For a Few Dollars More: A Brief Guide to Variations

Author: Eugene Lenehan

April 2022

Introduction

Given the competitive nature of the construction industry, with contractors regularly winning jobs on very tight margins, they frequently rely on variations to increase their profit margin.

It is extremely rare for any construction project to be completed entirely in accordance with the original contract provisions. Variations occur on almost every project, even on the most carefully planned schemes. Construction projects are complicated and challenging. The unexpected occurs and the client’s plans change, so it is important that construction contracts can cater for such events.

Without a variation provision in the contract the client has no authority to direct variations and hence there is no obligation on a contractor to alter the scope of works. Consequently, all standard forms of construction contract include provisions for the client to issue orders for variations from the original design (usually with clauses entitling appropriate additional payment and time).

Variations may be small, inexpensive, well managed and have minimal impact on the construction project. Alternatively, variations may be large, expensive, poorly managed and cause enormous delays. Sometimes these delays are due to the cumulative disruptive impact of a large number of variations, whose effect on productivity and cost eclipses the actual cost of the changed work.

Variations have been reported to account for 79 per cent of project cost overruns. Variations also regularly delay the project, accounting for 68 per cent of project time overruns. Consequently:

  • variations feature in a high proportion of claims and disputes.
  • minimising variations is one of the main client priorities for completing the project on time and keeping within budget.

What is a construction variation?

The term ’variation’ can be defined as a change in design, material, scope or method of working, compared to what was specified in the contract.

Variations are usually changes from the original scope of work, which can be in the form of an addition, omission or substitution. It also applies where there is a change in the conditions in which the work must be carried out, such as access arrangements, limitations of working space or working hours.

Variations can include:

  • Increase, decrease or omission of any part of the work in the contract
  • Changes to the character or quality / standard of material or work
  • Changes in design
  • Changes to orientation, line or level
  • Changes to the scope of works (e.g., additional works)
  • Changes to working conditions

Why is there a need for variation clauses?

Neither party can alter the contractor’s obligation to complete the works in accordance with the scope of works in the agreed contract. To change the specification, or add to the scope of work, a contract would have to be renegotiated. To avoid this, most construction contracts include a variation clause.

Without a contractual variation mechanism:

  • The contractor is not obliged to vary the work in the contract; and
  • The client will be in breach of contract if it omits a part of the contract works.

There is no implied power to order variations. In the absence of a variation clause in the contract, a contractor will not be entitled to extra payment for any additional or varied work which he has done on the instruction of the architect / contract administrator, unless he can demonstrate that the employer agreed to pay for the variation.

A contract for building work not only gives the contractor a duty to carry out the work, but also the right to be able to complete the work which it contracted to carry out. To omit or to vary the work is an infringement of that right and is a breach of contract. Therefore standard forms of contract include express rules for the ordering of varied work, enabling the client to achieve legally what would otherwise be breaking the contract, or require a separate further contract with the contractor.

If the variation clause is operated, the contractor’s obligation becomes the performance of the newly instructed work.

The inclusion of a variation clause can benefit both parties, especially the client, as it:

  • Provides the client the power to instruct the contractor to alter the works, usually at agreed rates and/or comparable prices.
  • Gives the client the flexibility to adapt its requirements so that it can achieve its desired result.
  • Preserves the contract and ensures that the contract is not frustrated.

The form of contract will determine the party’s obligations and contractual mechanisms for administration of variations.

What causes variations?

As construction projects progress, additional work to that originally described in the contract often appears worthwhile or necessary. It has been said that the main purpose of a variation clause is to deal with the unforeseen, but they are also frequently used to deal with the consequences of inadequate planning and changes of mind by the client.

Construction projects can be very complex, encompassing a multitude of different designers, contractors, suppliers and manufacturers. Unlike the manufacturing industry, which involves a consistent team of people working in a controlled environment producing a tried and tested product, a construction project invariably entails a unique mix of people working in an exposed environment, on a unique building site, constructing to a unique design. It is almost inevitable that something will not go to plan.

Variations usually result from the need to alter aspects of the construction project in reaction to circumstances that arise during the construction process.

Variations can be caused by a multitude of factors. Below are nineteen reasons why variations occur:

  1. Client’s project brief not thorough / clear: Sometimes the client’s brief is not sufficiently developed until after the contract has been awarded.
  2. Lack of co-operation / effective communication among project teams: When teams do not work effectively, mistakes are made.
  3. Ambiguous / Inadequate drawing details: To communicate the project design, the working drawings must be clear. Inadequate working drawings can result in confusion, resulting in variations.
  4. Design complexity: As complex designs are developed, problems can be identified that were not apparent when entering contract.
  5. Design errors: Designers are only human, sometimes they make mistakes.
  6. Errors/omissions in contract documents: Sometimes errors can result from an insufficient time for preparing the contract documents.
  7. Conflicting contract documents: Construction contracts can be complex, involving numerous documents prepared by various consultants. A lack of co-ordination often results in conflict between contract documents.
  8. Delays to decision-making process: A failure to make prompt decisions can result in the need a variation.
  9. Change in scope: This can be caused by inadequate planning at the pre-contract stage, perhaps resulting from a lack of involvement of the building owner/user.
  10. Client’s financial issues: The client’s financial issues can result in variations, especially if the projected project cost is increasing, causing the client to seek savings. Also, if the client’s budget increases, or there is a need to spend it before the end of the tax year, this can result in an instruction to carry out additional works.
  11. Client change requirements / specifications: This is a common occurrence in construction projects.
  12. Unforeseeable site conditions: The physical ground conditions encountered on site (such as contamination, soil conditions or man-made obstructions) can differ from that indicated in geotechnical reports and that found during ground investigations.
  13. Changes in statutory requirements: After the contract is agreed, there might be changes in government policies / legislation that result in a variation. Changes in laws might relate to building dimensions, safety, materials and taxes/levies of a project.
  14. Value engineering: Value engineering exercises often occur after the contract is agreed, perhaps seeking designs or products with better life cycle costs.
  15. Change in specification by consultant / specialist: Consultants and specialist can express a preference for certain products / designs, perhaps persuading the client of various advantages, such as in respect of durability, reliability and aesthetics.
  16. Unavailability of materials / products: This is a problem that has significantly increased in frequency due to Covid-19, Brexit and the effects on the war in Ukraine. Difficulties can occur in procuring materials and specialist products / equipment. This might be because they are no longer being manufactured, or there is a delay in receiving them in time to suit the programme. This generally results in alternative materials / products being used.
  17. Shortage of skilled labour: Some trades occasionally experience issues in securing sufficient skilled labour. This can result in instructions for alternative specifications.
  18. Technological advancements: Construction projects often run for a long time, during which time products and processes can improve.
  19. Impact of variations on non-varied work: Where a variation instruction results in other work, not itself varied, being executed in conditions other than those which would otherwise have occurred (See for example clause 5.9 of the JCT SBC).

To minimise variations, the design stage is the most important stage to focus on. When the root causes of variations are addressed early, there can be a significant reduction in the total number of variations. The use of BIM (i.e., 3D modelling) can be extremely beneficial in minimising undesirable variations, by increasing coordination of designs and other construction documents.

What are the effects of variations?

There can be many different effects of variations, such as:

Causes rework: Depending upon when the variations are instructed in terms of the construction process, they can result in demolition and/or rework. Obviously, this is not a factor if the variations occur during the design phase.

Quality of works: Some variations might involve changing to materials or products of lesser quality. In addition, the quality of work is sometimes detrimentally affected because contractors try to overcome for the delay effects of variations by cutting corners.

Increase in project cost: Whilst some variations relate to the omission of works, generating a reduction in costs, the most common effect of variations is to increase the project cost.

Delay in completion: Variations often hinder progress, which can lead to critical delays.

Disruption / reduced productivity: Some variations can disrupt and hamper other work activities, reducing productivity / outputs.

What is a Variation Order?

‘Variation order’ (“VO”) is a common term in construction projects. It is used to refer to a formal instruction issued by the Architect or Contract Administrator etc.

For a variation order to be valid, it generally must be in writing and issued by the person designated in the contract.

Who can issue a Variation Order?

Standard forms of contract identify who has the power to issue variation instructions.

  • In the JCT Standard Building Contract, it is the Architect/Contract Administrator.
  • In the JCT Design and Build Contract, it is the Employer, or Employer’s Agent.
  • In the NEC Engineering and Construction Contracts, it is the Project Manager.
  • In the Infrastructure Conditions of Contract, it is the Engineer.

Are verbal instructions valid?

Verbally instructing contractors to carry out additional work is not uncommon in the construction industry. However, under some standard forms of contract verbal instructions are not valid. For those contracts that allow verbal instructions, contractors must follow a prescribed procedure and ensure they have the necessary documents to claim the additional work.

Standard forms of construction contracts try to ensure that variation instructions are issued in writing. In fact, the NEC contracts require all contract communications to be in writing, with clause 13.1 stating as follows:

Each instruction, certificate, submission, proposal, record, acceptance, notification, reply and other communication which this contract requires is communicated in a form which can be read, copied and recorded”.

The JCT contracts are more flexible, containing a confirmation of verbal instruction (CVI) procedure. However, the CVI procedure in JCT contracts is often misunderstood, with many incorrectly believing that a contractor can immediately proceed to implement the verbal instruction provided they issue a CVI.

Clause 3.12.1 of the JCT Standard Building Contract 2016 edition (“JCT SBC”), states as follows:

Where the Architect/Contract Administrator issues an instruction otherwise than in writing, it shall be of no immediate effect but the Contractor shall confirm its terms in writing to the Architect/Contract Administrator within 7 days, and, if he does not dissent by notice to the Contractor within 7 days from receipt of the Contractor’s confirmation, it shall take effect as from the expiry of the latter 7 day period.”

[Emphasis added]

 

The JCT Design and Build Contract 2016 edition (“JCT DB”) has a similar provision, found at clause 3.7.1 (except that it refers to the ‘Employer’ rather than the ‘Architect/Contract Administrator’).

It is consequently clear that under JCT contracts verbal instructions have “no immediate effect”. The verbal instruction is only converted into a formal instruction following issue of the CVI and any failure by the Architect/Contract Administrator to contradict that CVI. As is clear from the above JCT clause, this procedure can take up to 14 days. In the meantime, the verbal variation instruction has no validity.

The CVI procedure creates risk for the contractor. Given that the verbal instruction has “no immediate effect”, the contractor should not start to implement the change. This could mean that the contractor must proceed with building work that will have to be taken down if/when the CVI procedure is completed. In theory, this additional works should be included in the value of the variation, but will the employer be happy to pay it! Alternatively, if the contractor immediately started to implement the change, he might find that the Architect/Contract Administrator/Employer changes his mind. The contractor is likely to incur cost and/or a delay, none of which he would have any contractual entitlement to recover.

Instead of issuing CVI’s, a better procedure for the contractor to adopt is have a pro-forma pad of instructions, to be issued to himself. Each pro-forma could be entitled ‘Instruction’ and addressed to himself. When the Architect/Contract Administrator gives a verbal instruction whilst on site, the contractor simply completes the pro-forma instruction and ask the Architect to sign it. The contractor could then immediately implement the change.

Ideally, CVIs should only be used for minor variations. They can be a useful tool to speed up site progress, but given the technological advances over recent decades, including the widespread proliferation of smart phones, there surely can be extremely few occasions where a written instruction cannot be issued immediately by email. This can generally be done within minutes of giving a verbal instruction to the contractor on site. I suspect it is a matter of time before the JCT remove the CVI procedure from its contracts.

How should a CVI be drafted?

When drafting a CVI, as a minimum it should ideally:

  • Include a heading of “Confirmation of Verbal Instruction”.
  • State when and where the verbal instruction is given.
  • Identify who gave the instruction and to whom it was given.
  • Provide details of the verbal instruction.

By providing all the above information, it will help the verbal instructor to remember what he/she instructed.

Although not always necessary, it might be useful for the CVI to include an estimated cost and time implication. This might cause the verbal instructor to re-consider everything before confirming the instruction. It should also reduce the chances of any arguments later, when a contractor might be put under pressure to reduce its variation claim.

Can contractors refuse to carry out a variation?

Some contracts provide the contractor, in limited circumstances, with a right to object to an instruction.

The scope of a contractor’s works is generally beyond his control, because he might be issued with variations instructions which significantly alter the scope of works included in the contract. The contractor may have agreed a contract price of, say, £5 million based on tender documents, but has to carry out £10 million worth of work when taking into account variation instructions. Whilst many contractors might rub their hands with glee at the additional profit to be made from such a large variation account, others may be concerned at the problems such changes might cause. There are situations where a large number of variations to a contract can spell disaster for the contractor. If, for example, the contract has been priced in a depressed market, at very low rates, and the variations are of similar character and performed in similar conditions to the original contract works, the rates cannot be increased.

Historically, there have been cases where contractors have argued that a very substantial variation, or series of variations, goes to the root of the contract, totally altering the identity of the contract, such that the contract had to be regarded as vitiated or destroyed. However, contractors should be aware that in certain situations JCT contracts provide an option to issue a notice of ‘reasonable objection’ to a Variation instruction.

Under the JCT SBC, the contractor’s obligation to comply with an instruction is subject to the following exceptions:

  • Clause 3.10.1: Where an instruction requires a Variation of the type referred to in clause 5.1.2 (e.g. restriction in respect of access to the site or limitations of working space / hours or affects the sequence of work), the contractor “need not comply to the extent that he notifies a reasonable objection”.
  • Clause 3.10.2: Where a Variation instruction is given, which under clause 5.3.1 requires the Contractor to provide a Variation Quotation, the Variation shall not be carried out until the Architect/Contract Administrator has issued either:
    • a ‘Confirmed Acceptance’; or
    • a further instruction (under clause 5.3.2) that the Variation is to be carried out and is to be valued by a Valuation.
  • Clause 3.10.3: Where the instruction might adversely affect the efficacy of the design of the Contractors Designed Portion, or compliance with CDM Regulations, the contractor has 7 days to notify the details. Once the contractor has issued such a notice, the Variation instruction “shall not take effect unless and until confirmed by the Architect/Contract Administrator”.
  • Clause 3.10.4: Where the instruction may infringe patent rights.
  • Clause 3.10.5: Where the instruction relates to a Named Specialist, and the contractor has “reasonable grounds of objection” (Refer to Schedule 8: paragraph 9.4).

The JCT DB also contains exceptions to the contractor’s obligation to comply with instructions:

  • Under clause 3.5.1 and 3.9.2, the contractor can notify he has a reasonable objection to a Change instruction of the type referred to in clause 5.1.2 (e.g. restriction in respect of access to the site or limitations of working space / hours or affects the sequence of work).
  • Clause 3.9.4: In the contractor’s capacity as Principal Designer and/or Principal Contractor, it might have an objection under the CDM Regulations.
  • Clause 3.9.1: The contractor’s consent is required for any instruction requiring a change which “makes necessary, an alteration or modification in the design of the Works”, although (pursuant to clause 1.10) that consent is not to be unreasonably delayed or withheld.

Unlike the JCT contracts, the NEC contracts do not contain any express rights of objection. However, clause 27.3 of the NEC3 and NEC4 ECC contracts imply that the contractor may refuse to comply with instructions that are not authorised “in accordance with the contract”.

The consequences of failing to comply with a valid instruction could result in serious sanctions against the contractor. A contractor’s refusal to proceed with variation work might constitute a repudiatory breach of contract. Where the contractor does not comply with a valid instruction, JCT contracts allow the employer to “employ and pay other persons to execute work of any kind that may be necessary to give effect to” the instruction, in which case, the contractor “shall be liable for all additional costs incurred by the Employer” (clause 3.6 of the JCT DB and clause 3.11 of the JCT SBC).

If a contractor wrongfully refuses to comply with a variation instruction, it could also result in termination. For example:

  • Under the NEC ECC contract the client might be able to terminate, relying on the provisions of clause 91 and reason R11 (“Substantially failed to comply with his obligations”).
  • Under the JCT main contracts, the contractor’s actions could amount to a failure to “to proceed regularly and diligently with the Works” (clause 8.4.2).

Can instructions be issued retrospectively?

Yes. Although instructions are usually issued prior to variation work being carried out, contractors sometimes proceed without a formal. Some contracts allow retrospective instructions to cater for such issues. For example, in respect of verbal instructions, clause 3.12.3 of the JCT SBC expressly states as follows:

If neither the Contractor nor the Architect/Contract Administrator confirms such an instruction in the manner and time stated but the Contractor nevertheless complies with it, the Architect/Contract Administrator may at any time prior to the issue of the Final Certificate confirm it with retrospective effect”.

In the JCT DB there is an equivalent provision at clause 3.7.3.

In addition, clause 13.4 of the JCT SBC provides as follows:

The Architect/Contract Administrator may sanction in writing any Variation made by the Contractor otherwise than pursuant to an instruction”.

The NEC contracts have no such provisions.

Can changes in Statutory Requirements create variations? 

A change to the statutory regime might result in deemed variations. For example, pursuant to clause 2.15.2.1 of the JCT DB, if there are changes to “Statutory Requirements” after the “Base Date”, which necessitates an alteration or modification to the Works, such alteration or modification “shall be treated as a Change”. A similar provision is found at clause 2.17.2.1 of the JCT SBC, in respect of the Contractor’s Designed Portion.

The change will be deemed to be a Variation for which the contractor is entitled to payment. This means that the contractor does not have to wait for a formal instruction before carrying out the necessary change.

With NEC contracts, if secondary option X2 is incorporated into the contract, a change in the law is a compensation event if it occurs after the Contract Date.

Is a contractor obliged to carry out variations after practical completion?

Once practical completion has been achieved, it might be convenient for the client to have the contractor remain on site to carry out additional works. As the contractor is familiar with the project and already has resources on site, he would normally be the most suitable organisation to carry out the work. In many instances this might also be convenient for contractors. Alternatively, they might have no desire to do anymore work and prefer to move their resources to the next project.

However, once practical completion is granted, the Rectification Period (previously called the ‘defects liability period’) commences. Afterwards, the Architect/Contract Administrator / Employer can only issue instructions to the contractor in relation to any incomplete works and defects that arise in the Works. Hence, the Contractor is no longer obliged to carry out any Variations.

How are variations valued?

This depends on the mechanisms in the contract, but in general, there are two approaches to the valuation of variations:

  • Valuing on the basis of actual cost.
  • Using rates and prices, usually taken from within the contract, although sometimes they can be ‘fair rates and prices’.

NEC forms usually seek to value variations on a cost basis, whereas the JCT forms primarily aim to value variations using the rates and prices in the contract.

Is a contractor entitled to be paid for carrying out a variation without receiving a formal instruction?

While the client may give permission for a variation, contractual entitlement to payment will only be triggered if a valid instruction has been issued. Consequently, if a contractor believes that it should be paid for variation work, it should attempt to secure a formal instruction from the client in advance of implementing the change.

Proceeding with variation work in the absence of a valid instruction could create much greater problems for the contractor than merely not getting paid for the change. Depending upon the facts, the contractor is likely to be in breach of contract for carrying out a variation (and hence departing from the contract scope) where it has not been issued with a formal instruction. If the contractor is not to be in breach, he will at least need to receive permission for the change.

Does the client’s permission to make a change amount to a variation instruction?

It is important to make a distinction between:

  • A valid contractual instruction, triggering entitlement to payment; and
  • The client’s permission, which simply permits the change to be made and safeguards the contractor from being in breach of contract.

If the client merely gives permission, then the contractual variation mechanism will not have been triggered and consequently, the contractor will (usually) not be entitled to payment.

One of the most common causes of clients giving permission to change the scope of works without issuing a formal instruction is the contractor making an error. This could be a construction error, which causes the client’s design to change. Alternatively, where the contractor has design responsibility, the error could involve the contractor using an inappropriate specification. This too could result in the client’s permission to change something.

Permission would also be necessary if the contractor has enhanced the design without consulting with the client.

Whether the client’s communication should be classified as a valid Variation instruction or merely a permission will depend upon the words used and the contract provisions.

An interesting case on this issue was Simplex Concrete Piles v St Pancras MBC (1958) 14 BLR 80. Simplex was the foundations contractor on a project for a nine-storey block of flats in London. It became apparent that Simplex’s piling design was deficient, causing the client’s architect to have discussions with Simplex regarding solutions to the problem. The architect agreed to Simplex’s suggestion to obtain quotations for a different way of carrying out the works, and then sent a letter agreeing to Simplex’s proposed changed method.

Simplex argued that the architect’s letter was an instruction for a variation and hence it was entitled to extra cost. In response, it was argued that the architect’s letter was simply a concession to Simplex, to allow it to perform its contractual obligations in a manner different from that specified, which would mean it had no entitlement to extra costs. The judge agreed with Simplex and said that the architect’s letter constituted a variation instruction, which under the contract entitled the contractor to additional payment. This was regardless of the fact that had the architect not issued the letter, the contractor would have had to undertake the additional piling works at its own expense simply to comply with the terms of the contract.

The decision in the Simplex case was clarified in the case of Howard de Walden v Costain (1991) 55 B.L.R. 124, where it was decided that even where the contract is followed so that the contractor appears able to claim additional payment, he will not be paid for getting himself out of a situation where he is in breach of contract (or may find himself in breach of contract if no action is taken) provided he is put on notice that he will not be paid for that work.

JCT contracts now include (at clause 3.18 of the JCT SBC and 3.13 of the JCT DB) provisions regarding instructions to the contractor in respect of removal of work, materials or goods not in accordance with the contract, including issuing “such Variation instructions as are a reasonably necessary consequence”. These clauses also clarify that “to the extent that such instructions are reasonably necessary” the contractor is not entitled to any additional payment or any extension of time.

JCT SBC clause 3.18.2 also allows non-conforming work to remain, after consultation with the Contractor and with the Employer’s consent. This will not be construed as a Variation, but the Employer may make “an appropriate deduction” from the Contract Sum.

JCT V NEC

The two most frequently used standard forms of construction contract used in the UK are the JCT and NEC. Both forms provide for change control. In the JCT forms they are generally referred to as Variations (or ‘Changes’ in the JCT DB form). In the NEC there are various categories of ‘compensation event’, with the first one listed [at clause 60.1(1)] equating to variations, described as ‘changes’ to the Scope / Works Information.

However, the two contracts deal with the effects of change differently. For example, the JCT separately addresses the effects on cost and time, with individual mechanisms for:

  • The direct costs of variations
  • Loss and expense, for issues of prolongation, prelim thickening and disruption
  • Extensions of time

In contrast, the NEC deals with the effects of time and cost together, requiring a quotation to be prepared by the contractor shortly after the change occurs or the need for change has been identified. Each quotation should encapsulate all effects on cost, plus the need for any extension of time.

Further details of how the JCT and NEC contracts deal with variations are provided below.

NEC Contracts

NEC contracts contain detailed provisions for managing change in section 6, relating to ‘compensation events’. This is the longest and most complicated section in NEC contracts.

The NEC4 compensation event that deals with variations is found at clause 60.1(1), as follows:

“The Project Manager gives an instruction changing the Scope except 

  • a change made in order to accept a Defect or 
  • a change to the Scope provided by the Contractor for his design which is made 
  • either the Contractor’s request
  • in order to comply with the Scope provided by the Client”.

The NEC4 mechanism for instructing variations is a combination of clauses 14.3 and 27.3, as follows:

Clause 14.3: The Project Manager may give an instruction to the Contractor which changes the Scope or a Key Date.

Clause 27.3: The Contractor obeys an instruction which is in accordance with this contract and is given to him by the Project Manager or the Supervisor.

It must be remembered that pursuant to clause 13.1, instructions must be issued in writing, which is one of the reasons that clause 27.3 states “in accordance with the contract”. There can be no verbal instructions. If the Project Manager gives a verbal instruction, the contractor should request a written instruction before complying with it.

The Project Manager is obliged to instruct the contractor to prepare a quotation for each compensation event. The contractor then has three weeks to submit his quotation, although this can be extended by agreement between the Project Manager and the contractor.

The quotation is to include all the effects of a variation, including in respect of cost and time. There is no separate valuation of loss and expense, or extension of time.

When it comes to assessing variations (and any other compensation event), the NEC generally values on a cost basis, rather than by reference to the contract prices. The NEC Guidance Notes explains that the reason for this policy is that no compensation event is due to the fault of the contractor or relates to a matter which is at his risk under the contract. Hence, it is therefore appropriate to reimburse the contractor his additional costs arising from the compensation event.

The contractor’s financial entitlement for any compensation event (including variations) is based on the effect of the variation on the ‘Defined Cost’ of the works, which often amounts to the actual cost incurred by the contractor in carrying out the variation. A percentage uplift (the ‘fee percentage’) is then applied to the change in Defined Cost, to cover the contractor’s overheads and profit, plus anything not included in the schedule of cost components.

Clause 63.1 provides that the ‘changes to the Prices’ are assessed as the effect of the compensation event upon:

  1. the Defined Cost of the work already done;
  2. the forecast Defined Cost of the work not yet done; and
  3. the resulting fee (which is the agreed fee percentage applied to the Defined Cost).

The definition of Defined Cost varies dependent on which of the six main options the NEC contract is based on, as follows:

  • In Options A and B, Defined Cost is the cost of the components in the Shorter Schedule of Cost Components.
  • In Option C, D and E, Defined Cost is the cost of the components in the Schedule of Cost Components less Disallowed Cost.
  • In Option F, Defined Cost is:
  • The amount of payments due to Subcontractors for work which is subcontracted without taking account of amounts paid to or retained from the Subcontractor by the Contractor which would result in the Client paying or retaining the amount twice; and
  • The prices for work done by the Contractor

Less Disallowed Cost.

For option A-E, Defined Cost includes payments due to subcontractors, plus other cost components (in the applicable schedule) for works, such as relating to plant, equipment, materials and people. This calculation relies on the contractor’s accounts and records.

Under the four cost-reimbursable main options (C, D, E and F), the definition of Defined Cost, includes reference to ‘Disallowed Cost’. These are costs incurred by the contractor that do not have to be paid by the client and hence are borne by the contractor.

Disallowed Costs are usually costs that are incurred because of some sort of failure or fault of the contractor, such as:

  • Costs not justified by the contractor’s records
  • Costs that should not have been paid to a subcontractor / supplier (e.g. over-ordering the number of doors required)
  • Costs incurred because the contractor did not follow the proper procedure
  • Costs incurred because the contractor failed to give an early warning
  • The cost of correcting Defects after Completion
  • Preparation for Adjudication

Whilst the NEC generally values variations (and other compensation events) on the basis of Defined Cost, if the Project Manager and the Contractor agree, rates and lump sums may be used to assess a compensation event (refer to clause 63.14 in the NEC3 and clause 63.2 in the NEC4).

In terms of assessing an appropriate ‘extension of time’ (which is not a phrase found in NEC contracts), the NEC uses the ‘Accepted Programme’ as a tool for assessing delay.

JCT Main Contracts

The JCT SBC defines ‘Variation’ at clause 5.1, as follows:

.1 the alteration or modification of the design, quality or quantity of the Works including: 

.1 the addition, omission or substitution of any work; 

.2 the alteration of the kind or standard of any of the materials or goods to be used in the Works; 

.3 the removal from the site of any work executed or Site Materials other than work, materials or goods which are not in accordance with this Contract; 

.2 the imposition by the Employer of any obligations or restrictions in regard to the following matters or any addition to or alteration or omission of any such obligations or restrictions that are so imposed or are imposed by the Contract Bills or the Employer’s Requirements in regard to: 

.1 access to the site or use of any specific parts of the site; 

.2 limitations of working space; 

.3 limitations of working hours; or 

.4 the execution or completion of the work in any specific order.”

Instead of using the term ‘Variation’, the JCT DB uses the term ‘Change’. Nonetheless, the definition is essentially the same.

JCT clause 5.1 is divided into two categories:

  • Clause 5.1.1: This category is more straightforward, dealing with the usual adds, omits and modifications to quality etc.
  • Clause 5.1.2: This category is more problematic, with greater difficulty in determining the effects of the factors listed.

Variations in respect of clause 5.1.2 allow the contractor to notify a reasonable objection (under clause 3.10.1 of the JCT SBC, or clause 3.9.2 of the JCT DB).

JCT contracts include several ways of valuing Variations, the choice in a particular case being that which is applicable to the circumstances.

In both the JCT SBC and the JCT DB, the value of Variations is to be “such amount as is agreed by the Employer and the Contractor” (clause 5.2.1 in the JCT SBC and clause 5.2 in the JCT DB). In the JCT SBC, agreement can be reached following submission by the contractor of a ‘Variation Quotation’ (discussed below). If agreement is not reached, the value is to be calculated in accordance with the JCT’s ‘Valuation Rules’, which are found at:

  • clauses 5.6 to 5.10 of the JCT SBC; and
  • clauses 5.4 to 5.7 of the JCT DB.

Under the JCT SBC, the usual method is for the Quantity Surveyor to calculate the value.

Clause 5.6 of the JCT SBC (and clause 5.4 of the JCT DB) deal with ‘Measurable Work’ with a hierarchy of valuation methods, dependent upon whether the Variation work is carried out under similar conditions to those contemplated at the time of entering the contract, plus the extent to which the quantity of work has altered. If the Variation is not measurable, it can be valued by daywork.

The overall hierarchy of the Valuation Rules in the JCT SBC is as follows:

  1. Clause 5.6.1.1: Where the varied work is of similar character to the contract work and is carried out in similar conditions, without significantly changing the quantity of work to be carried out, the rates and quantities set out in the contract will apply.
  2. Clause 5.6.1.2: Where the varied work is of similar character but is carried out under significantly different conditions, or significantly alters the quantity, then the rates and quantities contained in the contract will be consistent with the relevant rates, prices and values in the contract, with a fair allowance for:
    • any change in the conditions under which the work is carried out; and/or
    • any significant change in the quantity of such work.
  3. Clause 5.6.1.3: Where the varied work is not of a similar character to the work set out in the contract bills, it will be valued at “fair rates and prices”.
  4. Clause 5.7: Daywork.

The JCT DB is based on a similar hierarchy, but there are differences in the drafting. For example, instead of using the term “fair rates and prices”, the JCT DB uses the phrase “a fair valuation”.

Valuing variations on the basis of competitively priced rates is likely to generate a lower valuation. Consequently, there are frequently disputes over the interpretation of the “similar character”, with contractors attempting to apply a new rate, or to price the variation on a daywork basis. Employers have an obvious preference for the market-tested rates contained in the contract.

Clause 5.9 of the SBC (and clause 5.6 of the JCT DB) provide that, as far as a Variation leads to a “substantial change in the conditions” under which any other work is executed, that other work is also be “treated as a Variation” and valued in accordance with the Valuation Rules.

Any effect of the Variation on the regular progress of the Works is to be ascertained separately, under the loss and expense provisions.

What is a Variation Quotation?

Under clause 5.3.1 of the JCT SBC, the Architect/Contract Administrator has the option of requesting the contractor submit a quotation in accordance with the provisions of Schedule 2 (a ‘Variation Quotation’). The contractor has seven days to disagree to the application of this procedure. If the contractor disagrees, the instruction is not carried out unless the Architect/Contract Administrator gives a further instruction that the Variation is to be carried out, in which case it is valued by the Quantity Surveyor in accordance with the JCT Valuation Rules.

Unless otherwise agreed, the contractor must submit the Variation Quotation within 21 days. The Variation Quotation should include:

  • The direct cost, by reference (where relevant) to the rates and prices in the contract;
  • The required extension of time;
  • The loss and expense required; and
  • A fair and reasonable amount in respect of the cost of preparing the quotation.

The contractor must not implement the Variation until he receives a ‘Confirmed Acceptance’ of the Variation Quotation. If a ‘Confirmed Acceptance’ is issued it will take the place of a valuation by the Quantity Surveyor. If the Variation Quotation is rejected, the Variation can still be instructed, but it is then subject to the valuation by the Quantity Surveyor. The contractor will also be paid a “fair and reasonable amount” for the cost of preparing the Variation Quotation.

What is meant by “fair rates and prices” / a “fair Valuation”?

The Valuation Rules contained in the JCT SBC, provide as follows:

where the work is not of similar character to work set out in the Contract Documents, it shall be valued at fair rates and prices”.

The JCT DB contains a similar provision:

Where there is no work of a similar character set out in the Contract Sum Analysis a fair valuation shall be made”.

The terms “fair valuation” and “fair rates and prices” effectively have the same meaning.

There is no universally agreed method by which a fair valuation can be calculated. A fair valuation does not necessarily have to be based on the costs incurred by the contractor, although actual cost might be one of the considerations.

In dealing with the question of what is a ‘fair valuation’ and who it is fair to, Davison and Mullen (2009) state in their textbook “Evaluating Contract Claims, 2nd Ed.,”:

The only reasonable answer seems to be that a fair rate or price will be one that reflects the pricing level in the contract, and is not simply the contractor’s cost for the varied work plus overheads and profit additions”.

In the case of Weldon Plant Ltd v The Commissioner for the New Towns (2000) a dispute arose in connection with the valuation of a site instruction to excavate gravel and backfill with clay in connection with the construction of a Reservoir. The contractor’s entitlement was to be paid a fair valuation. Judge Humphrey Lloyd took the following view:

the contractor would be entitled to a fair valuation which would ordinarily be based upon the reasonable costs of carrying out the work, if reasonably and properly incurred … Clearly if, in the execution of the work, cost or expenditure is incurred which would not have been incurred by a reasonably competent contractor in the same or similar circumstances, then such costs would not form part of a fair valuation”.

The judge also said that in evaluating a fair valuation the calculation must include each of the elements normally found in a contract rate or price, which normally includes a contribution to overheads and profits.

When are dayworks appropriate?

Clause 5.7 of the JCT SBC (and clause 5.5 of the JCT DB) deal with daywork, for Variation work that cannot be properly valued by measurement.

Dayworks are often used to value works an unforeseen nature. The RICS Guidance Note says that dayworks are “intended for short duration, limited scope activities” such as “opening up works for inspection, testing operations, repair of damage etc.” e.g., They are also often used to value the breaking out with ground obstructions.

The valuation is based on the prime cost of the work, calculated in accordance with the ‘Definition of Prime Cost of Daywork carried out under a Building Contract’ issued by the Royal Institution of Chartered Surveyors and Construction Industry Publications Ltd, as current at the Base Date. The contractor must provide daywork sheets for verification no later than 7 Business Days after the work has been executed.

Daywork sheets list the resources involved. In addition to labour, this might include plant, materials and ancillary items used to carry out the works.

It is often the case that daywork sheets are signed “FRPO” or “For records purposes only”. This is because the signatory does not wish to approve payment on a daywork basis. Instead, the signatory signs to acknowledge that the work was carried out and the hours and resources claimed are accurate.

When it comes to valuing the works, a signed daywork sheet does not guarantee the method of valuation. The contract conditions will prevail, determining whether the works should instead be valued using contract rates, pro-rata rates or fair rates.

Clients generally consider that valuation on a daywork basis to be the least favourable option, on the basis that the contractor has little incentive to maximise its output rate. Hence, if they are unproductive, the risk of increased cost is borne by the client.

Using daywork is low risk for the contractor and, dependent on the daywork rates contained in the contract, could provide a higher return than other methods of valuation.

RICS Guidance Note explains as follows:

“Significant works, or works of a prolonged duration, should be capable of valuation by measurement, either using a contract rate as a basis or preparing a new rate based on fair rates and prices. Daywork is a last resort basis of valuing works”

Conclusions

Variations are a major issue in the construction industry, with a multitude of different causes that can delay projects and cause cost / budget over-runs. This can result in claims and disputes. Standard forms of contract contain differing mechanisms to manage and assess the effects of variations, some based on cost, others on rates and prices in the contract. If variations are not correctly managed properly it could lead to severe consequences for contractors.

 

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