Last edited 03 Aug 2016

Variations in construction contracts


[edit] Introduction

A variation (sometimes referred to as a variation instruction, variation order or change order) is an alteration to the scope of works in a construction contract in the form of an addition, substitution or omission from the original scope of works.

Almost all construction projects vary from the original design, scope and definition. Whether small or large, construction projects will have inevitably depart from the original tender design, specifications and drawings prepared by the design team. This can be because of technological advancement, statutory changes or enforcement, change in conditions, geological anomalies, non-availability of specified materials, or simply because of the continued development of the design after the contract has been awarded. In large civil engineering projects variations can be very significant, whereas on small building contracts they may be relatively minor.

Variations may include:

  • Alterations to the design.
  • Alterations to quantities.
  • Alterations to quality.
  • Alterations to working conditions.
  • Alterations to the sequence of work.

Variations may also be deemed to occur if the contract documents do not properly describe the works actually required.

Variations may not (without the contractors consent):

In legal terms, a variation is an agreement supported by consideration to alter some terms of the contract. No power to order variation is implied. Hence there should be express terms in contracts which give the power instruct variations. In the absence of express terms in the contract the contractor may reject instructions for variations without giving rise to any legal consequences.

Standard forms of contract generally make express provisions for the contract administrator (generally the architect or engineer) to instruct variations (for example, FIDIC Clause 51.1). Such provisions enable the continued, smooth administration of the works without the need for another contract. Variation instructions must be clear as to what is and is not included, and may propose the method of valuation.

[edit] Valuation of variations

Variations may give rise to additions or deductions from the contract sum. The valuation of variations may include not just the work which the variation instruction describes, but other expenses that may result from the variation, such as the impact on other aspects of the works. Variations may also (but not necessarily) require adjustment of the completion date.

Variations may be valued by:

Valuations of variations are often based on the rates and prices provided by the contractor in their tender, provided the work is of a similar nature and carried out in similar conditions. This is true, even if it becomes apparent that the rates provided by the contractor were higher or lower than otherwise available commercial rates. They do not become reasonable or unreasonable by the execution of variations (see Henry Boot Construction v Alstom (2000)).

In some contracts, when rates are applied to the valuation of variations, the contractor is not able to claim for additional payments in relation to profits and overheads.

If similar types of works to those instructed by a variation cannot be found in the drawings, specification or bills of quantities, then fair valuation of the contractor's direct costs, overheads and profit is necessary.

NB NEC contracts do not value variations based on rates in the tender. Guidance on assessing compensation events states:

"Assessment of compensation events as they affect Prices is based on their effect on Defined Cost plus the Fee. This is different from some standard forms of contract where variations are valued using the rates and prices in the contract as a basis. The reason for this policy is that no compensation event for which a quotation is required is due to the fault of the Contractor or relates to a matter which is at his risk under the contract. It is therefore appropriate to reimburse the Contractor his forecast additional costs (or actual costs if the work has already been done) arising from the compensation event."

In other words the contractor can ignore their tender pricing and claim cost plus on variations. The arguments come on items such as factory overheads and management which are very hard to evaluate. In addition, given the complexity and length of the supply chain in major building works, getting forecast pricing out of all the parties affected takes time, often beyond the date by which the contract administrator has to make the decision as to whether or not to instruct the variation. They may then have to decide whether or not to proceed with a variation based on estimates from the cost consultant which in due course get replaced by the actual cost. It has been argued that this practicality defeats the rationale of the NEC contracts in relation to cost control and decision making.

[edit] Source of conflict

Conflict can arise when work is not mentioned in the bills of quantities, drawings or specifications. In common law this silence does not mean the contractor has an automatic right to claim for extra payment. The client is not bound to pay for things that a reasonable contractor must have understood were to be done but which happen to be omitted from the bills of quantities. Where there are items that, whilst they are not expressly mentioned, are nonetheless required in order to complete the works, then the contractor should have included them in their price. The bills of quantities and specification do not necessarily have to include “every nail to be punched in”. For example in fixing GRC façades it is necessary to have steel supports, and a reasonable experienced contractor must make provision for this in the contract price. Unless expressly excluded, such supports are not paid for as a variation.

Conflict can also arise when a sub-contractor qualifies that, for example, “Supply & Fixing of Door is included” but “Supply & Fixing of Ironmongery is excluded”. A reasonable sub-contractor should foresee that a door cannot be fixed without hinges – which is a part of the ironmongery. So even if ironmongery is excluded, the sub-contractor cannot expect a variation for any of the items required to fix the doors.

Also under the pretext of variation, the contract administrator cannot change the nature of works. For example, if the contract provides for secant pile shoring, they cannot ask for diaphragm wall shoring as it will entirely change the nature of the work. Further, if the contract administrator omits work from contractor’s scope, such an omission must be genuine: that is, the work omitted must be omitted from the contract entirely, it cannot be used to take work away from the contractor to give it to another (for example, see FIDIC Clause 51.1). Similarly, the contract administrator is not empowered to order variations to help the contractor if the contract works are proving too difficult or expensive for them.

[edit] Limits on variations

FIDIC forms of contract put limitations on variations that can be instructed. If the value of the contract increases or decreases by more than 15% of the net contract sum (excluding provisional sums and day works) then the contract administrator can add or deduct from the contract sum a determined value upon consultation with the contractor, having due regard to their site expenses and other general overheads. Note that this 15% increase or decrease is not for a single item of work, but the total contract sum at completion.

In NEC3 (Option B) if the rate in the bill multiplied by the final total quantity of work done is more than 0.5% of the priced total of the bill at the contract date, then it will constitute a variation (see Clause 60.4)

[edit] Extension of time

Many construction contracts allow the construction period to be extended where there are delays that are not the contractor's fault. This is described as an extension of time (EOT).

Variations may (but do not necesarily) constitute relevant events that can merit an extention of time and so adjustment of the completion date. See extension of time for more information.

[edit] Conclusion

Variations are often sources of dispute (either in valuing the variation, or agreeing whether part of the works constitute a variation at all) and can cost a lot of time and money during the course of a contract. Whilst some variations are unavoidable, it is wise to minimise potential variations and subsequent claims by ensuring that uncertainties are eliminated before awarding the contract. This can be done by:

[edit] Find out more

[edit] Related articles on Designing Buildings Wiki

[edit] External references

  • The JCT 05 Standard Building Contract: Law and Administration By Issaka Ndekugri, Michael Rycroft.