Contract variations: clear terms from the outset

Matters of principle

19 June 2015

Variations in contracts can take time and money to resolve, so make sure the terms are clear at the outset, cautions Michael Sergeant

At the end of a construction project the parties will often have a long list of unresolved variations. Many of the items will involve disagreements as to how changes are valued. The amount in dispute will normally be of comparatively low value and can normally be resolved through negotiation.

More problematic are the variations where there is a difference in principle as to whether the item of work is a change or not. Because the whole basis of entitlement is disputed, the sum of money involved will typically be much greater.

These 'in principle' disputes will normally divide the parties for one of 2 reasons. First, there may be disagreement on whether the item of work is extra or within the contract scope. Second, it may be accepted that the work is extra but the employer may deny that they ordered the work and therefore have no obligation to pay.

Deciding extras

It is surprising how many construction disputes are essentially disagreements about what the contractor was supposed to build and therefore whether an item of work is extra. In other industries, such disagreements are much less common. This is because of a number of factors that distinguish construction contracts from those for the sale of 'normal' products: a construction project is a 'one off' in the sense that it is unique to the land on which it is constructed, it is technically complex and has yet to be built at the point the contract is entered into. These factors contribute to the problems that arise with contradictions within the defined scope.

It is surprising how many construction disputes are essentially disagreements about what the contractor was supposed to build and therefore whether an item of work is extra

A construction contract will describe the works that the contractor must deliver in a series of annexed technical documents, including a specification, drawings, pricing documents and a programme. These documents will have been produced by different teams coming to the project from a range of specialist backgrounds, and will often contain contradictions and gaps. While everyone in the process will seek to minimise or eliminate these discrepancies, it is important to recognise that they are inevitable. If the employer wants to fast track the project, with the financial gains that this will often represent, then more errors of this kind are likely.

It is important, therefore, that a contract contains provisions that allow discrepancies to be resolved. The most common is a priorities clause, which sets out a list identifying which technical document takes precedence over another. Typically, for example, the specification will be given a higher priority than the drawings. Contracts will sometimes contain provisions that give the contract administrator the power to assess which of two competing descriptions should take precedence if there is a contradiction. Incorporating such clauses can reduce disputes later.

Formal order

A construction contract will normally state that the contractor is only entitled to be paid for a variation if the employer has issued a formal order for the work. Such a provision prevents the contractor unilaterally increasing the size of the project, and its price. However, this rule can prove problematic. For example, the contractor may not be able to physically proceed with the work unless a design change is made.

The courts have therefore found a variety of ways around the strict application of this principle to prevent unfair outcomes. For example, where the employer indicates to the contractor that it will get paid for the extra work in the absence of a formal order specified under the contract, then they cannot go back on this representation. In limited situations there may even be a positive duty on the employer to change the scope if the design proves unbuildable.

Disputes as to whether extra work counts as a valid contract variation can involve considerable sums of money. In addition, there are the knock-on costs and liabilities. For example, the question is often at the heart of disputes about project delay. Therefore, the issues concerning the scope of works and formal approvals can be crucial – not only in determining payments due for extra work but also responsibility for project delay and liquidated and ascertained damages.

Michael Sergeant is a Partner at Holman Fenwick Willan and the author of Construction contract variations

Further information

Related competencies include:

This feature is taken from the RICS Building Surveying journal (May/June 2015)