Decoding design and construct contracts: Variations (Part 5)

In this fifth article breaking down the popular AS4902 standard form design and construct contract, we consider variations, what they mean, and how they work.

What is a variation?

Under the standard AS4902, clause 36.1 defines ‘variation’; however uniquely (compared to other defined terms under the contract), it does not state what a variation means. Instead, clause 36.1 advises that a Superintendent may direct a Contractor to “vary” the works by any of the following (as capable of being carried out):

1. increase, decrease or omit any part
2. change the character or quality
3. change the levels, lines, positions or dimensions
4. carry out additional work
5. demolish or remove material or work no longer required by the Principal.

The above form a “variation” for the purposes of the contract. Clause 36.1 also states that a Contractor can only carry out a variation where it has been expressly directed in writing.

There are technically two types of variations under this type of contract:

1. a variation as directed by the Superintendent; or
2. a variation for convenience of the Contractor.

Each type comes with different rights for work payment and time extensions.

Direction by the Superintendent

A Superintendent may give the Contractor:

• a written notice of a proposed variation under clause 36.2; or
• an express direction to carry out a variation as per clause 36.1.

When a ‘written notice of a proposed variation’ is given, the Contractor is required to advise whether the variation can be effected, the impact of that variation on the program and the cost of the works. The Superintendent can direct the Contractor include a detailed quotation for the variation works.

Importantly, clause 36.1 only allows for a variation to be directed prior to the date of practical completion.

Therefore if you are in the defects liability period after the end of the project, a Contractor cannot recover costs for a variation if it claims any works it is completing during that period were not in the original scope of work. This also means that if a Principal wants further work done during the defects liability period, it will need to enter into a new contract with the Contractor, rather than just providing a variation direction.

Variations for convenience

On some occasions, it may be the case that a Contractor requires a variation to be directed, either for its own benefit or the overall benefit of the project. These types of variations are called “variations for convenience”. Under clause 36.3 of the Contract, a Contractor can request the Superintendent to direct one. However, these types of variations generally do not entitle a Contractor to claim extra time or payment under the Contract, so Contractors may only choose to use this clause when necessary.

Deemed variations

There can be occasions where something gives rise to a deemed variation. In an unamended AS4902, these situations are:

1. an adjustment to quantities (clause 2.5)
2. an omission in the schedule of rates (if used) (clause 2.5)
3. reinstatement of damage (clause 14.2)
4. a latent condition (clause 25.3)
5. acceptance of defective work (clause 29.4).

A deemed variation means it is not necessary that the Superintendent direct the Contractor to complete the variation works however it will mean the work carried out according to the ‘deemed variation’ will be priced pursuant to clause 36.4.

Pricing your variation

Clause 36.4 sets out the process for a Contractor to price a variation through a set of preferred options in order of precedence. These are:

1. prior agreement
2. applicable rates or prices in the Contract
3. rates or prices in a schedule of rates or schedule of prices, even though not Contract documents, to the extent that it is reasonable to use them
4. reasonable rates or prices, which shall include a reasonable amount for profit and overheads.

This means that if the parties have already agreed on what a particular type of work will cost, either in the Contract or in a schedule of rates, they are held to that price in the first instance.

For example, if there is a schedule of rates (or another pricing document) that says it will cost a Contractor $9.00 per square meter to excavate and dispose of spoil, unless it is agreed between the Superintendent and the Contractor that the Contractor can charge $10.00 per square meter for the same work for a variation, the variation will be priced at $9.00.

This also means that even if the Contractor obtains a quote from a subcontractor where the subcontractor says the cheapest it can carry out the work is $11.00 per square meter, the Contractor may be forced to wear the $2.00 difference. Whilst $11.00 may be a ‘reasonable’ rate or price, it is below the other pricing options and therefore will not overrule options one to three above.

Disputes and variations

Variations can be one of the most hotly contested aspects of contracting. This can result from:

1. Superintendents failing to comply with the direction requirements of a variation;
2. Superintendents rejecting a Contractor’s pricing for a variation; or
3. Contractors seeking a variation for works that are within their scope of work.

Superintendent’s should be aware that if they do not strictly follow the procedure of directing a variation under the Contract, but the Contractor can show the Superintendent knew it was doing the work and the Principal would obtain the benefit of that work, the Contractor can make a claim in quantum meruit.

We have seen more than one case where a Superintendent has only verbally directed works and then later down the line, refused to pay the Contractor despite knowing the Contractor was doing what it had been instructed to do. These types of variation claims run to adjudication, and are accompanied by a laundry list of misdeeds by both parties through statutory declarations swearing that a variation was (or was not) verbally directed.

Further, if a Superintendent continues to verbally direct variations (and not direct them in writing), it will open the Principal up to a potential argument that the Superintendent has waived the requirement for the variation to be in writing and further, may be estopped from arguing that variations must be in writing before they are effected.

Whilst it is not present in the standard AS4902, we often see variation clauses amended to include time bars or opportunities for Contractors to seek clarity on whether a direction is a variation or not. This type of amendment generally means that if a Contractor believes that it has received a variation direction, but it hasn’t been specifically labelled as one, it has a set period of time (sometimes only five days) to advise the Superintendent it believes it has received a variation direction and will provide a price accordingly. If the Contractor does not notify the Superintendent during this time, it may have lost its entitlement to claim a variation.

Whether you’re a Contractor, Superintendent or Principal, variations will come up throughout the course of your projects. If you require assistance with handling these situations, contact us below or send in your enquiry here.

Author: Andrea Wilson

• Andrea Wilson is an Associate in our national Construction, Infrastructure & Projects group. 

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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