Introduction
Variations are the inevitable aspect of all forms of construction and irrespective of the project type change will always occur. How change is managed and controlled determines the outcome of the project, consequently the majority of construction disputes around the world centre on variations. The evaluation and agreement of variations is a core activity all construction professionals have to understand. This article highlights 6 important issues to consider when reviewing any variation submission from a contractor all of which are applicable to every type of construction project irrespective of location or contract form.
Written Instruction
The vast majority of construction contracts (irrespective of procurement route) envisage variations or changes to the original scope of work and include specific clauses setting out how they are to be evaluated. What all these provisions have in common is that they require the instruction to change the scope of work, to be in a written format. Whilst there is extensive legal precedent establishing that variations can arise from verbal directions, intentions, actions, and implied statements, the fundamental requirement of a contact is for the change to be communicated clearly. Therefore using a written format is the expected medium.
It is this particular aspect, which is one of the major root causes of numerous construction disputes, because the clarity expected from an instruction is lacking. Many clients and consultants feel that by being vague or resisting the issue of formal instructions somehow protects them from increased costs, delays, or claims on a project. This quite simply is not the case. A clear instruction sets out exactly what the contractor has to do, and how it revises the original scope of work. It should also be remembered that an instruction does not have to have any financial or time consequences, but it removes doubt and provides clarity on what the parties expect. Furthermore, it ensures that there is no doubt about the expectations for the finally completed project.
Therefore, all variations must start with a clear written instruction setting out exactly what is to be modified. If this is done then the future evaluation can be carried out successfully. Importantly, if this written instruction does not exist, it is likely no “contractual” variation has been issued and the change should not be evaluated. Hence, the first and most important check is to validate that there really is a contractual change.
Contract Rates
When considering how to evaluate any construction change it is important to refer to the pricing contained in the contract documentation. The rates and prices contained in this document form the basis of the contract sum and the contract usually stipulates that these rates must be applied in the evaluation of variations. In other words, if the variation comprises the addition of 100m3 of concrete, and the contract already has a rate for concrete, the same contract rate must be used for the new work (except in a few extreme situations).
Whilst contractors will attempt to find reasons or ways to avoid using the contract rates, these must be the primary pricing source, unless there are justifiable reasons why the rate is no longer applicable (contractually there are only a limited number of circumstances, which would qualify for abandoning the contract pricing). The contract rates are the basis of the original deal struck between the parties and a variation should not be used as the basis for rewriting this deal. It is worth noting that this rule applies even when the pricing may appear to favour the contractor (i.e. the contract rate is higher than normal).
Dayworks / Time & Materials
The assessment of variations using time and materials is also defined under some forms of contract as being a daywork evaluation. Although many contractors consider this approach to be the fairest method of determining the value of a construction variation (because it is supposed to compensate them for the actual costs incurred), most contracts consider this as being the last of the evaluation methods to be adopted. The use of contract rates and prices must therefore be the primary evaluation approach. Only if the variation involves a completely different type of work, should this time and materials method be considered, and even then with strict rules.
Some contract forms require that a specific direction should be issued permitting the use of “Dayworks” as the evaluation method. Where this instruction is required, there is also an obligation on the contractor and supervision team to record / validate the resources deployed for the instructed work. Without these records and validation, the daywork evaluation should not be accepted.
Although this maybe a clear contractual requirement, the practical reality is that, the records are rarely prepared correctly at the time with the necessary verification, taking place. Furthermore, the formal direction / approval to use dayworks as the evaluation process is rarely stated in the instruction issued. The result is that the consultants carrying out the final evaluation of the variation usually have to accept the information provided on face value. Despite these common failings, it is always worth the effort in trying to establish the validity of the items claimed by referring to actual site diary records made at the time.
Quotations
The submission of quotations as substantiation for a variation assessment is a common approach adopted by many contractors. Whilst these documents are essential supporting information when determining the value of any variation, they have to be carefully checked before being accepted. The following are some of the important checks to be undertaken:
- Ensure the issuing company is approved to perform the proposed work
- Verify if the quotation includes the full scope of work
- Check the exclusions to ensure they are covered elsewhere if necessary
- Check the payment terms – these may not be acceptable and result in an increased price
- Check the time for completion of the works to ensure programme compliance
- Validate if the quotation reflects any trade or commercial discounts
It is also important to recognise that the quotation received for the variation work will typically not be competitively obtained, especially if the supplier or sub-contractor is already performing work on the project. In these cases, it is always beneficial to try to seek alternative quotations to validate the pricing proposed.
Ultimately, just because there is a quotation, it does not mean it has to be accepted blindly. The above checks are what should be regarded as being the minimum due diligence undertaken before any quotation is considered for inclusion in the variation assessment.
Savings & Omissions
One of the most overlooked aspects of any variation assessment is the potential for savings or omissions from the original scope of work. In most cases, construction variations revise work, which was already part of the original scope. This means that something already existed in the contract, but is now being changed. Even when purely additional work is being instructed, there may still have been something originally in the physical location of the new work.
In all cases it is important that the contract information be reviewed to establish clearly what was originally proposed before the change was introduced. An example might be a new sub-station has been introduced, whilst this is a completely new building, the ground it sits upon might have been part of the external landscaping, and in which case, there would be an omission of the original landscaping work.
It is therefore rare for any construction variation to be purely an extra without the omission of some previous work.
Abortive Works
Following on from the above, the most common situation where the original work cannot be omitted would be when the work had already been constructed. In these situations, there would be abortive work (i.e. completed work has to be removed / demolished / altered). Abortive work falls broadly into two categories; work, which has been constructed, and works that, is no longer required.
Where constructed work has to be removed, it is important to establish first, exactly what was there before the instruction was issued. Site records made at the time (referred to as contemporaneous records) are the key to making this determination and reliance on the views / opinions of the contractor should be resisted.
In the case of materials no longer required for the work, as a direct result of the variation, it is important to answer a number of key questions:
- Can the surplus materials be used elsewhere on the project?
- Are the materials actually purchased and on site?
- Are these materials still in good condition?
- Can the materials be returned to the supplier for a refund?
Only if these issues are clarified should the abortive materials be incorporated into the variation assessment.
Conclusion
The valuation of variations on a construction project must be carried out with care and based upon verified information. There are many aspects to consider when determining the value of a variation, but if the whole process is carried out methodically, with each stage being checked and verified systematically, the result will comply with the contractual requirements. Furthermore, any assessment, which is based upon appropriate checks, will be harder to dispute in the future. Although this will not avoid future disputes, it will reduce the areas of difference to only those aspects where there is a genuine disagreement because the justification and basis are clearly presented.
To understand more about the assessment of post contract variations, including how they should be monitored and reported during the construction stage, please see the Practical Guide to Contract Administration – Variations, Cost Reporting & Final Accounts.
Plateau Group 