Practical Law

An employer must be allowed to decide what changes are made to the contract scope and therefore a contract will stipulate that variations are to be expressly instructed. Equally, unexpected difficulties in building the defined works may arise, which means that the scope has to be altered simply in order to complete the project. If the contractor cannot get formal approval for such “necessary” changes then the danger arises that it will have to proceed “at risk”. In other words, the employer may refuse to give a formal instruction, which is the condition precedent to payment under the contract.

One way of avoiding this problem is to provide that when certain specified events occur that necessitate a change to the scope, a variation is deemed to have been automatically triggered, without the need for the employer to give a formal instruction.

Allocating the risk of “necessary” change

The risk that change to the statutory regime may necessitate variations is often treated in this way. For example, under the JCT Standard Building Contract, 2011 Edition (SBC/2011), if there are changes to “Statutory Requirements” after the “Base Date” under the contract, then the contractor must alter the scope of work to comply. The change will be deemed to be a variation for which the contractor is entitled to be paid, even if no formal instruction has been issued. This approach means that the contractor does not have to wait for a formal instruction before implementing the necessary change. It avoids the possibility that the employer refuses to issue the instruction, which can lead to a stand off, with the contractor refusing to proceed.

Such an approach to managing variations is only effective where the change in question needs to be made, rather than something that is optional. After all, if the change is a matter of discretion then it is only right that the employer is given the choice.

What is a necessary change?

But what may be considered a necessary change can be a matter of debate. Consider the problem arising where unforeseeable site conditions mean that the contractor cannot build in accordance with the planned scope. In theory, this could be dealt with under a contract as a “deemed variation” and indeed, this is the approach that is adopted by the commonly used Australian form of contract, AS 4000. Under clause 25 of this contract, the discovery of “latent conditions” (being a certain class of site condition for which the employer takes the risk) will be treated as a deemed variation, entitling the contractor to be paid for the necessary changes to scope.

While the Australian approach of treating changes necessitated by unforeseeable site conditions as deemed variations may seem alien to UK lawyers, all contracts need to grapple with this problem at some level. Many contracts seek to ensure that the contractor is compensated for the additional costs of unforeseeable conditions without a formal instruction needing to be issued, in order to avoid the impasse that may arise in the meantime. For example, under the NEC3 suite of contracts, a contractor is entitled to be paid its additional costs as a “compensation event” without the need for a formal instruction (see NEC Option A, clause 60.1(12)).

Errors in the description of the scope

The “deemed variation” mechanism is not only used to deal with unforeseen events that necessitate change, the concept is also employed to manage the correction of errors in the description of the works. In particular, where the employer mistakenly omitted certain works, such that the contractor’s price needs to be adjusted accordingly.

For example, take the JCT SBC With Quantities, 2011 Edition (SBC/Q 2011), which is a re-measurement contract. The employer is required to prepare a bill of quantities, based on the design shown on the drawings, by reference to the Standard Method of Measurement (or, since January 2013, the New Rules of Measurement ). Situations may arise where items of work that are required to be undertaken (and shown on the drawings) are not included in the bill of quantities. Clause 2.14.1 states that omission of such items will be automatically corrected and will be treated as a variation (clause 2.14.3).

The same approach is taken in relation to errors in the employer’s design. Under the JCT Design and Build, 2011 Edition (DB 2011), if a design error is identified in the Employer’s Requirements (which is not of the class that the contractor was required to identify as part of the tender process) then the Employer’s Requirements are treated as being altered. This is deemed to be a variation that the contractor is paid for complying with.

As with “necessary changes” to the scope arising from events on site, these discrepancies in the description of the work need to be corrected. The process of treating them as deemed variations amounts to a pre-agreed allocation of the risk to the employer and therefore (perhaps not surprisingly) such provisions are often struck out.

Next time

This post has analysed the way in which contract procedures can side step the need for a formal instruction by deeming a variation. This issue can sometimes arise because of uncertainty as to whether or not an instruction has been given.

The next post in this series on variations will consider what form of communication is required for a variation and whether a drawing, email or verbal instruction can, in the right circumstances, be treated as sufficient.