Sunday, June 6, 2010

Variations Clause

This is the most important clause in the contract.

In a contract, a contractor is promised a certain amount of money to perform a certain amount of work. In the absence of an expressed provision for variation in a contract, any instruction issued to modify or alter the original scope of work will entitle the Contractor to end the contract. Subsequently the contractor is no longer bounded by the contract rates and could make the subsequent claims based on ‘quantum meruit’.

Clause 11 of the PAM 2006 Form in general, empowers the Architect to issue instruction ordering a variation without vitiating the contract. PAM06 expressly provides that the instruction has to be in AI format. Clause 2 further stipulates the procedural requirements of the issuance of AI.

What is a valid variation?

In general, work which is incidental to the work already contracted for is within the scope of the Works and is thus not a variation. Other phrase used is “indispensable and/or necessary work”.

The principal elements of a valid variation are:

1. Must be in a form of instruction (AI)

2. Contractual Empowerment to the person issuing the instruction

3. The instruction must effect change to the works; and

4. The instruction is not intended to rectify negligence, omission, default and/or breach of contract by the Contractor

Clause 11.1 further stipulates the scope of variations allowed in the contract.

Architects should be mindful not to instruct variation beyond their contractual ambit, as such act could be regarded as ‘ultra vires’ and could expose the architect directly liable under tort. For instance, the architect does not have the right to issue instructions regarding safety of the works. If such instruction calls for a variation to the contractual provision, the contractor cannot look for the employer for compensation.

It should also be noted that any error in pricing or rate by the contractor is not a valid variation and thus may not be adjusted irrespective of the quantities involved after the execution of the contract.

Can An Architect Issue a Variation After CPC?

Instructions in general can be issued by the Architect right up to the issuance of Final Certificate where the Architect becomes ‘functus officio’. However, instructions that effect a variation to the contract should not be issued after CPC accept for compliance to requirements by Appropriate Authority and Service Provider as expressly provided in Clause 11.3 of PAM 2006

Valuation of Variation

The contractor is entitled to additional cost implicated by a valid variation. Clause 11.6 further stipulates the method of valuation of variation.

The contract rate is applicable for Variation items with ‘similar character’ and ‘similar conditions’ to the existing contract items. The word “similar” means “of a like nature” and does not mean have to be “identical”.

Similar character of variation work usually refers to the similar item of work already described and has a rate/price in the contract BQ. e.g. concrete columns/beams, brickwalls, etc. Variation work not of similar character e.g. installation of floor and ceiling tiles. Similar condition of variation work usually refer to the physical conditions, timing and extent of the variation work which is similar to that described and allowed in the contract BQ. Variation work not of similar condition, which may be affected by the three factors e.g. addition of a concrete beam after completion of all concrete works in the project.

The contractor is entitled to caim for additional costs on a fair and/or reasonable basis, commonly known as ‘quantum meruit’ if instructed to carry out additional works on an existing contract as a variation to the contract where:

1. the existing contract prices/rates do not cater for the said variation works;
2. the nature of the works is not with ‘similar character’ and ‘similar conditions’; or
3. the nature of the works is with ‘similar character’ and ‘similar conditions’but with significant change in quantity (new provision in PAM06 clause 11.6(a))

A QS/Architect may value a fair market rate or include a fair allowance on the contract rate/price to take into consideration the circumstances prevailing at the time of execution of the variation work.

There is no provision for submission of quotation or price agreement by the contractor prior to carrying out any variation works in PAM06. However, in good practice and to avoid unnecessary dispute or problem arising, it is prudent that the Contractor submit a quotation upon SO’s instruction or prior to carrying out the variation works.

Notice Requirement

Clause 11.7 (a) & (b) of PAM2006 expressly provide that a written notice of the contractor's intention to claim and their susequent submission of the supporting document within the stipulated time, is a condition precedent to contractor’s claim for additional expenses caused buy a Variation. If the contractor fail to comply with the formalities stipulated in the contract, he cannot insist either under the contract or other contractual promise to be paid a reasonable sum, even though the employer derived some benefit from the work varied: Taverner & Co. Ltd. V Glamorgan County Council.

1 comment:

  1. The key difference in the contract with BQ is that the Contract Bills form the basis for quantity of the works. The BQ carry the risk of error in quantities, hence, any error or inaccuracy in the bills of quantities is at the risk of the employer in that it may constitute a ‘variation’: see Patman & Fotheringham Ltd. v Pilditch (1904). Since the risk of error of quantity is born by the employer, any discrepancy between BQ quantity and as-built quantity would entitle the contractor for a Variation, see PAM06 Clause 12.2

    Interestingly to note, the PWD form 203A(83) had attempted to depart from this understanding. Clause 25(b) expressly provides that the quantities in the BQ are conclusive, unless provided therein as provisional. Here, the expressed provision tried to transfer the risk to the contractor where the as-built is in access of the BQ quantity. The contractor could still seek recourse under the common law for breach of warranty on the part of the employer: see Re Ford & Co Ltd v Bemrose & Sons (1902). To address the criticism raised, Clause 26(a) had been revised (see addendum 6) where adjustment to the contract sum was allowed in case of error in description in quantity.

    So what so ‘lump sum’ about the contract with BQ and why do we need to set any priority among the contract documents?

    The Contractor must not rely solely on the descriptions in the BQ in coming up with the CONTRACT RATES. The BQ may not provide an exhaustive description of the works but should be read as mutually explanatory with other contract documents, i.e. specifications and contract drawings. Hence the contractor should thoroughly check all the relevant contract documents according to the priority set in clause 3.1 in coming up with the contract rates.