Valuing change

Valuing change

In a construction contract change can come from many different sources, such as modifications to the design of the works, changes in the standard of the materials and/or changes to the conditions under which the works are to be provided. 

The source of a change will determine how the contract treats each one. Change can arise from a source for which the employer or contractor carries the risk. Standard construction contracts set out detailed procedures for dealing with change that arise from an employer’s risk source. These changes are most often referred to as a variation or compensation event.

Contractor-driven change only needs a contractual process if it requires a change to the specified works and/or a change to a constraint under which those works are to be provided. For example, a change voluntarily taken by the contractor in the method he or she adopts to complete the works is not a variation unless it is imposed on the contractor by an employer’s risk change.

The employer can impose some control over changes that are his or her risks and make conscious decisions before choosing to make such changes. Examples include an instruction to introduce a change in scope or a constraint imposed on the contractor, such as the specified timing or sequence of the works. Other risks are uncontrollable, like the weather, inflation and changes in the law. The contract can allocate these uncontrollable risks to any of the parties but more commonly they are employer’s risks.

The different standard forms of contract handle the valuation of employer’s risk change differently. Forms such as the NEC3 use a process of assessment that aims to value variations at the time they arise, or even in advance using a forecast, often in the form of a contractor’s quotation. Forms such as FIDIC and JCT allow for variations to be valued retrospectively.

The processes associated with variations or compensation events included in these standard forms all aim to ensure the affected parties are treated fairly and the balance of commercial risk between the parties is maintained as far as possible.

This section is maintained by Paul Birch of Palbro Consulting Ltd.