Variations in construction contracts: directing, claiming and valuing changes to the work
Few projects are built exactly as drawn. Design changes, site conditions and client requirements all lead to variations, and variations are one of the most common sources of construction disputes. Most disputes come back to the same questions. Was the change a variation at all? Was it properly directed? And how should it be valued?
This article looks at how variations work under the Australian Standard forms most commonly used in Western Australia, AS 2124-1992 and AS 4000-1997. Many contracts amend these forms heavily, so always check the clauses in your own contract.
Key takeaways
The variation power has limits. A principal can only direct changes that are within the general scope of the contract.
Directions should be in writing and identified as variations. Informal requests on site or by email are a common trigger for disputes.
Respond to every variation notice. A contractor's notice that a direction is a variation needs a clear answer, quickly.
Value variations before the work is done where possible. Prospective valuation gives both parties certainty and reduces the risk of a daywork-based claim later.
Follow the contract's valuation order. Check the clause - if there is no agreement, usually contract rates come first, then schedule rates, then reasonable rates
What changes can be directed?
The variation clauses in AS 2124 (cl 40) and AS 4000 (cl 36) give the superintendent a broad power to direct changes to the work. That can include increasing, decreasing or omitting work, changing its character or quality, or changing levels, lines, positions or dimensions.
The power is not unlimited. Under AS 2124, the contractor is only bound to carry out a variation that is within the general scope of the contract. In Wegan Constructions Pty Ltd v Wodonga Sewerage Authority [1978] VR 67, the principal directed increases of between 40% and 90% in the excavation, sewer length, manholes, concrete and house connections. The Court held these went beyond what the variation clause permitted, and the contractor was entitled to refuse to carry them out at the contract rates. The test was whether an independent bystander would consider it reasonable to require the contractor to accept the change on the contract terms.
Changes to the sequence of work
A direction about the order in which work is done may not be a variation, but it can still cost money. Under cl 33.1 of AS 2124, if a direction about sequencing causes the contractor more or less cost, the difference is valued as if it were a variation. Contractors price their work on an assumed sequence, so re-sequencing directions can lead to significant disruption claims.
Directing a variation properly
A variation should be directed in writing and expressly identified as a variation. The superintendent acts as the principal's agent in directing it.
The standard forms let the superintendent either direct the variation and value it, or first ask the contractor to price the proposed variation and state its time impact. Getting a price first takes time, but usually reduces the scope for later disputes.
Directions that are not called variations
Problems often arise when someone asks for extra or different work without recognising it as a variation. It might be an email, a comment in a site meeting or a request from a consultant.
Under cl 40.6 of AS 2124, a contractor that receives a direction it considers to be a variation must give notice before starting the affected work. The superintendent should then respond, either confirming the variation and its value or advising that it is not a variation. If the superintendent disputes that it is a variation, the contractor must generally carry out the work and raise a dispute.
The contract usually sets no deadline for the superintendent's response, so a reasonable time will be implied. Do not let these notices sit. If the work goes ahead without a response and is later found to be a variation, the contractor may argue that it should be valued retrospectively, often on a daywork basis.
Many amended contracts also require the contractor to give written notice of the cost of a variation, and to obtain the principal's written approval, before incurring that cost. These requirements are often expressed as conditions precedent. Contractors who ignore them risk losing their claim, although courts may consider arguments such as waiver where the principal's conduct is inconsistent with strict compliance.
Valuing a variation
If the parties cannot agree a price, the standard forms set an order of precedence for valuation:
rates or prices in the contract
rates or prices in a priced bill of quantities or schedule of rates, where applicable
reasonable rates or prices
daywork, as a last resort.
Whether contract or schedule rates are "applicable" can itself be contentious. The stage of the project, the quantity of work, whether preliminaries are included and the profitability of the original rate may all be relevant. Where reasonable rates are needed, a superintendent may draw on published cost data, independent estimates, quotes or its own estimate.
If daywork is used, be clear about when it applies, check daysheets daily, and make sure the daywork schedule is precise about labour, plant and overheads.
"Ascertaining" the value
Some contracts require the superintendent to "ascertain" or "determine" the value of a variation. In Dura (Aust) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2014] VSCA 326, the Victorian Court of Appeal held that "ascertain" permits a process involving judgment, estimation and approximation, not a single uniquely correct answer. Mechanical calculations (rate × quantity) can be corrected if wrong. A discretionary valuation made honestly and in accordance with the contract is harder to disturb.
Responding to a variation claim
A superintendent's response should be in writing and should:
state whether the direction is a variation, and if not, why not
set out the adjustment to the contract sum and the new contract sum
state any adjustment to the date for practical completion
explain how the valuation was calculated and under which clause.
Where the principal's written approval is also required, it should clearly identify the approved costs and state that further work or costs need further approval.
How we can help
Lang Litigation and Construction Law advises principals, contractors and subcontractors on variation clauses, variation claims and disputes, from contract drafting through to adjudication and litigation. If you have a variation dispute, or want to tighten the variation regime in your contracts, contact us.
This article is general information only and is not legal advice. You should seek specific advice about your circumstances