Star Rates

Most JCT- and FIDIC-based contracts set out ‘rules’ for valuing variations. FIDIC Fourth Edition (1987) Clause 51.1 provides six scenarios where the contractor is entitled to recover additional costs arising from instructed variations, provided that the variation has not resulted from contractor default.

FIDIC Clause 52.1 states that the engineer should value variations in the following order:

a) At the rates set out in the contract if, in the opinion of the engineer, the same shall be applicable;
b) If the contract does not contain any rates or prices applicable to the varied work, the rates and prices in the contract shall be used as the basis for valuation so far as may be reasonable;
c) Failing which, after due consultation by the engineer with the employer and contractor, suitable rates or prices shall be agreed upon between the engineer and the contractor;
d) In the event of any disagreement, the engineer shall fix such rates or prices as are, in his opinion, appropriate, and shall notify the contractor accordingly, with a copy to the employer.

How do you value variations? Many people have conjured up different and often ‘creative’ ways. One approach is the use of new rates, or ‘Star Rates’. Star Rates tend to be used where the rates in the contract cannot be applied.

An example is where an employer requires a technical room. Prior to the works, the contractor is instructed to provide additional electrical outlets, thus complicating the MEP design.

The actual works performed are more complex than envisaged at tender, resulting in increased costs. In such a case, contract rates similar to the work undertaken may be used as the basis to determine a Star Rate to value such work. Alternatively, in the absence of similar rates, suitable rates may be agreed upon by the engineer and contractor.

The difficulty to determine what is often referenced in the contract as a ‘fair rate’ often involves analysis of quotations, market prices and trends. What is meant by ‘similar conditions’? How do you calculate Star Rates? Should they include overhead and profit?

Star Rates can be more expensive for the employer if they are based on cost-plus-profit rather than competitively-tendered contract rates. Not surprisingly, engineers tend to be dismissive of Star Rates, as these move away from the original rates.

While there is no guaranteed way around this, if the engineer can be convinced that contract rates are not applicable (in whole or in part) then Star Rates will be applicable – i.e. rates which are not contract rates, but may be derived in part from some element of the same.

In order to successfully negotiate the use of Star Rates, a party must demonstrate to the engineer the inapplicability of contract rates. This might be justified where the works are a different size, quantity, nature and/or scope to that stated in the contract in the case of Weldon Plant V.

Commission for New Towns [2000] TCC BLR496, the issue was the meaning of ‘fair valuation’ of variations under ICE 6th Edition Clause 52(1).

In particular, whether a contractor was required to prove loss of opportunity as a result of the variation before being entitled to be paid overhead and profit.

The arbitrator decided that Weldon was to be paid an amount which would leave him in the same financial situation he would have been in if the instruction had not been issued. He was entitled to costs, but not overheads and profit.

However, on appeal, the Court held that fair valuation would ‘ordinarily’ be based on the reasonable cost of carrying out the work and that this would include labour, plant, materials, the cost of overheads and profit, otherwise it would not be a fair valuation under the Contract.

Although this case falls under English legal jurisdiction and is not legally binding in the Middle East, the principles that arise from the case are persuasive in addressing the evaluation of Star Rates in this region.

Edward Ryan is Senior Consultant at Hill Claims Group.