Variations in construction contracts

1 What are variations in the construction industry?
2 What are the reasons for variations?
3 What types of variations might be required?
4 How are variations provided for in construction contracts?
5 How are variations valued?
6 What are the potential problems with variations?
7 How can variations be avoided?
8 What is the relationship between variations and extensions of time?
9 Related articles on Designing Buildings
10 External references

[edit] What are variations in the construction industry?

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

[edit] What are the reasons for variations?

Almost all projects vary from the original design, scope or specification at some point during the construction works.

Reasons for variations include:

Technological advancement.
Changes in the client's requirements.
Statutory changes or enforcement.
Change in conditions.
Geological anomalies.
Non-availability of specified materials.
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.

[edit] What types of variations might be required?

Variations might include:

Alterations to the design.
Alterations to the quantities required.
Alterations to the quality requried.
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):

Change the fundamental nature of the works.
Omit work so that it can be carried out by another contractor.
Be instructed after practical completion.
Require the contractor to carry out work that was the subject of a prime cost sum.

[edit] How are variations provided for in construction contracts?

In legal terms, a variation is an agreement supported by consideration (payment) to alter some terms of the contract. No power to order variation is implied, and so there must be express terms in contracts which gives the power instruct variations. In the absence of such express terms the contractor may reject instructions for variations without any legal consequences.

Standard forms of contract generally make express provisions for the contract administrator (generally the architect or engineer) to instruct variations. 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] How are variations valued?

Variations may give rise to additions or deductions from the contract sum (the price agreed with the contractor and entered into the contract). 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:

Agreement between the contractor and the client.
The cost consultant.
A variation quotation prepared by the contractor and accepted by the client.
By some other method agreed by the contractor and the client.

Valuations of variations are often based on 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. The contractor's rates do not become reasonable or unreasonable by the execution of variations, as stipulated by the ruling in the case of Henry Boot Construction Ltd v Alstom [1999].

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.

However, 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. However, there may be disagreements about 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 from 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 some of the rationale of the NEC contracts in relation to cost control and decision making.

[edit] What are the potential problems with variations?

Change can be a source of conflict, either because the client does not believe that a change has been instructed, the work instructed is unreasonable or undeliverable, the valuation of the changes is disputed and so on.

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 facades it is necessary to have steel supports, and a reasonably 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, the contract administrator cannot change the nature of works under the pretext of variation. For example, if the contract provides for secant pile shoring, they cannot ask for diaphragm wall shoring instead as this will entirely change the nature of the work.

Further, if the contract administrator omits work from contractors 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] How can variations be avoided?

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.

Variations can be avoided by:

Undertaking thorough site investigations and condition surveys.
Ensuring that the project brief is comprehensive and is supported by stakeholders.
Ensuring that legislative requirements are properly integrated into the project.
Ensuring that risks are properly identified.
Ensuring that designs are properly coordinated before tender.
Ensuring the contract is unambiguous and explicit.
Ensuring the contractor's rates are clear.
Preparing concise drawings, bills of quantities and specifications, providing for all situations which are reasonably foreseeable.