Beware of Variations in Construction Contracts

“The dispute [was], in essence, whether the plaintiff contracted to execute precisely the work described in the site plan and other documents, or whether the plaintiff contracted to produce a result”. (Perum Building and Construction Pty Ltd v Tallenford Pty Ltd [2007] WASCA 245 (Supreme Court of Western Australia).

Variations in construction and engineering contracts can lead to financial loss if the provisions dealing with them are not properly negotiated and documented at the outset or if not complied with throughout the term of the contract.

Do not fall asleep at the negotiating table

One of the main areas in which contractors or engineers get caught on variations arises out of a failure to scope and price the project accurately at the tender stage. In addition, the failure to negotiate an appropriate variations regime and / or careless contract administration in respect of variations can have sudden and severe adverse financial consequences. This applies across the board whether in commercial, industrial, retail or residential projects (and in the latter, there is residential construction legislation that makes non-compliance with a variations regime particularly unsavoury).

The expression “variation” commonly is used in contract documentation and project administration to identify an alteration, whether by an addition or omission, to the work that is required by the contract documents to be performed. Variations changing the design or the specifications usually have a time impact and a cost impact. It is for this reason that the plans and specifications should be prepared with great care and precision. The less ambiguity in terms of design documentation, the lower the potential for variations (or at least disputation).

The more sophisticated industry standard contracts allow a superintendent or an architect the power to approve, value and certify variations, however that of itself does not always prevent disputation. Many, although not all, of the industry standard form contracts have an inherent bias towards one party or the other (whether developer, owner or principal on the one side or contractor / engineer on the other side) as regards the variations regime. Admittedly, perhaps a handful of the standard forms that now supersede their respective predecessors have gone some way to remedying this but by no means entirely. The fact that there tends to be an industry lag in terms of taking up of new standard forms also does not assist this process.

The numerous Australian Standards contracts, ABIC / Australian Building Industry Contracts, Property Council of Australia contracts or the major domestic building standard forms published by the dominant trade associations in those sectors each have their own variations regimes. In practical terms, the claiming, scoping, pricing and certification of variations to construction works in many standard form contracts (or even “accepted amended versions” as licensed to the end users) always require project-specific amendment so as to ensure that one party does not end up “under the thumb” of the other party where variations are concerned.

Variations and risk allocation

These are just some of the aspects of risk allocation that need to be dealt with “front-end” before a contract is executed:

• who may request and / or direct variations;

• increasing, decreasing or omitting parts of the works;

• changing the character or quality of any material or work;

• changing the levels, lines, positions or dimensions of any part of the work;

• executing additional work;

• the extent to which the contractor or engineer is bound to execute a variation only as long as it is within the general scope of the contract;

• the process for notifying proposed variations and for managing adjustments to the construction program;

• whether the variation still has to be performed upon direction even if the price has not yet been determined or agreed at the time of the direction (which some contracts allow);

• whether there can be variations for the convenience of the contractor or engineer, or for the principal / developer;

• the need to draft step-by-step processes for the fair valuation of variations. For example, specific rates or prices; rates or prices in a priced bill of quantities or a schedule of rates;

• the power of a superintendent or architect unilaterally to decide a reasonable price;

• if the contractor or engineer incurs delay or disruption costs as a result, whether the valuation will allow a reasonable amount for overheads , profit or loss of profit;

• whether there is to be a “day work” regime as a supplement to other pricing measures;

• a review of the contract to ensure consistency and workability with the variations regime. (For example, latent site conditions, changes in legislative requirements, the impact of claim bars, time bars and the final claim / final certificate provisions);

• whether the tender documents and / or a bill of quantities used to generate the contract price are to be incorporated as contract documents, the order of precedence or importance to be given to them in the case of ambiguity or discrepancies and similar considerations;

• if a bill of quantities is incorporated, there should be provisions for consequential adjustments to the contract sum where the actual quantities differ from those specified in the bill.

The project delivery model may affect significantly the type of risk allocation for variations. For example, constructing to a fully documented design prepared by engineers and architects engaged by the principal / developer obviously is quite different from assuming obligations under a design and construct contract or an engineering, procurement and construction contract. Different considerations also would apply if there is a cost-plus type contract (a riskier contract for a developer / principal to enter and arguably a better contract for a contractor to enter), a schedule of rates contract or, say, a guaranteed maximum price contract.

The critical point is that courts and arbitrators generally are very reluctant to break free of a contractual variations regime, and the time and expense that a party claiming a variation will have to bear in order to recover disputed variations under the common law, where the contract is inadequate, can be very onerous.

Author: Stuart Miller