Variations in Construction Contracts

Steven Batchelor
The maturing Middle East construction industry has yet to fully adopt best practice around the handling of claims and variations.

During the Middle East’s construction boom, the traditional tendency towards informal commercial arrangements and negotiations often got the job done. We’ve seen a lot of changes since those days and a clearer focus on contractual terms has emerged. The established business culture is still respected, but the construction industry is increasingly adopting common global practices to protect the interests of all parties.

The FIDIC Red Book remains the routine standard form of contract, often chosen through habit and familiarity – yet there is a widespread lack of understanding of the contract’s provisions, and a lack of engagement with its binding properties. The Red Book is often amended from its purpose as a re-measureable contract to a lump sum contract, with a further increase in the risk placed on the contractor often by apportioning of design responsibilities, but with little thought to amended conditions contained within or use of an alternative appropriate form of contract.

...the construction industry is increasingly adopting common global practices to protect the interests of all parties.

Where the Red Book is amended to lump sum and the employer wishes to transfer some design obligations to the contractor. Wording often included in the parts of the specifications and/or drawings is for the contractor to develop the design provided into a finished solution, making a variation and/or claim unnecessary for the development in the scope to meet the contract requirements. The problem seems to be a lack of clear understanding of the priority of documents and the words and obligations contained throughout, not just the reading of the headings of the contract. These misunderstanding then give rise to confusion over what are a valid variation and/or a claim against the contract.

A further common misconception in the Middle East is that a claim is the appropriate response to a change or confirmation of the scope of the work or a response to a request for information from the contractor. For requests for information the engineer is often only confirming what the contract allows for, yet this still gives rise to unwarranted claims against the contract. However, a claims culture is time consuming and disruptive and when a variation order is the correct course of action for a change in scope. Noting each and every claim notification must be responded in specified time frame. 

Variations and claims are not the same and should not be confused.

Variations and claims are not the same and should not be confused. It is often said that a contractor is claiming a variation, but this actually means that they are making an application for a variation. A claim then only occurs if the engineer/employer rejects the application for the variation and the contractor disagrees with the decision and subsequently pursues a claim.

A variation to a contract can involve changes to the contract provisions, requirements or scope of works. Changes are made for differing reasons such as design development, stakeholder requirements or cost, and can potentially decrease the scope of works as well as increase it.

It can also be said that a valid variation can be evaluated and administered against the provisions of the contract, with measurement rules and applicable rates stated clearly and agreed between the parties to the contract. Whereas, a claim is generally for events impacting the contract, hence the use of industry formulas to determine any applicable costs for any valid event causing delay, disruption, prolongation, loss of profit etc.

The correct preparation of the contract helps enormously, with best practice procedures followed. A weak contract gives rise to problems, so all clauses and specifications should be unambiguous.

A weak contract gives rise to problems, so all clauses and specifications should be unambiguous.

There is a tendency for contractors to be demonised in this process, but it should be remembered that they are playing their part in a construction culture that does not always treat them fairly. Problems can be minimised if there is a clear and shared understanding of the contract. The contractual parties need to understand the conditions and scope of works, and they need a clear view of those items that will impact upon them. Facilitating this understanding is a big part of Faithful+Gould’s work here in the Middle East.

Faithful+Gould has local experience gained from operating in this region for over 15 years. This know-how can be used to our client's advantage to ensure the correct contracts are selected and the parties to the contract are aware of their full responsibilities and obligations, therefore minimising un-necessary applications for variations and claims against the contract.

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