Enigmatic variations

Variations are an inevitable part of construction and it is probably impossible to avoid them altogether, given the complexities of the construction process. They do, however, present an increased risk to a project. For example, it is well known that accidents are more likely when carrying out a variation. This is because a variation often does not receive the careful consideration given to design or construction work which has been part of the project from the early stages.

In addition, sometimes a difficulty can arise in valuing a variation, despite the usual clause on the valuation of variations. Take a recent example: a contractor was required to provide the equipment needed to construct the works. The usual arrangement applied; if the equipment broke down, any resulting delay was at the contractor’s risk, and liquidated damages could become payable if the contractor did not make up the time. That seems a fairly straightforward situation.

The project involved the installation of offshore foundations for a wind farm for Eon Climate & Renewables, and the equipment that broke down was a support vessel, a jack-up barge called the Lisa. (The same allocation of risk would usually apply if the project had been onshore and, say, earth-moving equipment had broken down.)

In the Eon case, after significant delay while the contractor tried to have the Lisa repaired, the employer supplied an alternative vessel, the Resolution, on a free issue basis, no doubt in an attempt to avoid yet further delay and make progress on the project.

When it came to valuing the cost of using the Resolution instead of the Lisa, the contractor argued that the engineer’s instruction to use the vessel supplied by Eon was an instruction to omit the use of the Lisa, and that instruction should be valued as an omission.

Eon argued, however, that the adjustment in the contract price should be calculated by applying a rate (or alternatively, a cost) to the amount of time it would have taken the Lisa to carry out the contract works if it had in fact done so. The difference between the two approaches was around €44,350,000 (£38m) or €21,750,000 (£19m), depending on which of Eon’s alternative cases applied.

Consider what-if scenarios well in advance, to avoid last-minute variations

The contract was bespoke, and gave room for argument on which method of valuation should be used in these circumstances. The court held that the contractor’s interpretation was the correct one.

Instructing a variation also caused problems in an older case, Simplex Concrete Piles vs St Pancras MBC. Simplex had taken the risk of the ground conditions in constructing a block of flats. The ground conditions were difficult and Simplex could not carry out the foundations in the way anticipated. It therefore suggested to the architect two alternative methods to complete the piling. The architect accepted one of these methods (using bored piles), Simplex obtained quotations, and the architect wrote a letter confirming that he was prepared to accept the cheapest quotation.

Simplex later argued that the architect’s letter was an instruction for a variation and therefore it was entitled to extra cost. For the architect, it was argued that the letter was merely a concession to Simplex to enable it to perform its contractual obligations in a manner different from that specified, and it was not entitled to any extra costs in relation to that concession. The judge agreed with the contractor, however, and said that the architect’s letter was a variation instruction.

So what can be done to avoid these problems when variations are instructed? Here are some suggestions:

1. Try to avoid them altogether if you can, by allowing more time at the front end of the project to develop the design fully, rather than relying on variations later to deal with outstanding issues.

2. Consider using BIM so that the design and possible construction issues can be anticipated in advance, and resolved prior to work starting
on site.

3. Even if BIM is not used, for particularly challenging areas of the design or construction consider some what-if scenarios well in advance, to avoid the need for last-minute variations.

4. Recognising that the English language can be quite slippery at times and take a hard look at the variations clause of your proposed contract. In JCT contracts, for example, the contract administrator can issue instructions “at no cost to the contract” in certain circumstances, which is helpful.

Gillian Birkby is head of the construction group at Fladgate