Variations

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:

1. the parties agree a lump sum reduction or;
2. 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:

1. 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.
2. 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.
3. 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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by Nina Hewitt