– The impact of variations, what they are and how to protect yourself
HENRY HATHAWAY writes that at this time, when the cost of procurement is increasing dramatically, it is essential to understand the nature of variations.
One of the topics I get asked most about is variations, and it is such a popular topic that I regularly get asked to address it in seminars.
Although discussed in much more depth at these events, there are a few salient matters that businesses will benefit from knowing. It would appear to be such a straightforward question, but usually, it will constitute an area of dispute between parties on a regular basis.
What are variations?
A variation is an alteration in the scope of works in a construction contract that will include substitutions, additions and omissions. They happen for two main reasons: events occur external to the contract, or there are changes in the design, scope or circumstances.
They can include but are not limited to alterations to the design, quantities, sequence of work and working conditions, but they ought not make any changes to the fundamental nature of the works. In some instances, an employer will attempt to omit work from a scope in order to be carried out by another party. This most likely will cause issues surrounding repudiation of the contract entitling the innocent party to terminate and perhaps seek damages.
Fundamentally, two questions will arise as to whether a claim for a variation is a valid one. Firstly, what works were contained within the initial agreement and does the contract have a mechanism to establish that it is a valid variation? And secondly, what is the correct way to value the change? These two points can be and regularly are misapplied and misunderstood.
What is the impact of variations?
There can be significant issues when the procedures surrounding variations are not considered properly. Changes to the types of products used to complete works can add vast sums to the final costs of the project, and changes to design can lead to delays and more costs. But fundamentally, a party may not, in fact, realise its true position in terms of value or time which also may need to be addressed on account of a change.
Whether or not there is a disagreement over whether an item of work is a variation itself, most commonly, it will be the value of the variation that will cause the issue. Usually, the argument is on the price and effect on the works.
Remember, the rules of valuation, if they apply, are mandatory. For example, JCT sets out a specific mechanism under Section 5. If in similar character to the work set out in the contract bills and carried out in similar conditions, the value of the variation will reflect those same rates as set out in the contract. If the variation is of a similar character but in different conditions or where quantities or quality are further considerations, then the rates and value will include a fair allowance for these differences. If, however, the additional work set out is not of a similar character, the work will be valued at fair rates and prices. This is a sequential approach to how the variation is valued and ought to be taken in order.
What do I need to look out for?
Contactors are expected to be reasonable and competent when pricing work. The client is not bound to pay for things that a reasonable contractor should have understood to be done. One such example will be the risk of ground conditions unless expressly excluded. Standard contracts generally allow the contract administrator to instruct variations to allow the smooth progression and running of the works. However, a party should be very clear as to what is and is not included from the outset, as ambiguous language can often lead to delays, additional costs and disputes.
How can I protect myself?
In general, there must be certainty as to what works are, in fact, included in the agreement to be carried out. If this is not readily available or understood, there will be considerable difficulty in understanding how the variation will exist. This is generally where a dispute will occur. Most likely, a party that finds itself in this position will suffer greatly when seeking to establish its right in the first place. Secondly, it is vital to understand the mechanics of how the variation is to be valued. These are specific rules and can be readily applied.
In these particular times, when the cost of procurement is increasing, and this presents threats to the financial viability of a contract, it is essential to understand the nature of variations. If fluctuations are not allowed or provided for, then a party may easily be bound to what it contracted for, and there is no mechanism to correct a bad bargain.
Henry Hathaway is a solicitor who practises in Ireland, England and Wales and specialises in construction law. He is a qualified civil engineer and spent 12 years working in the industry. He advises on contract formation and provides practical advice when entering construction contracts, and regularly provides training and seminar days to companies to assist knowledge and application in order to assist them in avoiding disputes in construction. If you require further information in relation to contract formation or would like to discuss training and development in this area, contact firstname.lastname@example.org
This is one in a series of articles by Henry Hathaway for Irish Construction News, Click Here to read other articles
Disclaimer: This content is provided for information purposes only and does not constitute legal advice. It is provided to present information to the broader construction industry and provide awareness. Independent legal advice should always be sought prior to application, and no solicitor/client relationship is formed, and no duty of care nor liability arises from any of the contents of this article.