How can variations to contracts affect your firm? Dennis Brand explains.
A contract can be varied in one or two ways: either by a variation to the contract terms or the scope of works. The latter is the one that most of us will think of when the term variation is used.
Variation to the contract terms (or conditions) - also referred to as an amendment to the contract - amounts to the same thing. It is a change to the terms that the parties had agreed and accepted when the contract was signed.
To vary the terms and conditions of a contract the same degree of formality is required as was the case with the original contract. It must be in writing, signed by the respective authorised party representatives, and in same form as the original contract eg signed under hand or executed as a deed.
However, the more common understanding and indeed use of the term variation relates to a variation in the scope of works.
A contract will usually, but not always, provide a method that allows a client to make changes to the scope of works. By signing to this the contractor effectively consents to such changes being made.
Some contracts provide a method that allows the contractor to propose changes. If the employer rejects these proposals the contractor has no right of redress.
A more usual form of variation provision that allows the employer to alter the scope of works will also provide that the contractor is compensated for any additional costs and, where appropriate, given an extension of time.
While it is almost a matter of course that when a contractor seeks compensation for extra costs they will also claim an extension of time, it is by no means certain that this will be granted.
There are also circumstances when a contractor may be granted an extension of time but as they have not incurred any additional costs they will receive no financial compensation.
In construction and engineering contracts, the basis of payment to the contractor in respect of any variation will usually be established in the contract eg bill of quantities.
The contractor will ultimately be required to give notice of their intention to claim a variation and provide the employer with supporting documentation within a specified period. Failure to provide such information will result in the application being rejected.
Moreover, some contracts provide for a time limit to provide this information and failure to do so within the specified time may result in rejection of the application, even though it may not have been without merit.
Often a contract will provide for the notice, documentation and supporting information to be submitted to a supervising engineer. Depending on the contract terms the engineer may have authority to agree variations, including the assessment of compensation and time extensions.
Usually in the first instance such authority is subject to the employer's approval. Subsequently, depending on contract terms such as FIDIC, the engineer may need to give a formal decision independently of the parties.
Variations V claims
Variations must not be confused with claims. It is often said that a contractor is claiming a variation, but this actually means that they are making an application for variation. Any claim in respect of the variation only occurs if the employer or engineer rejects the application and the contractor disagrees with the decision and wishes to pursue a claim.
Variation generally occurs as a result of a change made to the scope of works. Changes are made for differing reasons such as design or cost, and can just as easily decrease the scope of works as increase it.
Some contracts contain a provision that triggers a variation in the event of certain quantities being increased or decreased in excess of a fixed percentage; this is not unusual with civil works, where many quantities are forecast.
Another example of variation is where the contractor is required to change the timing, order or sequence of the work.
While they will be carrying out the same work with probably the same quantities, by requiring them to do it at a different time or in a different sequence to that previously agreed may need additional deployment of labour or equipment in order to accommodate the change.
Some forms of variation require the contractor to perform the work in a different way. This may result in a need for more or different equipment and labour skills. In such circumstances variations required by the employer do not usually need the contractor's consent.
Claims by the contractor however usually arise from failure on the part of the employer. It is also possible that the claim may arise because of some outside event that has affected the contractor's work.
Generally the contractor's right to make a claim arises from the General Law, therefore consent or approval of the employer is unnecessary.
Dennis Brand is senior legal advisor with HBG Gateley Wareing. Email: Dbrand@hbj-gw.com. Tel: +971 4 321 9999.
Variations to contracts in brief
- A variation to a contract can involve changes to the contract terms or scope of works.
- The same degree of formality is needed to vary the terms and conditions of a contract as was used with the formation of the original contract. It must be in writing, signed by the respective authorised party representatives, and in same form as the original contract eg signed under hand or executed as a deed.
- A contract will usually provide a method that allows a client to change the scope of works. By signing the contract the contractor effectively consents to such changes being made.
- In construction and engineering contracts, the basis of payment to the contractor in respect of any variation will usually be established in the contract eg bill of quantities.
- Depending on the contract terms a supervising engineer may have the authority to agree variations, including the assessment of compensation and time extensions.
- Variations must not be confused with claims. Any claim in respect of the variation only occurs if the employer or engineer has rejected the application and the contractor disagrees with the decision and wishes to pursue that as a claim.