IMPLICATIONS OF DIFFERENT TYPES OF VARIATION UNDER FIDIC 1999 REDBOOK
Table of Contents 1.
INTRODUCTION .................................................................. .............................................................................................................. ............................................ 1
2.
VARIATION CLAUSE AND DEFINITION IN FIDIC............................................................... 1
2.1.
Limitations to the right to vary .................................................................... ....................................................................................... ................... 2
3.
TYPES OF VARIATIONS VARIATIONS ................................................................... .................................................................................................... ................................. 2
3.1.
Engineer or Employer Initiated Changes ............................................................. ........................................................................ ........... 2
3.1.1.
Additional works or modifications modifications ........................................................... ................................................................................. ...................... 2
3.1.2.
Omissions ............................................................... ....................................................................................................................... ........................................................ 3
3.1.3.
Acceleration order or Sequence changes............................................................ ...................................................................... ........... 3
3.1.4.
Provisional sum and Day-works ............................................................... ..................................................................................... ...................... 4
3.2.
Contractor Initiated ............................................................ ........................................................................................................ ............................................ 4
3.2.1.
Acceleration request .......................................................... ...................................................................................................... ............................................ 4
3.2.2.
Not part of original scope, but required works .............................................................. 4
3.2.3.
Value Engineering............................................................... ........................................................................................................... ............................................ 4
3.3.
Other categories categories of Variations Variations .................................................................... ....................................................................................... ................... 5
3.3.1.
Re-measured vs lump-sum contracts ..................................................................... ............................................................................. ........ 5
3.3.2.
Result of Force Majeure ................................................................... ................................................................................................. .............................. 5
3.3.3.
Technical errors in design design or contract documents ......................................................... 5
3.3.4.
Others ...................................................................... ............................................................................................................................. ....................................................... 6
4.
VALUATION AND PAYMENT FOR VARIATIONS VARIATIONS ............................................................... 6
5.
TIME FOR COMPLETION COMPLETION ................................................................... ................................................................................................. .............................. 7
6.
CONSEQUENCES CONSEQUENCES OF VARIATIONS VARIATIONS ............................................................. ................................................................................... ...................... 7
7.
VARIATION PROVISIONS PROVISIONS UNDER UAE CIVIL CODE.......................................................... 8
8.
CONCLUSION .......................................................... .................................................................................................................. ........................................................ 8
Page i of ii May 2013
9.
BIBLIOGRAPHY .............................................................................................................. 10
10.
TABLE OF CASES............................................................................................................ 11
Author : Femeena Mohamed, UAE
[email protected]
Page i of ii May 2013
Most construction standard contracts include clear and precise variation clauses. However, it is still controversial whether acceleration order, out of scope works order, etc. are types of variation orders. Discuss the several types of variation order and their effect on payment and period of performance with particular reference to FIDIC red book 1999.
1.
INTRODUCTION
A variation clause arguably is of dual purpose. Firstly it empowers the employer to make necessary changes to the agreed terms and conditions in a contract and secondly it facilitates an amendment to contract and thereby ensures payment and other rights to the contractor. From the outset it may seem that this arrangement or provision is a straightforward deal, however, when it comes to exercising such rights by employers or contractors the actual problems of interpretation or right and wrong arises.
Variation is a broad topic and when it comes to omission or works and certain additions, it becomes very debatable. In this paper, I will discuss key topics such as types of variations,
valuation and payment for variation, consequences of variation and review provisions for variations under UAE Law.
2.
VARIATION CLAUSE AND DEFINITION IN FIDIC
Most standard forms of contract provide variation clauses. In FIDIC Red book, Variation is defined as any change to the works which is instructed or approved as per provision in clause 13. There is further clarity attempted in cl 13.1, however there is not clear cut answer as to what all may constitute a variation and it can be said that the definition is quite generic and not very helpful1. It may be argued that is left up to the interpretation of parties who are required to reach an agreement whether certain matters constitute a variation after considering the specifics of circumstances. All such instructions may not constitute a variation order, different categories of variations are explained the following sections of this paper.
1
T McGoldrick, FIDIC – The Management of Variations, Construction Law, (2007) 18 6 cons. Law 17
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2.1.
Limitations to the right to vary
A variation may be initiated prior to issue of TOC by means of direction instruction or by requesting a proposal from contractor for proposed additional works and then proceeding with it2. The contractor shall be bound by such instruction; conversely the only ground for non-acceptance of such instruction can be issue related to ready availability of goods required for variation3. Other limitations to vary the contract include the required changes falling outside the scope of contract or variation clause and also the works not being capable of being carried out 4. As held in Beaufort Developments v Gilbert Ash and Others, the changes to the contract shall be within the limits the parties have agreed to in their contract5.
3.
TYPES OF VARIATIONS
There are many types of variations. These may be initiated by the engineer or the contractor or due to requirements arisen due to unforeseen situations. Determining whether certain works constitutes varied works requires in depth understanding of contract and scope of work. Following section describes the types of variations usually encountered under construction contracts based on FIDIC Red Book.
3.1.
Engineer or Employer Initiated Changes
A variations clause allows the employer to unilaterally change elements of contract and this ensures ability of contract to respond to practical needs of the project6. These changes could be any of the following types.
3.1.1.
Additional works or modifications
Additional works or modifications related to scope change, quantity change, regulatory change, quality or specification change, methodology or design change, substitution, changes related to technical innovation, changes to prescribed levels etc. These changes will help adapt to the changing requirement of the project. However, there are limitations to what may constitute a variation in strict contract terms:
2
FIDIC Red Book (1st edn, 1999), Clause 13.1 st FIDIC Red Book (1 edn, 1999), Clause 13.1 4 L C Ren, Variation in Construction contract, Construction Management Guide, http://www.cmguide.org/archives/2634, accessed on 07 May 2013 5 Beaufort Developments (NI) Ltd v. Gilbert-Ash (NI) Ltd and Others [1998] 2 All ER 778, 798j 6 A V Jaeger and G S Hok, FIDIC – A Guide for Practitioner (Springer, Heidelberg 2010) 3
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A fundamental change to the agreed scope of work or agreed methodologies 7
cannot be recognized as a true nature of variation .
3.1.2.
All changes to quantities do not necessary become a variation8.
Omissions
Deletion, de-scoping etc are included in this category. A negative variation order is issued when due to change in requirements, certain parts of scope is required to be deleted or omitted. This type of variation order thus reduces the value of contract. In case such omission is significant in quantity, the contractor may claim for loss of profit had such works been carried out 9 . Omission of work shall not be with intention of completion or works by the employer or by others 10 and if this is the case, it will be a clear case of breach of contract and an invalid variation order 11. Further to Wraight Ltd v P H and T Holdings 12, it seems that loss of profit on omitted works is claimable as direct loss.
3.1.3.
Acceleration order or Sequence changes.
If due to unforeseen requirements, the employer wishes to complete the work prior to the agreed completion date, such instruction may be given. However, this may require the contractor to employ additional resources in terms of labour, supervision, overtime, equipment etc. which may substantially increase the agreed or estimated cost of works. The employer may directly instruct works or request the contractor to provide a proposal
7
S Lofthouse QC, Valuations Under FIDIC and Finding an Acceptable Arbitrator to Determine Disputes, , Atkin Chambers, London 8 FIDIC Red Book (1st edn, 1999), Clause 13.1.a 9 Dr C Jayalath, Understanding the Generality of Variation Clauses and the Variety of Broad Interpretation that Exists under FIDIC Based Contract Modalities in Gulf , Construction Management Guide, http://www.cmguide.org/archives/3215, accessed on 01 May 2015 10 st FIDIC Red Book (1 edn, 1999), Clause 13.1.d 11 Dr C Jayalath, Understanding the Generality of Variation Clauses and the Variety of Broad Interpretation that Exists under FIDIC Based Contract Modalities in Gulf , Construction Management Guide, http://www.cmguide.org/archives/3215, accessed on 01 May 2015 12 Wraight Ltd v P H and T Holdings (1968) 13 BLR 26
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3.1.4.
Provisional sum and Day-works
Variation order is the instrument used to execute the works included as a Provisional sum in a BOQ. Similarly a variation process is used when varied works of minor or incidental nature are required to be carried out in a day-work basis13.
3.2.
Contractor Initiated
3.2.1.
Acceleration request
The contractor may wish to complete the project earlier than planned. When this is out of value engineering scope and for reasons completely attributable to contractors benefit such as allocation of resources to other project after completing the subject project, the employer is not under any obligation to assist with it. However, if the employer wishes to proceed with such acceleration, then the question about allocation of extra cost arises. If the employer ’s approval is excluding any extra cost, the contractor shall bear cost related to additional resources, equipment, overtime etc including extra cost for supervision which is under scope of engineer or employer. Such change in completion date and additional cost approved, if any shall be executed under a variation order.
3.2.2.
Not part of original scope, but required works
If according to the contractor, certain works are required to be carried out but not forming part of contract scope, they may alert the engineer to this point. Upon evaluation, if an agreement is reached these works may be issued as a variation order. However, if the employer contests that it is not a deviation and included in scope, the contractor is placed in a claim position.
3.2.3.
Value Engineering
If the contractor provides a proposal under clause 13.3 14 which will benefit the employer by way of improving efficiency or cost of operating or maintaining the works and if such value engineering proposal meets engineers approvals, the contractor is eligible for 50%
13
FIDIC Red Book , Clause 13.6 FIDIC Red Book , Clause 13.3
14
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of any saving made 15 .
Variation order procedure is followed to give effect to such
proposal and this would decrease the total or effective contract value.
3.3.
Other categories of Variations
3.3.1.
Re-measured vs lump-sum contracts
In a re-measured contract, the actual quantities will be measured at completion and be paid according to the rates in BoQ 16. A variation order may be used to reflect the change in quantities and to enable payment. Here the employer takes the risk for quantities and the contractor has to be satisfied that his rates are adequate. A lump-sum contract on the other hand has no room for measurement and the risk of quantities is absorbed by the contractor. Any anomalies or oversight in the BoQ related to quantity does not constitute grounds for adjusting the contract price 17 .
FIDIC Red book is essentially a re-
measurement contract; however it can be converted to a lump-sum contract with minor customization.
3.3.2.
Result of Force Majeure
In such an event, as per clause 19.4, the contractor is only entitled to additional cost without any profit and is not subject to variation procedure. It is a controversial scenario where the contractor may dispute the situation, however if the contract clearly sets out so, the intention of the parties shall be respected18.
3.3.3.
Technical errors in design or contract documents
When such errors are noted by either party or the engineer, a variation order may be initiated to mitigate the errors and correct the technical details.
15
FIDIC Red Book (1st edn, 1999), Clause 13.2.c 16 A V Jaeger and G S Hok, FIDIC – A Guide for Practitioner (Springer, Heidelberg 2010) page 264 17 Dr C Jayalath, Understanding the Generality of Variation Clauses and the Variety of Broad Interpretation that Exists under FIDIC Based Contract Modalities in Gulf , Construction Management Guide, http://www.cmguide.org/archives/3215, accessed on 01 May 2015 18 Pacific Associates v. Baxter [1990] 1 QB 993 at 1010, confirmed by the House of Lords in White v. Jones [1995] 2 AC 257 in A V Jaeger and G S Hok, FIDIC – A Guide for Practitioner
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3.3.4.
Others
Other variation claims include unforeseeable cost for cooperation (clause 4.8), unforeseeable physical conditions (clause 4.12), additional samples (clause 7.2.b), additional tests (7.4), suspension considered as omission (clause 8.11), cost of remedying defects caused by others (clause 11.2).
4.
VALUATION AND PAYMENT FOR VARIATIONS
When a contract provide for variations, it would also invariably provide mechanism for payment for such variations. After the contractor executes the instruction included in the variation order, payment for these works shall be included in the interim payment applications. In case a formal instruction or approved variation order was not issued to carry out additional work and if the contractor chose to carry out such work at his own discretion, there is no right to payment 19.
Under clause 13.3 of Red book, each variation shall be evaluated in accordance with clause 1220. The BoQ rates shall apply incase the varied work is similar in nature and to be executed under similar circumstances as for work priced in BoQ 21. If a similar item is not available in bill for the varied works, a new rate or price shall be derived from relevant prices with reasonable adjustments or from reasonable cost of work including reasonable profit22. Until a rate is agreed, the engineer shall use a provisional rate for the purposes of interim payment certification23. If the engineer fixes the rates unilaterally, the contractor may challenge such decision citing duress 24.
25
From the decision in Henry Boot Construction Ltd v GEC Alstom Combined Cycles Ltd , it can be regarded that variations do not have to be valued fairly but in accordance with the contract terms and rates agreed even if it meant that bill rates were unduly favourable to one of the parties.
19
A V Jaeger and G S Hok, FIDIC – A Guide for Practitioner (Springer, Heidelberg 2010) FIDIC Red Book , Clause 13.3 21 Dr C Jayalath, Understanding the Generality of Variation Clauses and the Variety of Broad Interpretation that Exists under FIDIC Based Contract Modalities in Gulf , Construction Management Guide, http://www.cmguide.org/archives/3215, accessed on 01 May 2015 22 FIDIC Red Book , 12.3 23 FIDIC Red Book , 12.3 24 Dr C Jayalath, Understanding the Generality of Variation Clauses and the Variety of Broad Interpretation that Exists under FIDIC Based Contract Modalities in Gulf , Construction Management Guide, http://www.cmguide.org/archives/3215, accessed on 01 May 2013 25 Humphrey Lloyd QC at [1999] BLR 123 and that of the Court of Appeal at (2000) 69 Con LR 27. 20
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5.
TIME FOR COMPLETION
Typically the variation order takes into account the extra time and related cost required for variation works. If a delay occurs which is attributable to the variation, the contractor may claim for EoT in accordance with sub-clauses 8.4 and 20.1 26. In line with sub-clause 3.1, the engineer does not have the right to agree to revised completion date unless approved by the employer.
The engineer is required to evaluate the variation in
accordance with clause 12 and as a result, if the contractor incurs additional cost or time, there is no time bar related to adjustments to costs and reasonable profit 27.
6.
CONSEQUENCES OF VARIATIONS
Variations are considered as a major source of disputes or conflict in construction projects28. Following common claims are encountered as a result of variations: a. Change in sequence and additional works have made the bill rates irrelevant and that an exercise for re-rating is demanded29. b. The effect of variations on time for completions of works may be substantial. This is a common area of dispute and is a difficult area to assess when it comes to concurrent delays c. When works as per variation order is carried out, sometime it involves disruption work which is not varied and it leads to EOT situation. This becomes a very tough area to evaluate30. d. Quantum meriut claims are often made when the contractor is not satisfied with the overall change in contract price as a result of variation. e. Change in quantities and contract price above certain percentage may require rerating.
Clause 12.3 sets out the different criteria where a new rate or price shall be
appropriate31. There are often disagreements pertaining to how these unit rates are evaluated, which ends up in disputes.
26
FIDIC Red Book , Clauses 8.4 and 201. A V Jaeger and G S Hok, FIDIC – A Guide for Practitioner (Springer, Heidelberg 2010), p 275 28 Dr C Jayalath, Understanding the Generality of Variation Clauses and the Variety of Broad Interpretation that Exists under FIDIC Based Contract Modalities in Gulf , Construction Management Guide, http://www.cmguide.org/archives/3215, accessed on 01 May 2013 29 P Newman, Do variations have to be valued fairly?, Construction Law Journal (2000)11 8 Cons.Law 27 30 R Knowles, Change Order,s IC contractual matters – (2001), page 18 31 FIDIC Red Book , Clause 12.3 27
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7.
VARIATION PROVISIONS UNDER UAE CIVIL CODE
Variation provisions for muqawala contracts are covered under articles 886 and 887 of UAE Civil Code and it seems there are no principle conflicts between these provisions and those under Red book.
According to article 886(1), if the expected quantities
required tocarry out the works increases substantially the contractor is required to immediately notify the employer failing which he shall lose his rights for additional cost for excess quantities over and above the value indicated in itemized list 32.
As per article 887(2), any variation or addition executed with permission of the employer is subject to terms agreed in the contracts33. In case value for such works was not agreed in advance, it can be argued that provisions under clauses 885 and 888 of CTC shall apply and the contractor shall be entitled for a fair remuneration in accordance with the market price or custom.
Two cases at Dubai Court of Cassation, namely 44/2008 34 and 139/2009 35, concluded that in absence of an agreed price the contractor is eligible for fair remuneration for additional work and the contractor should be compensated for works completed, respectively. This was in accordance with 886(1) and 887(2) or UAE Civil code.
8.
CONCLUSION
Red book is a mature standard contract. However as with any other standard form of contract, a contract cannot assume position of a comprehensive guide in exercising the rights and obligations under it. Certain provisions like that of variations cannot be black & white terms and should be backed up by evaluating the particular details of the situations before a consensus or an assessment can be made. This is applicable whether it be type of variation or payment and completion time for these works.
Since construction atmosphere is considered very dynamic, these matters can get very controversial or dispute prone in nature. From an overall point of view, one can conclude 32
Article 886(1) of UAE Civil Code Article 887(2) of UAE Civil Code 34 Dubai Court of Cassation, 138/2009 35 Dubai Court of Cassation, 44/2008 33
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that FIDIC Red Book provides balanced provisions with regards to variations and that it does not seem to be biased towards one of the parties. It is up to the parties to bring full clarity into the contract by ensuring other critical elements of contract such BoQ, specifications, drawings etc are robust and free from any conflicting information.
Author : Femeena Mohamed, UAE
[email protected]
May 2013
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9.
BIBLIOGRAPHY
Books
FIDIC Red Book (1st edn, 1999) Jaeger A V and Hok G S, FIDIC – A Guide for Practitioner (Springer, Heidelberg 2010)
Reports and Articles
Dr Jayalath C, Understanding the Generality of Variation Clauses and the Variety of Broad Interpretation that Exists under FIDIC Based Contract Modalities in Gulf , Construction Management Guide, http://www.cmguide.org/archives/3215, accessed on 01 May 2015 Knowles R, Change Order,s IC contractual matters – (2001), page 18 Lofthouse S QC, Valuations Under FIDIC and Finding an Acceptable Arbitrator to Determine Disputes, , Atkin Chambers, London McGoldrick T , FIDIC – The Management of Variations, Construction Law, (2007) 18 6 cons. Law 17 Newman P, Do variations have to be valued fairly?, Construction Law Journal (2000)11 8 Cons.Law 27 Ren L C, Variation in Construction contract, Construction Management Guide, http://www.cmguide.org/archives/2634, accessed on 07 May 2013
U.A.E Civil Laws U.A.E Civil Transaction Code, Law # 5 of 1985
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10.
TABLE OF CASES
138/2009, Dubai Court of Cassation 44/2008, Dubai Court of Cassation Beaufort Developments (NI) Ltd v. Gilbert-Ash (NI) Ltd and Others [1998] 2 All ER 778, 798j Humphrey Lloyd QC at [1999] BLR 123 and that of the Court of Appeal at (2000) 69 Con LR 27. Pacific Associates v. Baxter [1990] 1 QB 993 at 1010 White v. Jones [1995] 2 AC 257 Wraight Ltd v P H and T Holdings (1968) 13 BLR 26
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