A deal is a deal

The valuation of variations or additional works has always given rise to disputes. The employer wants to pay as little as possible; the contractor wants to be paid as much as possible. The value put on variations can determine whether a contract is profitable overall for a contractor.

Recently, there was a very important court decision on the valuation of variations, Henry Boot Construction Ltd vs Alstom Combined. Both main standard forms of contract, the JCT and ICE, lay down similar rules for the valuation of additional work.

Essentially, those rules are that where the extra work is of similar character or is executed under similar conditions to work priced in the contract, it is to be valued at the contract rates and prices. However, where the extra work is not of a similar character or is not executed under similar conditions, those rates and prices are to be used as the basis for valuation.

Essentially, however, the starting point is rates and prices set out in the contract. A major problem regularly arises when the contract rates or prices are, by accident or design, unduly low or high. When tendering, contractors often inflate a particular rate or price if they anticipate substantial variations or remeasurement. When the expected increase comes, the contractor does well for itself and the employer becomes upset.

Sometimes, however, the contractor underprices by accident, perhaps not appreciating the full extent of the work.

The loss which it makes is magnified when variations are ordered. The employer is then not so upset.

The Henry Boot case dealt with this difficulty head-on. Boot had, by mistake, overpriced a particular contractual item of work – temporary sheet piling work – within one area. This mistake benefited Boot.

Variations were ordered requiring additional sheet piling in other areas. An arbitrator had decided that since the original contract price was flawed, it would be wrong to compound the effect of the error in valuing variations; he therefore refused to use the original contract price to value the variations.

His Honour Judge Humphrey Lloyd disagreed with the arbitrator. He decided that a mistake in a rate or price or in its application binds both parties. The judge found that “the fact that the rate or price otherwise applicable [to the variation] may appear to be too high or too low is immaterial”. He endorsed the academic view that it was reasonable to apply such rates as a basis for pricing varied work even though they were mistaken or uneconomic.

Reference in the valuation clauses to works being executed under similar conditions did not refer to economic or financial conditions or considerations; intrinsic profitability or otherwise of the contract rate or price is not a relevant consideration in the valuation of variations.

This decision confirmed the view of many in the industry, although there has been little or no precedent to support it.

As the judge found, this approach is justified because, when entering into a contract, both parties need to know where they stand. An employer ordering a variation needs to know with reasonable certainty what the effect of a proposed variation may be.

Similarly, a contractor can price the work intelligently and commercially. The fact that there is, or might be, a windfall to an employer or contractor is simply not relevant. It is to be hoped that this decision, which is the subject of an appeal, will provide clarity to the industry. There should be no need in the future to refer to contract rates or prices as high, low, reasonable or unreasonable; the contract rates are the contract rates, for better or for worse. The parties are stuck with them.

(1) 1999 3 BLR