Implications of different types of Variation

Implications of different types of Variation

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Implications of different types of Variation

A variation clause has two basic purposes. Firstly, it gives an employer the power to make required adjustments to terms of agreement. Secondly, it smoothens the progress of contract amendment consequently ensuring prompt compensation of the contractor. This provision or arrangement may seem like a straightforward deal, but when contractors or employers exercise such rights, interpretation problems arise. Variation is debatable because it is a broad topic, especially when it certain additions, works, and omissions. The analysis of topics such as variation review provisions, consequences of variation, payment, and valuation for variation, and types of variation helps readers to have an understanding of implications of dissimilar kinds of variations.

Variation Definition and Clause In FIDIC

A number of standard contract forms offer variation clauses. The FIDIC Red book defines variation as changes to the works that are approved or instructed in accordance with clause 13[1]. Clause 13.1 further attempts to clarify this, but it has is no clear response regarding what constitutes variation, and as a result, one is entitled assert that the definition is generic and insignificant. It is arguable to suggest that the interpretation of parties should reach an agreement to show that some matters form variation, especially after the consideration of specifics of prevailing circumstances.

Parties can initiate variation prior to TOC issue by application of direction instruction or by asking the contractor to provide any additional work and complete it. The contractor is expected to follow such instruction. However, any issues that relate to ready accessibility of goods that the parties require for variation can result in rejection of such instruction. Other restrictions that may vary the contract include essential changes that fall outside the scope of variation or contract, and the works that the contractor cannot perform[2]. In Gilbert Ash et al. v Beaufort Developments, it was held that any changes to the contract should be within the limits the parties have set in such agreement.

Types of Variations

There are different types of variations, which the contractor or engineer may initiate because of requirements that arise from unforeseen state of affairs. Determining that some works may amount to alteration requires proper understanding of scope of work and contract.

Employer or Engineer Initiated Variations

Variation clause permits an employer or engineer to change contract elements and the effect of this is that it ensures the capability of contract to respond to the project’s practical requirements. The following are some of such changes:

Modifications and additional works

Modifications and additional work that relate to changes to certain levels, variation that relate to technical innovation, substitution, design or methodology change, specification or quality change, regulatory change, quantity change, and scope change. The changes play a significant role because they help the concerned parties adapt to the project’s variation requirement even though there are limitations as to what may form a variation in contract terms that are strict. Such terms may be as follows:

1. Fundamental alteration to the accepted methodologies or scope of work is not recognizable as variations true nature.
2. [3]Not all changes to quantities amount to variation.

Omissions

De-scoping and deletion fall under this category. A negative variation order can be given when there is change in requirements or when some parts of scope should be omitted or deleted. This type of order consequently reduces contract value. In cases where such omissions have significant impacts, the contractor enjoys the privilege to claim for losses that he or she could suffer if such works had been completed. Omission of work does not form part of the intention to complete any contractual duties either by others parties or contractor. If this occurs then it will amount to an invalid variation order and a clear case of breach termination of contract. In PH and T Holdings v Wraight Ltd it was held that the loss that contractors suffer on omitted works can be claimed as direct losses.

Sequence changes or acceleration order

If the employers see the need to complete worker before the set date of completion due to any unforeseen circumstances, such orders can be given, but this is likely to require the contractor to spend more funds on equipment, supervision, overtime, and labor. This is likely to increase the estimated expenditure on work. The employer has the liberty to instruct works directly or communicate with the contractor to provide a proposal.

Day-works and provisional sum

Variation order is a tool that the parties use to complete work that they include as provisional sum in the BOQ. Likewise, variation is used when there is need to carry out varied work of incidental or minor nature.

Contractor initiated Variations

Acceleration request

The contractor may also wish to complete work earlier than they had agreed. However, the employer is not under any obligation to agree with such arrangements, especially when it is a result of engineering scope and other reasons that are likely to benefit the contractor’s decision; for example, the decision to allocate resources to other projects that should come after the subject project. However, in case the employer agrees to such terms, then the question of allocation of funds to cater for extra expenditure arises[4]. The contractor is otherwise expected to pay for any extra costs such as overtime, equipment, and additional resources including other costs that fall under employer’s or engineer’s scope such as supervision overheads in situations where the employer’s approval does not include further costs. The changes in completion date and additional overheads can only get approval if the parties agree to execute them under the variation order.

Not under original scope, but required works

In situations where according to the contractor, more works that do not form part of contractual obligation should be fulfilled to complete the project, he may contact the employer or engineer. If the two parties reach an agreement after the evaluation, the works are likely to be issued as variation orders. The contractor places himself or herself in a claim situation in cases where the employer contests that the work does not amount to deviation and should form part of scope.

Value Engineering

If the contractor offers a proposal that is likely to benefit the employer by means of improving efficiency or overheads that relate to operation and maintenance of work, and the value of engineering proposal meets the approval of the engineer, the contractor has the right to claim 50% of the savings[5]. The change order process should be followed to give approval to such procedure, and this plays the significant role of decreasing the effective or total value of the contract.

Other types of variations

Lump-sum versus Re-measured contracts

In re-measured agreements, real quantities should be measured after the completion of the project and be paid for in accordance with the set rates of BOQ. A variation order is sometimes used to reflect quantity changes and to facilitate payment. In such a scenario, the employer bears the quantity risk and the contractor should be convinced that his rates are reasonable. A lump-sum contract on the contrary, does not have room for measurement, and the contractor bears the burden of risk quantity. Any oversight or irregularities in the BOQ that relate to quantity do not amount to any ground for adjusting the value of the contract. FIDIC Red book is an example of a re-measurement contract but with minor customization, it is possible to convert it into a lump-sum contract[6].

Result of force majeure

According to clause 19.4, the contractor is entitled to extra costs but without any profits, and does not form part of the subject to any variation process. This situation is controversial, as the contractor may dispute it; however, there is need to respect the intention of the parties, especially if the contract states so.

Technical errors in contract documentation or design

The engineer or either of the parties to the contract pursues the variation order to mitigate the error and correct technical details when they note such errors.

Others

Other alteration claims include the following: costs of paying for defects that other people have caused (clause 11.2), suspension that the parties consider as an omission (clause 8.11), additional tests (clause 7.4), extra samples (clause 7.2), unforeseeable physical state of affairs (clause 4.12), and unforeseeable cooperation costs clause 4.8)[7].

Payment and valuation for variations

In situations where the contract provides for variations, it is also likely to offer mechanism for settling such alterations. Payment for the works should be included in the interim payment application, especially after the contractor has executed the procedures in the alteration order. In a situation of accepted variation or formal instruction, no order is issued to perform extra duties, and in case the contractor chooses to complete such work willingly, he has not right to demand for any payment. Clause 13.3 of Red book states that all variations should be evaluated according to clause 12. In case the changed work is same in nature, and is to be executed under the same conditions as those set in the BOQ, then the BOQ’s rates shall apply. If such an item is not obtainable in bill for the changed works then a different price or rate is derived from relevant pricing with right modifications or from fair cost of work that include realistic profit. For the purposes of provisional payment qualifications, the engineer can use provisional rate until the parties settle on an agreement[8]. The contractor has the right to challenge the decision by an engineer to fix the rates unilaterally. In GEC Alstom Combined Cycles Limited versus Henry Boot Construction, it was held that variations or changes do not have to be priced fairly. However, the pricing should be set in accordance with the agreed contract rates and terms even in situations where bill rates were not favorable to one of the involved parties.

Completion Time

Usually, the change order considers related costs and the extra time that the parties require to ensure that the variation works. If a delay that is attributable to variation occurs, the contractor is entitled to claim for EoT according to sub-clauses 20.1 and 8.4. Sub-clause 3.1 states that the engineer does not have the privilege to accept the revised completion date unless the employer makes an approval of such dates. The engineer should evaluate the change according to the provisions of clause 12 and consequently, the contractor has the obligation to cater for extra time or cost, no time bar relates to overhead adjustments or reasonable profit.

Consequences of Variations

Variations are major sources of conflicts or disputes in construction projects. The following claims are likely to arise from variations:

1. Change in additional works and sequence have made bill charges inappropriate, and this calls for rerating of an exercise.
2. The effect of change on work completion time maybe significant, and this forms a common ground for disputes, as it is an area that is difficult to assess in situations of simultaneous delays[9].
3. When parties to a contract perform work in accordance with the variation order, at times, it involves disruption work that is not varied thereby leading to EOT situation. This forms a difficult area to assess.
4. Quantum meruit claims are made when the contractor shows dissatisfaction with alteration in price of the contract because of variation.

Conclusion

FIDIC 1999 Red book showcases maturity when it comes to mature contractual obligations, but just like any form of contract, it does not form part of complete guide when exercising its obligations and rights. Additionally, some provisions such the variation one are not in black and white terms, and should have a back up of assessment of specific details of the situation before reaching an agreement.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bibliography

Ashworth A, Contractual Procedures in the Construction Industry (Pearson/Prentice Hall, 2006).

Besaiso H, Comparing the Suitability of FIDIC and NEC Conditions of Contract in Palestine (N.P, 2012)

Boswell P, Changes to the FIDIC® Construction Contract General Conditions (PGB, 2008).

Buni N, The FIDIC Forms of Contract (John Wiley & Sons, 2013).

Cameron CMS, Annual review of English Construction law developments (McKenna LLP, May 2015)

Construction Specifications Institute, The Construction Specifier, Volume 14, Issues 1-7 (Construction Specifications Institute, 1961).

FRICS C, Extensions of Time (OUP, 2015)

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Glover J, FIDIC an overview: the latest developments, comparisons, claims and a look into the future (Fenwick Elliot, 2008).

[1] Cameron CMS, Annual review of English Construction law developments (McKenna LLP, May 2015)

[2] FRICS Christopher, Extensions of Time (OUP, 2015)

[3] Besaiso Haytham, Comparing the Suitability of FIDIC and NEC Conditions of Contract in Palestine (N.P, 2012)

[4] Aktuğ Fatma, Comparison Of Fidic Conditions Of Contract (N.P, 2012)

[5] Glover Jeremy, FIDIC an overview: the latest developments, comparisons, claims and a look into the future (Fenwick Elliot, 2008).

[6] Construction Specifications Institute, The Construction Specifier, Volume 14, Issues 1-7 (Construction Specifications Institute, 1961).

[7] Boswell Peter, Changes to the FIDIC® Construction Contract General Conditions (PGB, 2008)

[8] Glover Jeremy, FIDIC an overview: the latest developments, comparisons, claims and a look into the future (Fenwick Elliot, 2008).

[9] Boswell Peter, Changes to the FIDIC® Construction Contract General Conditions (PGB, 2008)