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Variations at the contractor’s risk

In the first post of this series on variations, I looked at the issues that needed to be considered when assessing whether an item was within or outside the scope of works. In particular, the issues that arise when the contractual risk allocation is such that the contractor is responsible for the cost of undertaking work that is additional to the defined scope. For example, where the design put forward by a design and build contractor fails and it has a responsibility to undertake extra works to correct the problem. While such work may be classified as a variation to the originally defined scope, the employer will not expect to pay for it.

This post considers the issues surrounding compensation for such changes.

Simplex Concrete Piles v Borough of St Pancras

Simplex Concrete Piles v Borough of St Pancras (1958) 14 BLR 80, concerned the construction of a nine-storey block of flats in Camden. Simplex, the foundations contractor, was responsible for the design, which used driven piles. It transpired that this design was inadequate, following which the employer’s architect had discussions with Simplex as to what could be done to overcome the problem. Simplex recommended changing the piling design so as to use bored piles instead and the architect wrote instructing this change. Despite the fact that the change had only been required because the design had proved inadequate, Simplex claimed for the additional cost of the bored piles on the basis that a variation had been instructed, which should be valued and paid under the contract. The court found in the contractor’s favour.

The decision has been criticised by commentators and it certainly does not seem fair that a contractor should be paid for a change that has only been necessitated by its own error.

The court’s analysis is consistent with a strict reading of the contract provisions. The contract defined variations so as to include written instructions to change the scope and stipulated that the contractor should be paid for any such instructed variation. It did not state that variations necessitated by the contractor’s default should be treated differently. Under the terms of the contract therefore, payment was due for this change.

More money and more time?

Clearly, the risk that such changes will need to be compensated should be of considerable concern to employers. While the case concerned the right to additional payment, the same logic would equally apply to a contractor’s entitlement to additional time in respect of such variations. After all, an instructed variation can result in two forms of compensation under a construction contract: extra money and an extension of time. If a contractor can be entitled to additional payment for extra work then it can equally be entitled to additional time.

A contract can, of course, exclude an entitlement to additional money and time in the event that the variation is only necessitated by the contractor’s default; see for example NEC3, clause 61.4. But many contracts do not include such express exclusions.

Variations are often instructed because of a complex combination of reasons. While there may be concerns about the sufficiency of the design, a change will often allow the employer to improve the value of the end product being delivered. For example, a variation that enhances the foundations of a residential tower may allow the superstructure to be expanded. An enhanced end product will, of course, directly benefit the employer. There may therefore be a disagreement as to why a change has been instructed and who benefits from the alteration. Equally, there may be differences as to whether a design change is required at all. Such questions concerning the integrity of the design will often relate to the risk of future failure, which will be difficult to predict with any degree of certainty. A variation mechanism that makes no distinction between different types of variation, irrespective of the reason it needed to be instructed, avoids the need to investigate and analyse such complex issues.

Design driven changes

The “Simplex problem” is typically avoided by ensuring that the compensation (money and time) that is due for a variation is pre-agreed by the parties in advance of it being formally instructed. Indeed, the variations mechanism contained in most design and build contracts will typically include a procedure that provides for such pre-agreement of compensation.

This is because the nature of such design driven changes is more complex. The employer will want to ensure that a design and build contractor takes responsibility for finding a revised design solution, as occurred in Simplex. There may be a number of design solutions, each of which may involve compromises in relation to the performance and appearance of the end product. These design solutions may also vary in terms of cost and the impact on the programme. Therefore, a design driven change will often need to involve a dialogue with the employer as to its preferences.

Therefore, the employer will normally be on notice as to the cost and time implications of such changes and may instruct on the basis that it is not responsible for either, if this is appropriate.

If the variation is instructed without such a proviso and the contractor seeks payment in reliance on Simplex, then the employer may be able to defeat the claim on the basis of how such a variation is valued.

It depends, of course, on the particular valuation provisions and whether they give the contract administrator the flexibility to ensure a fair outcome is achieved. Take, for example, the JCT Standard Building Contract, 2011 edition which contains lengthy provisions for the contract rates and prices to be used for the valuation of variations (at clauses 5.6 – 5.9).

However, clause 5.10.1 gives the contract administrator a certain degree of latitude as it states that

“…to the extent that the valuation of any work or liabilities directly associated with a Variation cannot be reasonably effected in the Valuation by the application of clauses 5.6 to 5.9, a fair valuation shall be made.”

Where the contractor would be liable for the failure of the design, unless a variation was implemented, then this provision arguably allows that to be taken into account in seeking to make a fair valuation. Therefore, even if the instructed change is a variation, this does not mean that it cannot be properly valued at £nil in accordance with the contract valuation provisions.

Is the change a variation under the contract?

The final possibility worth considering is that the change does not fall to be treated as a variation under the contract at all. The employer may consent to the contractor making the change without issuing an instruction in accordance with the contract formalities. Only verbal consent may be given, or the written consent may specify that it is not to be treated as a contract instruction. Such informal consent to the change will mean that the contractor is permitted to depart from the contract scope as a concession. In implementing the change the contractor will not be in breach, as would otherwise be the case where the contractor departs from the scope without approval. But since a contract variation instruction has not been issued, the usual compensation (money and time) that is triggered as a result of such an instruction does not flow.

But care needs to be taken by employers when considering what type of communication can safely be treated as an informal approval rather than being construed as a variation instruction. For example, a contractor may be able to issue a CVI to confirm a verbal instruction. Equally, an email written months after a change was implemented may be treated as a valid instruction.

Next time

The next post in this series will consider the form that variation instructions may take and the parties’ position if no instruction is validly issued.

Holman Fenwick Willan LLP Michael Sergeant

One thought on “Variations at the contractor’s risk

  1. Hi Michael

    This is a very-well written and informative piece.

    Is it a correct assumption that the conclusion reached as to whether “a change is a variation” depends on whether the contract in question has a non-variation clause. This clause would require variations to be writing.

    Accordingly, a verbal instruction would naturally fall outside the ambit of a variation/contract instruction ?

    Looking forward to your views.

    Many thanks.

    Yours,
    khaya

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