Variations: How do you price them when the tender price has been adjusted?
I was recently asked this question about variations:
We agreed the Tender Price during contract negotiations. How do we apply an adjustment to the tender price when pricing variations?
This often causes contention and the following is a typical scenario:
- The contractor submits a tender accompanied by a priced bill of quantities for the tender price.
- The Employer meets with the contractor. They negotiate a reduction and agree the contract sum at a lesser figure than the tender price.
- The parties prepare the contract documents. The documents include a bill of quantities with the negotiated price reduction shown in the final summary.
- There is no clear record of the form of the price reduction that was negotiated, i.e. was a target price agreed, was it a lump sum price reduction or a percentage price reduction?
Common Problems
The problems start when variations happen that are measured and evaluated at the contract rates and prices.
The contractor believes that the rates and prices should be those shown in the bills of quantities. The consultants/employer believe that the rates and prices should be reduced by the same percentage as the price reduction agreed during tender negotiations.
So what do you do?
It's critical to look at the intentions of the parties during the tender negotiations. This would usually take one of two forms:
- the parties agree a lump sum reduction or;
- the parties agree a percentage reduction.
Without records to clarify the situation, we must look at the signed contract documents to find out the original intentions. Particular attention needs to be paid to the bills of quantities here. The following are the likely scenarios and outcomes:
- The parties show the agreed reduction as a negative lump sum in the final summary of the bill of quantities. Here, I would consider that the price reduction was made on a one-off lump sum basis and the rates and prices should remain as shown in the bill of quantities.
- The parties have re-priced the bill of quantities with the rates reduced by the agreed percentage. Here, it is clear that the parties should use the adjusted rates and prices for the evaluation of variations.
- The parties show the agreed reduction as a percentage of the tender price in the final summary of the bill of quantities. This scenario is not clear-cut. I would suggest though, that if the rates and prices were not amended in the bill of quantities by the same percentage, then variations should not be subject to the same percentage reduction.
Supporting Legal Principles
The legal principle of contra preferentem, supports my opinion in the third scenario. Osborn’s Concise Law Dictionary offers the following definition:
The doctrine that the construction least favourable to the person putting forwards an instrument should be adopted against him
where “instrument” is defined as:
A formal legal document in writing.
This means that the drafter of the document had every opportunity to produce a clear and unambiguous document. If any mistakes, ambiguities, or conflicts exist in the document, they must be interpreted in the favour of the other party.
If the employer, as the party responsible for compiling the contract documents, did not adjust the contract rates and prices in the bill of quantities to reflect the percentage price reduction, the parties should regard the reduction as a lump sum and should use the unadjusted rates and prices to evaluate variations.
Lessons
The lesson here is: those responsible for the preparation of the contract documents need to ensure that the principle and form of the negotiated reduction is very clearly shown in the bill of quantities. For more clarity, the parties could also include such details elsewhere in the contact documents.
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Claims for Additional Preliminaries as a Result of Variations
Variations - something that comes up a lot in our courses. One question crops up time and time again. Does the contractor have entitlement to payment for additional preliminaries arising from variations?
The short answer to the question (as usual) is that it depends.
What Are Preliminaries?
5 Tips for Success When Claiming for Variations
A question I am often asked during CPD talks and claims training courses is, “Is it necessary to submit claims for a variation?” Unfortunately, I have to give a lawyer’s answer to this and say, “It depends.” However, there are essential elements to a successful claim.
If the party responsible for administering the contract follows the procedure set out in most forms of contracts for instructing variations, then the answer is “no,” because the variation has been acknowledged. It will either be measured and evaluated as part of the remeasurement on a remeasurable contract or as a separate evaluation leading to a change in the contract price of a lump sum contract.
When Consultants Don’t Do What They’re Obliged to Do
We all know that, in many cases, consultants do not formally issue instructions for variations to the contract and often give instructions that are not acknowledged as being variations. Examples can often take the following forms:
- Issue of revised drawings;
- Comments on shop drawings that require changes to the contract drawings;
- Comments on materials submittals that change the specification;
- Instructions given during site meetings;
- Verbal instructions given on-site as the work is being carried out.
Very often, the above are a result of design errors or omissions. If, as is often the case, the consultant responsible for contract administration is also the designer, they understandably may not wish to draw the employer’s attention to their failings. They especially do not want to have to advise the employer that, because of these failings, the project is going to cost more and/or be delayed.
Bearing in mind that most forms of contract oblige the contractor to comply with instructions, the contractor has no choice but to proceed with the varied works. But what should the contractor do if they consider that the instruction comprises a variation, although no formal acknowledgement has been made?
5 Tips for Success
- First, they should consider whether the variation is going to result in significant additional cost and/or delay. If not, it is probably something that may not be worth pursuing for the sake of good relations.
- Is the contract remeasurable or a lump sum? If remeasurable, payment will be picked up in the remeasure, and unless the variation will delay the time for completion, there is no need for a claim. If, however, the contract is a lump sum, there must be a mechanism for increasing the contract price, so a variation needs to be established.
- If they decide to pursue the variation, it is vital to send a notice to the contract administrator stating that the instruction constitutes a variation under the contract and that the contractor intends to claim additional payment, an extension of time, or both. The contractual time frames for the submission of notices should be respected to avoid any time bars. This notice is vital to allow the contract administrator or employer to revoke any instruction they may have previously considered had no time or cost implication, or at least to make provisions against it. Hopefully, at this point, the contractor will receive an acknowledgement of the variation. However, in my experience, contractors should not hold their breath while waiting for this.
- If no acknowledgement is forthcoming, the contractor should submit a claim for the variation. The claim should follow good practice for claims and should set out the following as a minimum:
- Establish that an instruction has been given.
- Establish why the instruction comprises a variation. This can usually be achieved by comparing the works included in the contract to the work that has been varied by the instruction.
- Establish the contractual provisions for variations and demonstrate that the instruction comprises a variation leading to additional payment or time.
- Quantify and evaluate the variation—whether additional payment, an extension of time, or both—and explain how all calculations have been carried out.
- Substantiate everything.
Claims Class followers will know that the above comprises the essential elements of a successful claim, which are:
- Cause,
- Effect,
- Entitlement, and
- Substantiation.
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