1. Introduction
In construction projects, the term “variation” generally refers to a change to the original scope of works or design of the works specified under the contract, which are required to be carried out by the contractor. A variation can be in the form of an omission, addition or alteration to the original scope of work. It occurs when there is a change to the contracted works.
2. What Constitutes a Variation?
To determine this, one would have to look at multiple circumstances, such as the type of construction contract adopted by the parties (Letter of Awards, Standard Form of Contracts, etc), the nature of the contract works instructed to be carried out, the terms of the variation clause in the construction contract and other relevant circumstances.
3. Valuation of Variations
Variations, whether additions or omissions, should be valued based on the contractual procedures and methods for valuation. In most standard forms of construction contracts, there would be terms providing for the rules or methods of valuation of variations.
However, if there are no contractual procedure or method to evaluate variations, then the parties in the contract would usually be valued according to the accepted methods of valuation as explained in the foregoing paragraphs to determine the reasonable price for the varied work carried out at the relevant time.
Be that as it may, the parties are still free to negotiate and agree on any rate or price to the variation works.
3.1 Valuation Based on Contractual Rates
If the variation work instructed is the same work or a work of similar character executed under similar conditions as the work already provided for in the contract and there is no significant change in the quality of the work, then the agreed rate provided in the contract for that work should apply.
3.2 Valuation Based on Adjusted Rates
This valuation rule allows the employer or his contract administrator to apply the rate of work in the Bill of Quantities to a varied work which is of similar character but executed under dissimilar conditions.
A dissimilar condition is explained in the following passage by the authors in Keating on Building Contracts, 2021:
“Dissimilar conditions includes physical site conditions such as wet compared with dry, high compared with low, confined space compared with ample working space and winter working compared with summer working, where the Contract Documents show that the Bill prices were based on such conditions.”
If the differences are relatively small, the Engineer is obliged to use the rates set out in the Bill of Quantities as the basis for his valuation, making such adjustments as may be necessary to take into account the differences.
However, the differences may be very great, for example, if the variation order is related to the excavation of foundations in solid rock instead of clay. In those circumstances, the Engineer may take the view that it would not be “reasonable” to base his valuation on the rates contained in the Bill of Quantities.
3.3 Valuation Based on Market Rate
If the varied work is not provided for in any of the items of work in the Bill of Quantities, or there is no work of a similar character provided in the Bill of Quantities which the employer or contract administer can apply to the varied work for the purposes of valuation, then the varied work may be valued based on the fair market rate for that work or by adding a reasonable profit to the actual cost incurred by the contractor in carrying out the varied work.
If a contractor intends to claim for the varied work done based on the market rate, he has the burden to prove that the price claimed represents the prevailing market rate at the relevant time. Usually, the contractors would be required to provide evidence such as the contractor’s build-up rate, a comparison of the market rate of the same work at that particular time and other evidence to show that the price claimed is reasonable and not exorbitant.
3.4 Valuation Based on cost reimbursement
Cost reimbursement is compensation to the contractor for the work carried out, of which its value is derived on the basis of the cost of labour, materials and plant plus a markup for overheads and profit. Cost reimbursement is generally used when the work cannot be priced in the ordinary way.
A claim based on cost reimbursement rates would require the contractor to provide supporting documents such as the work instructions, payment vouchers, delivery orders and daily man-hour records or time sheets verified by the contract administrator or the designated personnel on site.
Therefore, proper records for a claim based on day work are important. The parties may agree to a specific format of such records to ease the process of cost reimbursement claims. This may also avoid unnecessary disputes related to the accuracy or sufficiency of records for such claims.
3.5 Valuation of Omissions
Generally, valuation of omissions could be carried out by measuring the items of work which have been omitted and valuing them using the rates for the items of work as provided in the Bill of Quantities. Once measured and valued, the total value derived would then be omitted from the contract sum.
3.6 Additional Expenses Caused by Variation
Sometimes, the contractor may also incur additional expenses arising from a variation, such as additional preliminaries or office overheads.
In some standard forms of construction contracts, the right to claim for these additional expenses arises from a variation clause that is expressly provided for.
For example, the provisions in clause 11.7 of the PAM 2018, clause 11.9 of the AIAC Form 2019 and clause 5.10 of the JCT Standard Building Contract With Quantities 2016 (JCT Contract 2016), respectively, expressly allow the contractor to claim for such additional expenses associated with a variation. In other standard forms such as the PWD Form 203A, the additional claims would need to be claimed as part of the contractor’s loss and expenses claim pursuant to Clause 44.
3.7 Quantum Meruit
The term ‘Quantum Meruit’ originates from Latin, which means ‘the amount he deserves’. It is a common terminology used in the construction industry, which means to recover reasonable compensation for the works and services carried out in the case when there is no agreed amount or rates.
For example, in Bumimetro Construction Sdn Bhd v. Sun-Jaya M&E Sdn Bhd [2020] MLJU 136 case, the High Court held that in the case where the contractor was requested to do work outside of the contract and no rates have been agreed upon, the contractor would be entitled to a reasonable sum based on the principle of quantum meruit or by virtue of Section 71 Contracts Act 1950.
Essentially, section 71 of the Contracts Act 1950 allows a party to claim reasonable compensation for the works or services rendered to another which were not intended to be rendered gratuitously.
Disclaimer:
The above article is for informational purposes only and does not constitute legal advice.