Streetwise Guide to Identification and Valuation of Variations in Construction and Engineering Contracts

The identification and proper valuation of subcontract variations is arguably the greatest source of problems for Specialist Sub-Contractors and it is therefore important to have a clear understanding of the contractual framework governing the instruction, execution and valuation of sub-contract variations.

A common feature of most construction projects is that at some stage the person who has commissioned the work is going to change his mind about some element of it and will require changes to be implemented during the construction phase.

Parties involved in the procurement and construction of buildings, plant and the like, have long since recognised that variations are so common place that all the standard forms of contract for Main Contractors and Specialist Sub-Contractors recognise this fact and specifically provide for their introduction.

If his contract did not contain provisions for variations then the Specialist Sub-Contractor would in theory be entitled to refuse to deviate from what he had originally contracted to provide. However, most contracts can be varied by the mutual consent of the parties and in practice it is not usually in the best interests of the Specialist Sub-Contractor to refuse to carry out sub-contract variations.

Wide powers to order variations are available to Architects, Engineers and Main Contractors  under all of the standard forms of contract and as the design process is rarely completed when work starts on site, these powers are frequently exercised.

WHAT IS A VARIATION?

Standard forms of contract and sub-contract tend to define the term ‘variation’ in a similar way.  However, the Specialist Sub-Contractor should be aware that there are a considerable number of standard forms and non-standard forms of sub-contract and many different ways of dealing with subcontract variations. The Specialist Sub-Contractor should therefore take care to ensure that he is familiar with and understands the provisions in each particular contract or sub-contract.

Standard forms are likely to provide for two types of variations namely, a change in the work itself, and a change in the obligations or restrictions relating to the way in which work is carried out.

The following extract from the Sub-Contract Conditions from the JCT DB SubC 2011 contract is typical of the way in which sub-contract variations are defined.

5·1 The term ‘Variation’ means:
1.  the alteration or modification of the design, the quality or (except where the Re measurement Basis applies) the quantity of the Sub-Contract 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 Sub-Contract Works;
·3 the removal from the site of any work executed or Sub-Contract Site Materials other than work, materials or goods which are not in accordance with this Sub-Contract;

2. the imposition in an instruction of the Architect/Contract Administrator issued under the Main Contract (or a direction of the Contractor passing on that instruction) of any obligations or restrictions in regard to the matters set out in this clause 5·1·2 or the addition to or alteration or omission of any such obligations or restrictions so imposed or imposed by the Numbered Documents and the Schedule of Information and its annexes 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.[8]

WHO CAN INSTRUCT SUB-CONTRACT VARIATIONS?

Disputes frequently occur as to whether a particular instruction amounts to a subcontract variation. Unfortunately a common misunderstanding made by many Specialist Sub-Contractors is to assume that all Architects, Engineers and Main Contractors instructions are variations.

This is not necessarily the case as these instructions may merely confirm or clarify that which was originally required under the contract and leave the Contractor or Sub-Contractor to argue that it is a change which entitles him to additional monies.  Such differences of opinion can be minimised by ensuring that the description of the work in the Contract Documents is as clear as possible.

This is very much a case of easier said than done. However, attention to detail at contract formation stage, will be well worth the effort when it becomes necessary for the Specialist Sub-Contractor to demonstrate that the work he is being instructed to do constitutes a variation to that originally contracted for.

Unless the Specialist Sub-Contractor can demonstrate that the instruction in question does  fall within the definition of a variation as set out in the subcontract, he will not be entitled to reimbursement of any additional costs incurred in complying with the instruction.

Recognising Variation Instructions

The Specialist Sub-Contractor has to accept that sub-contract variations can manifest themselves in many different ways.  The following is a typical, but not exhaustive, list of how such subcontract variation instructions may arise;

• As formal change orders issued by the Main Contractor
• Copies of Architects Instructions Verbal instructions
• Responses to technical queries or requests for information.
• Alterations to Architects/Engineers drawings.
• Architects/Engineers comments on drawings submitted for approval
• General correspondence.
• Minutes of meetings.
• Snagging lists.

Essentials

The are two essentials which the Specialist Sub-Contractor should observe when dealing with sub-contract variation instructions.

1. Check whether or not the person purporting to have authority to issue sub-contract variation instructions actually has authority to do so…….and

2. Comply with the particular requirements of the contract in respect to sub-contract variation instructions.

It is not uncommon for various parties to assume that they have authority to issue subcontract instructions when in fact they have no such authority.  Check the terms of the sub-contract and if it is not clear clarify the matter from the outset.

MAXIMISING RECOVERY FROM SUB-CONTRACT VARIATIONS

Variations are an opportunity for the Specialist Sub-Contractor to maximise his financial return from the project.

In theory it may be the responsibility of the Quantity Surveyor, or some other person named in the contract to value sub-contract variations.  However, the Specialist Sub-Contractor would do well to remember the old adage “if you don’t ask you don’t get” and in practice subcontract variations should always be valued by the Specialist Sub-Contractor.

The Specialist Sub-Contractor should also submit details as soon as possible after the subcontract variation arises. This will avoid situations where the person commissioning the work has not been properly advised as to the increased value that has arisen because of the changes he has instigated and may have insufficient funds to pay for them.

Most standard forms of sub-contract provide mechanisms for the administration and valuation of subcontract variations.  Very often these provisions refer to the valuation of variations in accordance with a Schedule of Rates.  However most standard forms also contain provisions for revising those rates in the event that the varied work is carried out under different conditions or is of a different character to that set out and/or described in the original contract documents.

Many Specialist Sub-Contractors make the mistake of attempting to claim something which when analysed more closely cannot actually be substantiated. The nature of construction is such that it is very often the case that the work is not carried out under similar conditions or is not of a similar character and therefore the Specialist Sub-Contractor is legitimately entitled to an appropriate adjustment to the rates, and this is a much more effective way to maximise entitlement.

There is no clear cut authority to determine when work is not carried out under ‘similar conditions’ or is not of similar character and this can be a problem for both parties to the contract.

There are many factors which may need to be considered in order to establish whether or not the work is carried out under ‘similar conditions’ and the following list is by no means exhaustive;

• Change of season e.g. winter working or summer working
• Late and/or ‘piecemeal’ receipt of instructions
• Issue of variations in disregard of agreed programmes
• Immediate/short notice response required to instructions
• Special procurement, planning or supervision arrangements
• ‘Piecemeal working’ involving special return visits to areas in order to execute small quantities of work
• Working in exceptionally congested circumstances due to out of sequence working
• Working in areas which have been occupied by the Employer and/or his direct Contractors
• Restrictions on access or operational methods

Once it can be established that work is not of a similar character or has not been carried out under similar conditions then the Specialist Sub-Contractor is entitled to recover the additional costs involved by way of an appropriate adjustment to the rates.  Such adjustment should take into account all relevant factors including amongst others.

• Additional labour or material costs
• Additional supervision or management costs
• Any additional or special plant costs
• The true cost of setting out instructing, controlling, detailing or arranging the additional work
• Any abortive costs
• Additional transport costs
• Loss of special discount

For advice and inspiration in regard to the valuation of variations or payment for construction and engineering variations then why not use the Ask Streetwise  feature on this site to ask our virtual team of experts for help to maximise your entitlements?