer terminates for contractor default is not that exercise. It looks similar on the page, because it still deals in valuations and deductions, but it answers a different question and it can leave the contractor owing money rather than owed it.

What the termination provisions set up

The termination provisions sit in Section 8 of the JCT forms, and the structure is consistent across SBC, DB and IC. When the employer terminates for the contractor's default, two things follow. The employer may engage others to complete the works. And no further sum becomes due to the contractor, with the employer not obliged to make any further payment, until the works are finished and the account is drawn up.

That second point is the one that catches people out. Termination does not trigger a payment. It suspends the ordinary payment machinery and replaces it with a single reckoning that happens at the end.

What the reckoning weighs

The account after termination sets two sides against each other.

On one side sits what the employer has actually spent and lost: the amounts already paid to the original contractor, the cost of engaging others to complete, and the damages flowing from the termination. On the other side sits what would have been payable to the contractor if the contract had simply run to its end.

The difference between those two sides is a debt. It runs to whichever party the arithmetic favours. If completing the works with a replacement contractor, added to what was already paid and the damages suffered, comes to more than the original contract would have cost the employer, the contractor owes the difference. If it comes to less, the balance is owed to the contractor.

Why it is not a final account

A final account never asks what the job would have cost had it finished normally, because it did finish normally. The termination account asks exactly that, because the counterfactual is the measure. You are comparing the world as it turned out against the world in which the contract completed without default.

That is why the two exercises cannot be run on the same template. A final account totals the value of what was done. The termination account totals the cost of the disruption and tests it against a hypothetical contract price. The measured work still matters, but only as one input into a larger sum.

The records that carry over

None of this can be reconstructed at the end from memory. The reckoning needs the numbers that were true at the point of termination, and it needs them to be trustworthy.

• Every sum certified and paid before termination, because that is the employer's outlay to date
• The retention held, because it does not vanish and it forms part of the settlement
• The agreed and disputed variations, because they change what the contractor would have been due
• The valuation position at termination, because completion cost is measured against the work still outstanding

Where insolvency is involved the position tightens further, because the ordinary duty to pay or release retention is suspended from the insolvency event whether or not the employer terminates. The employer that keeps paying past that point pays out of its own settlement.

The order of events matters

Because no further sum is due until the works are complete and the account is drawn, the sequence is fixed. Terminate, complete with others, quantify the outlay and the damages, compare against the hypothetical, then state the balance. Trying to settle a number before the works are complete pre-empts the one figure the whole exercise turns on, which is what completion actually cost.

The temptation to close the account early is understandable, because everyone wants certainty. But the reckoning is only as sound as the completion cost feeding it, and that cost is not known until the replacement contractor is done.

The check before you call it settled

• Are the works actually complete, so the completion cost is known and not estimated?
• Does the employer's side include everything paid, plus completion, plus damages, and nothing counted twice?
• Is the hypothetical clear: what the contractor would have been due had the contract run its course?
• Does the stated balance follow from the difference between the two sides, and does it name the direction?

If all four hold, the account reflects the mechanism the contract sets up. If it reads like a valuation of the contractor's work with a deduction bolted on, it has been drawn on the wrong template.