REUTERS | Carlo Allegri

Claims versus variations

An instructed variation is not the only way a contractor’s work under a project can be altered. Equally it is not the only contractual ground for the contractor to claim additional compensation. Construction contracts will normally also contain provisions allowing the contractor to make “claims”. For example, the site conditions may be different to those contemplated, such as unexpectedly bad ground conditions or restrictions on site access. Alternatively, the employer may fail to fulfil its obligations, such as providing design information or approvals late.

In each of these situations an event (or a discovery relating to the site) that is the employer’s risk under the contract, may result in the contractor undertaking the works in a different way as well as increasing its costs. Such events will typically give rise to a right to extra money (and possibly time) either under a particular clause of the contract or under a general claims provision, such as a loss and expense clause.

A comparison between variations and claims is interesting for a number of reasons, not least because of the possibility that the contractor may have a right, in certain circumstances, to choose which provision it relies upon to claim additional compensation.

Differences between variations and claims

The two provisions operate in different ways because they are incorporated in a contract for different reasons. The variations clause gives the employer the right to order alterations to the scope of works as originally defined. The employer may of course activate its right to vary for many reasons, not least because it simply changes its mind as to what it requires. On the other hand, a claims clause is there to compensate the contractor for unexpected events or discoveries that are agreed under the contract as being the employer’s risk.

As such, there are important differences in the way these two provisions operate:

  • While both provisions typically require formal procedures to be operated, they will normally be activated in different ways. For a contractor to be entitled to compensation for a variation it will normally need to point to a formal instruction that the employer has issued. On the other hand, a contractor’s right to be paid for a claim will normally only be triggered if it had given notice. Such a notification process allows the employer the opportunity to mitigate the impact of such claim events. Notification is not normally required for variations because the employer itself has instigated the change process by giving an instruction and therefore does not need to be informed about the alteration.
  • There are, in broad terms, differences associated with the type of change that the contractor implements. A variation will normally alter the permanent works. On the other hand, a claim will normally involve a change to the manner in which the permanent works are delivered. For example, the discovery of unforeseen ground conditions may result in a change to the plant or equipment that is being used on site. Late design may result in delay that effectively results in the same permanent works being undertaken but over a longer period of time. Exceptional weather may require temporary protection for the works.
  • A third difference relates to the way compensation is valued. Variations are normally assessed by reference to a schedule of rates and prices that is incorporated in the contract. On the other hand, claims are normally compensated by reference to cost because the nature of the change is often more unpredictable and the purpose of such a provision is essentially compensatory.

Choice of remedy

Situations sometimes arise where the nature of the change that the contractor has to implement, and the manner in which it comes about, are such that the contractor is entitled to compensation under both provisions: that is, as a variation and as a claim.

The contractor’s choice of remedy may be influenced by some of the differences identified above. For example, the different methods of calculating quantum may incentivise the contractor to choose to claim under one compensation provision rather than another. Equally, the contractor may be able to demonstrate that the formal procedure has been followed under one of the contract provisions but not the other. For example, the contractor may have an instruction from the employer but has not given a notice, or vice versa.

In order to illustrate the possible overlap between these two types of provision, it is useful to consider a couple of examples from the standard forms.

Change to working space under JCT SBC 2011

If a contractor working under a JCT Standard Building Contract, 2011 Edition (SBC 2011) form of contract has restrictions imposed on its working space by the employer (for example because another contractor needs access), then it would normally expect to seek compensation as loss and expense under clauses 4.23 and 4.24.

However, the SBC 2011 defines variations in such a way as to cover not only changes to the permanent works but also alterations to the manner in which the works are undertaken. Clause 5.1.1 defines variations as including the:

“alteration or modification of the design, quality or quantity of the Works.”

Clause 5.1.2 then goes on to widen the definition to include:

“…the imposition by the Employer of any obligations or restrictions in regard to…access to the site…limitations on working space…limitations of working hours.”

Therefore, under clause 5.1.2 imposing restrictions on working space would amount to a variation. The employer would have to instruct the change in order for the contractor to have a right to payment as a variation. The SBC 2011 is very amenable in this regard and defines a variation instruction widely. The instruction has to be in writing but the employer’s communication can be issued after the event so as to subsequently sanction the variation. Therefore, where the contractor has had its working space impeded then an email from the employer after the event recognising this fact may be sufficient to establish a claim as a variation. The contractor may then be able to choose whether to claim as a variation or loss and expense. A decision that may be dependent on whether the contract rates are more favourable than actual cost.

Ground conditions under FIDIC Red Book

You would normally expect all changes to the permanent works to be sanctioned and paid for via a contract’s variations mechanism. However, it is often the case that ground conditions clauses under civil engineering contracts can provide a wide scope for compensating contractors where the conditions encountered are different from those contemplated. Such clauses will often seek to put the onus on the contractor to proceed with the works once “bad ground” is discovered with an entitlement to be paid for increased costs.

Clause 4.12 of the FIDIC 1999 Red Book provides that where a contractor encounters “Unforeseeable Physical Conditions” it must issue a notice. The contractor is then required to proceed by employing “proper and reasonable measures as are appropriate for the physical conditions”. It is entitled to the additional costs it may expend in doing so.

Suppose a pipe laying contractor was constructing a trench and unexpectedly hit rock. The most appropriate method of proceeding may be to change the line and level of the trench. It would seem as if such a change would amount to a “proper and reasonable measures”, as required under clause 4.12. This would therefore entitle the contractor to be paid for changes to the permanent works under a claims clause, as opposed to the contract’s variations regime. Again, the contractor’s choice of clause may depend on rates under the contract and whether recovery of its costs under clause 4.12 is preferable.

Claims and variations under NEC

The possible overlap between claims and variations is an issue that both parties under a contract should be alive to. The age old problem of the lack of an instruction may be avoided if the contractor can base its entitlement on a claims clause, where no instruction is required.

The NEC forms of contract avoids the potential uncertainty of two parallel payment regimes by using a single “Compensation Event” mechanism. These forms of contract effectively use the same procedures for both instructed changes to the scope of works and employer risk events or site discoveries that trigger extra payment.

Next time

An interesting feature of some of the claims procedures discussed in this post is that a change to the scope may be effectively sanctioned despite the fact that no instruction has been issued. In my next post I will consider another contractual procedure which sanctions change without formal instruction: deemed variations.

Holman Fenwick Willan LLP Michael Sergeant

12 thoughts on “Claims versus variations

  1. Hi Michael, thanks for your blog I enjoyed reading it. Just a quick question:

    For a variation to scope of work, Contractor can use a Variation Order Request (VOR) and Employer can accept by issuing a Variation Order.

    What template/ form is used if a Contractor submits a claim for delay cost, is this often the VOR template?
    If Employer accepts the delay costs would he issue a Variation Order or would that normally another form of formal acceptance?

    Many thanks

  2. The answer depends entirely on what your contract says.

    If a contractor has a claim for delay costs then it will typically need to give notification of the claim. Any claim associated with delay will often have two aspects to it – a claim for an extension of time and a claim for the additional costs. The form of notification and the details that need to be provided will often be dictated by the contract. Certain contracts have strict penalties for failing to comply with the procedures. For example, FIDIC clause 20 has a strict “drop dead” procedure in relation to delay claims notification.

    For many claims the agreement of costs will be outside of the “variation procedure” and will often fall to be dealt with under the “claims procedure” albeit some contracts (e.g. NEC) merge the two procedures so there is no mechanistic distinction between variations and other claims (i.e. they are both Compensation Events).

    Michael

  3. Hi Michael, really interesting read, thank you.

    Under a JCT2005 (rev 2, 2009), under what mechanism would a subcontractor be assured of recovering the costs of dealing with variation requests? i.e. the time taken to understand, price and manage requested changes to the contracted item, whether or not the variation goes ahead?

    Many thanks,

    Andy

  4. Andy

    If the subcontractor was asked to give a quotation then it would be provided via the Schedule 2 mechanism which allows the subcontractor to include in its price the cost of preparing the quotation (Schedule 2/ clause 2.4). If the main contractor decides not to go ahead with the work, on receipt of the quotation, then there is no basis for the subcontractor to claim the wasted costs.

    If the subcontractor feels as if the process is being abused by the main contractor then it may want to apply pressure on the main contractor to pay those wasted costs on an ad hoc basis. One approach of the subcontractor would be to refuse to provide quotations (via clause 5.3.2) therefore forcing the main contractor to use the fall back instruction procedure. This may prove problematic for the main contractor which may be resolved if it agreed to pay for the wasted costs of variations which are quoted for but abandoned.

    Michael

  5. Hi Michael

    Excellent blog; just one query…

    You explain above how Employer instructed alterations to the manner in which the works are undertaken on a JCT Standard Building Contract can be a Variation by virtue of clause 5.1.1.

    I’ve noticed that there is a similar clause (5.1.2) in the JCT D&B Sub-Contract.

    However, depending on how you read the JCT D&B Sub-Contract clause, it might be interpreted that it only applies where arising from an instruction of the Employer under the Main Contract (and therefore not when instigated by the Contractor without an Employer instruction).

    What do you think?

    For example, on an un-amended JCT DBSub is a Contractor’s direction ordering limitations on working space a Variation even where there is no reciprocal instruction up the line from the Employer?

    Thanks

    Paul

    1. Paul

      My reading of 5.1.2 of the JCT DB subcontract is that there needs to be an instruction from the employer. I think the logic is that you would normally expect the main contractor to have much more control over the subcontractors to direct the work/ change the working sequences of subcontractors. Therefore, the subcontractor can only claim this as a variation if the main contractor can claim for a variation up the line against the employer on a back to back basis.

      Michael

  6. What could be the possible claimable variations under an EPC contracts. If employer’s engineer alter the design given by an EPC contract, will it not be considered as the variations for which an EPC contract may claim.

  7. Hi Michael,

    Thanks for the article and a question below which would be great to hear your thoughts on.

    An Engineer’s Instruction under 3.3 of FIDIC does not automatically constitute a request for a proposal or acknowledgement by the Engineer or the Employer of Variation under 13.1.

    If, as the Engineer, I have doubt that an Instruction constitutes a Variation (perhaps based on conflicting statements within documents or lack of clarity within scope) should I simply instruct and then wait for the Contractor to put forward their stance that the Instruction constitutes a Variation?

    If discussions with the Contractor on the works in question have been going on for weeks before the Instruction is issued would the Engineer be within his rights to say that the relevant notice under 20.1 Contractor’s Claims hasn’t been issued and therefore the Employer/Engineer’s ability to propose alternative solutions has been prejudiced?

    Thanks,
    Craig

  8. Hi Michael,

    Great article.

    How would you deal with a change or restriction on fixing to a slab for a stud wall where the developer has added a ceiling which I cannot alter so I cannot fix my stud wall to the slab above. I am now being forced to included steel posts in my wall to support a free standing wall. I had designed and costed for a standard stud wall. The contract is JCT D&B 2011.

  9. Hi Michael,

    Construction contracts normally provide a detailed methodology for evaluation of variations. However, these standard conditions of contracts normally do not provide such a detailed methodology for evaluation of claims.
    How can we deal with this?

    Thanks,
    Sam

  10. Many Thanks for the article and appreciate it.Kindly provide your feedback to a question below.
    Standard conditions of contract for construction contracts normally provide a detailed methodology for evaluation of variations. However, these standard conditions of contracts normally do not provide such a detailed methodology for evaluation of claims.
    For example, Sub-Clause 12.3 (Evaluation) of FIDIC Conditions of Contract for Construction (1999) provides such an evaluation methodology for Variations instructed under Clause 13 (Variations and Adjustments) thereof.
    However, there is no such a methodology for evaluation of claims under Clause 20 (Claims, Disputes and Arbitration).Please explain why

  11. Hello,

    Thanks for this blog. I have a question regarding Employers rights for approval in variations of an EPC or a Turnkey Contract.

    I have a general idea about the subject matter, but I would be obliged if you could refer me to some case laws, or an authoritative document that spells out the rights of an employer in situation of contractual variation.

    Thanks!
    Nikita

Leave a Reply

Your email address will not be published. Required fields are marked *