Bicycle Costs Budget
When a Costs Budget is like a Bicycle
Everyone who has ever studied mathematics knows that simplifying complex problems helps us to understand the underlying principles and develop the right formula. The same approach works with a costs budget.
Since Judgments made in Merrix v Heart of England NHS Foundation Trust  EWHC 346 (QB) (24 February 2017) and Harrison v University Hospitals Coventry & Warwickshire NHS Trust  EWCA Civ 792 (21 June 2017) it is quite clear how phased Bills of Costs now have to be assessed:
1. The costs incurred before the date of the Costs Budget will be subject to the process of detailed assessment, because the Costs Judge will not have approved costs incurred before the date of the Costs Management Conference (CMC);
2. The budgeted (estimated) costs must be within the amount approved at the CMC, as the Costs Judge will not depart from the same (upwards or downwards) unless satisfied there is good reason to do so.
However, the above approach works only if Judges all follow the same Costs Management principles – and this is not always the case.
Some judges approve global figures without specifying how costs are allocated for each phase. Some judges also approve disbursements and profit costs separately.
All judges take incurred costs into account when considering the reasonableness and proportionality of budgeted [estimated] costs, as per CPR PD 3E, 7.4. However, there is a difference as to how much weight they give to the incurred costs.
In Steven James Redfern v Corby Borough Council  EWHC 4526 (QB), it was noted that the incurred costs were excessive and disproportionate, and therefore estimated costs were approved at a lower level. The judge commented that this was “the only way in which one can take into account excessive costs already incurred in determining the reasonableness and proportionality of subsequent costs”.
In CIP Properties (AIPT) Limited v Galliford Try Infrastructure Limited  EWHC 481 (TCC) the judge considered that the Claimant's costs budget was unreliable and the costs were “wholly disproportionate”. He then identified four possible options where such a situation arose:
Option 1A. Ordering a new budget;
Option 1B. Declining to approve the Claimant’s Costs Budget;
Option 2. Setting budget figures.
Option 3. Refusing to allow any further costs.
The judge adopted a modified version of Option 2. He made a series of findings as to the levels of incurred costs that the Court would have expected to see in each phase, and set estimated figures on the basis of those findings.
And so onto the bicycle analogy:
Let’s assume the Judge has to approve the Claimant’s budget for the purchase of a bicycle. The Claimant has already bought a frame for £300 (incurred costs) and plans to buy wheels for £100 (estimated costs). His budget therefore is £400. Let’s assume that at this time a reasonable price for such a bicycle is £250 (£200 for the frame and £50 for the wheels). Let’s also assume that the Claimant subsequently buys wheels for £150. The Bill of Costs shows total costs of the bicycle therefore as £450.
There are two possible approaches that be used by the Court both at CCMC and assessment:
1. The Judge uses the Redfern approach. He comments on the cost of frame and approves £0 for the wheels because of the high level of the frame costs. The approved budget is £300. At detailed assessment, the Costs Judge subsequently uses the Merrix and Harrison approach. He awards £200 (of the £300 claimed) for the frame and £0 for the wheels, because the approved “estimated” costs are £0. This results in a total figure of £200 - less than the £250 reasonable price.
2. The Judge does not give much weight to the cost of frame, but comments on it and approves £50 for the wheels, because they are clearly needed. The approved budget is £350. At detailed assessment, the Costs Judge subsequently uses Merrix and Harrison approach. He awards £200 (of the £300 claimed) for the frame and £50 (of the £150 claimed) for the wheels, because the approved budgeted costs are £50. This is a fairer approach.
Now, let’s assume that by the time they come to be purchased, the £50 wheels are no longer manufactured, and the cheapest ones on the market now cost £100. This would be a good reason to depart from the approved Costs Budget. In this case the first approach creates an anomaly, because it is not clear if the Costs Judge should award £50 (as wheels were £50 more expensive than believed at the CCMC) or all £100 (as there is a good reason to depart from the awarded estimated costs anyway). The second approach doesn’t create this anomaly, because the Costs Judge should simply award a further £50.
Estimated costs and undervaluation
In both cases, the approved Costs Budgets are disproportionate and/or unreasonable as they are above £250. As can be seen in my example, at CCMC the Court cannot make sure that the overall Costs Budget is proportionate and reasonable, because the Court has no power over incurred costs.
In order to avoid problems on detailed assessment, at CCMC the Court should consider incurred costs, comment on them if necessary, determine further work required and then award reasonable and proportionate costs to complete the remaining work. Reducing estimated costs beyond reasonable and proportionate levels does not help and only leads to an undervaluation of the Receiving Party’s costs at detailed assessment (see example 1 above).
It is therefore my opinion that the Judge’s duty at CCMC is to ensure that only the estimated/budgeted costs are proportionate and reasonable (CPR PD 3E, 7.3) and it is the Costs Judge’s duty to ensure that overall costs are proportionate and reasonable.
Renatas has a range of legal costing experience, developed both in-house and as part of a dedicated costs practice. Renatas gained a Finance and Banking B.Sc. (Hons) from the London School of Economics and Political Science and also holds numerous computer programming qualifications.