Variations are changes in the scope of works for a construction contract that occur after the date that the contract is entered into. Where possible variations should be avoided as they are likely to increase the cost of the works and may also delay completion of the project.
Some variations are unavoidable, for example, variations that are required as a result of the consents that have been obtained for the project or changes in materials because the originally prescribed materials are no longer available.
However, the most common reasons for variations are lack of detail/clarity in the scope or the principal/client/owner requesting a change to the works. The first of these can be avoided by ensuring that the scope is fully completed in sufficient detail prior to entering into the contract. Spending some additional time doing this can avoid costly variations once the works commence.
All construction contracts will need to allow for variations to be made to the scope of works. Some issues to consider are set out below.
Pre-instruction quotation process
Most construction contracts work on the basis that the principal/client/owner can request variations to the works, and provided that those variations are not ones which the contractor can refuse to carry out (see below), the contractor will proceed with the variation.
However, this process does not allow for the provision of information that arguably needs to be provided before an informed decision can be made by the principal/client/owner in regard to proceeding with the variation. For example: clients may request additional works to be carried out, unaware of what the final cost of those additions will be.
However, if the cost was known prior to official instructions being given, and the cost actually outweighed the capital benefit, the decision may be made not to proceed. The variation may also increase the time required to complete the work beyond that which the principal/client/owner is prepared to allow.
Where there is good communication and a high level of engagement between the parties, this process may well happen in practice. However, it can be useful to have a contractual obligation for this pre-instruction process to be worked through so that the principal/client/owner can make an informed decision as to whether or not to formally instruct a variation.
When should a contractor be entitled to refuse to carry out a variation?
Construction contracts vary greatly as to the reasons why a contractor can refuse to carry out a variation. Some contracts give the contractor complete discretion as to whether or not they have to agree to variations, others are very prescriptive as to when the contractor can refuse, and some provide that the contractor cannot refuse to carry out a variation request.
There are certain circumstances where it would not be reasonable for a contractor to have to carry out a variation request. For example, if it would require an amendment to or the issue of a new building consent or be a breach of statutory or regulatory requirements.
Processing costs for variations
Many construction contracts allow the contractor to recover the costs incurred in processing variation requests. This is reasonable in the case of a decision being made to not proceed with the variation as the contractor does not have any ability to recover those costs. However, if the variation does proceed, the contractor will be being paid the costs plus margin of those variation works and so arguably should absorb these processing costs.
Removing Works from a Contract
Variations can be made to remove works from the scope of a construction contract as well as to incorporate additional works. Consideration needs to be given as to whether works can be removed so that they can be carried out by another contractor or by the principal/client/owner themselves, or whether works can only be removed from the scope where they are no longer required for the project.
It is clearly reasonable to be able to remove works which are no longer required. Removing works to enable them to be completed by another party is more contentious. Contractors may be reluctant to agree to this because they will have priced and programmed to complete all of the works. There may be a significant impact to a contractor if their works are reduced as they may have turned down other opportunities based on being engaged on that project for a specific period of time.
Reducing the scope also needs to be carefully considered by the principal/client/owner. This is often done for reasons of either saving time or cost. However, it can be problematic if issues arise with the project following completion in terms of determining which contractor is responsible for the issue that has arisen. The practicalities of having more than one contractor working on site at the same time also needs to be managed.
Key Takeaways
- Changes in the scope of works after the contract is signed, often leading to increased costs and project delays. Variations can include removing works, which can be contentious if it involves reallocating tasks to other contractors or the client.
- Common causes of variations include lack of detail in the initial scope and client requests for changes.
- Ensuring a comprehensive scope before contract signing can prevent costly variations.
- If variations are requested, clients should be informed of the costs and time implications of variations before deciding to proceed.
- Contractors may refuse variations under certain conditions, such as regulatory breaches or unreasonable requests.
If you have any questions about the content covered or variations in construction contracts, contact our construction law team.
Special thanks to Partner Julia Flattery for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
