Abdul Rahman SABRA Contracts Manager
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GHANTOOT TRANSPORT & GEN. CONT. - BUILDING DIVISION
DOC. 20 A CTM
V
Saturday, January 11, 2014
EXPLANATIONS EXPLANATIONS OF CLAUSE 52: Value of Variations
The Clause 52 “Value of Variations” of of FIDIC’s "Red Book", the 4th Edition of the "Conditions of Contract for Works of Civil Engineering Construction" published in 1987. Employers, engineers, contractors and their respective advisors should all find something in this Document to understand and make best use of this Clause. The value of variations is established by this clause. The starting point is that the rates and prices set out in the contract should be used as far as possible, failing which suitable alternative rates are either agreed or fixed by the Engineer. While the discussions proceed, proceed, the Engineer is required to make on account payments to the contract for the varied works. The Contractor must give notice within 14 days of the instruction and before he starts the work if he intends to claim extra payment for the variation. Similarly, the Engineer must give notice in the case of an omission. If at the end of the project, it is found that the variations amount to more than 15% of the contract price (as adjusted), an addition or omission to the contract sum may be agreed or determined by the Engineer in respect of the Contractor's overheads. The Engineer is empowered to issue instructions that variations be executed on daywork, at the rates and prices set out in the contract. Detailed provision is made for the proving of the amount of labor and materials involved. SUB-CLAUSE SUB-CLAUSE 52.1
If the rates are "applicable", they should be used. If not, they should be used as far as "reasonable" "reasonable" to agree a "suitable" rate. Failing agreement, the Engineer fixes an "appropriate" rate. It is not not clear what what "applicable" means nor what "suitable" and "appropriate" mean or whether there is any difference between them. This clause must be read alongside sub-clause 52.2 which deals with occasions when the nature or amount of the varied work renders the rates "inappropriate or inapplicable". Where the Engineer fixes a rate, there can be little doubt that that the rate may be challenged by either party. Although fixing is not referred to in clause 67 (Disputes), it is clearly a decision of the Engineer and thus not intended to be final. A more m ore difficult dif ficult question ar ises in relation to a rate or price "agreed upon between th e Engineer and the Contractor". Is such an agreement open to challenge by either the Employer or the Contractor? If the Engineer is acting as the agent of the Employer for the purposes of such agreement, then such agreement would be binding as there can presumably be no dispute over a matter that has been agreed between the parties. One would feel more confident about coming to that conclusion if it were not for the requirement for prior consultation by the Engineer with both parties. Such consultation is associated throughout the
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contract with those functions of the Engineer which he performs in his capacity as an independent certifier. The Engineer has six functions under this clause:a. b. c. d. e. f.
The valuation of variations at at the rates and prices set out in the contract; Valuation based upon the rates and prices; Forming an opinion as to the applicability of rates and prices; Agreement of suitable rates and prices; Fixing of appropriate rates and prices; and The determination of the provisional valuation.
SUB-CLAUSE SUB-CLAUSE 52.2
This sub-clause appears to address not only the rate applicable to the varied work but the alteration of an existing rate or price. It talks of a "rate or price contained in the Contract" which is "by reason of such varied work, rendered inappropriate or inapplicable". Thus, if the variation comprised, say a 50% increase in quantities in an item, this clause addresses the question whether the rate for that item should be adjusted, and not just the rate for the additional work. Compare sub-clause 52.3 where the whole of the value of the contract has been increased or decreased by more than 15%. The question raised by the comparison is quite how the two clauses connect. The answer is that there may ma y be an accumulation of variations and changes in quantitie s, none of which qualify under sub-clause 52.2 for re-rating. In that case, sub-clause 52.3 applies. Where the 15% includes variations that have been re-rated, the exception in sub-clause 52.3 operates: "(subject to any action already taken under any other Sub-Clause of this Clause)". Dayworks under sub-clause 52.4 are ruled out by item (b) The works may be varied by the omission of work. In a measurement contract, the effect is that the work is not done and therefore is not measured or paid for. Yet, this sub-clause indicates that the omission may not be valued unless notice is given by the Engineer or by the Contractor. As this cannot mean that the Contractor is to be paid for work not performed in the absence of notice, it is apparently predicted that the Contractor may wish to claim in respect of the overhead and profit elements of the price for the omitted work. It is submitted that this is the correct interpretation and one that produces a fair result. THE ENGINEER'S FUNCTIONS UNDER THIS SUB-CLAUSE ARE AS FOLLOWS: 1. 2. 3. 4. 5.
Forming an opinion whether rates or or prices are "inappropriate or inapplicable". The agreement of suitable rates or prices. The fixing of appropriate rates and prices. The determination of provisional valuations. Giving notice of his intention to vary the rate or price.
IN NO CASE IS AN INSTRUCTION UNDER CLAUSE 51 CALLED FOR "... Before the commencement of the varied work... The meaning of this phrase is difficult to determine. If the object is to give the Employer an opportunity to change his mind when he discovers that the Contractor intends to claim increased rates, it must mean before the Contractor has committed himself to expenditure. Otherwise, it could simply be an arbitrary, and somewhat pointless deadline additional to the 14-day limit. ”
One possible difficulty is where a Contractor has, within 14 days of the instruction, formed no "intention to claim extra payment". It may only be later that it becomes apparent to anybody that the varied work is such as to make the rates inappropriate. In these circumstances, it is highly doubtful whether notice is required or not. An arbitrator seeking to avoid the injustice that will undoubtedly be worked by the strict application of the provision may well resort to this route. 2|P a g e
As the contract contains no express loss and expense clause to compensate the Contractor f or the cost of prolongation caused by the ordering of variations, this sub-clause is normally relied upon. It is said that the fact that the extra work has caused delay to the completion of the works and additional costs renders the rates inappropriate. This argument seems rightly to be accepted by arbitrators so it is perhaps surprising that the conditions continue to leave the matter to be dealt with in so oblique a manner.
SUB-CLAUSE SUB-CLAUSE 52.3
It is not entirely clear whether the figure to be compared with the "Effective Contract Price" is the net result of the additions and deductions or whether "taken together" means the total of the additions plus the total of the deductions. This issue will often be important. As it would have been simple to make it clear that the net result was intended, it is submitted that the two figures should be added, even if this means an adjustment in circumstances where the additions and omissions in fact cancel each other out. Whilst it is sometimes assumed that this clause is for the benefit of the Contractor, it can also be the case that the increase in the work has resulted in an over-recovery of overheads which the Engineer is able to nullify. The return to 15%, last seen in the 2nd Edition, from the 10% used in the 3rd Edition is also to the benefit of the Employer. The extent of the benefit depends on the right of the Contractor to demand the same adjustment in respect of all varied work under sub-clause 52.2 by showing the rate to be "inappropriate or inapplicable". Exactly what adjustment the Engineer can make is not spelt out: it is a sum to be "determined ... having regard to the Contractor's site and general overhead costs" but "such sum shall be based only on the amount by which the additions or deductions shall be in excess of 15% of the Effective Contract Price." Presumably, this means that where, for example, the Contractor put in his price a lump sum for overheads and the contract price increased by 20%, the Cont ractor may only be allowed an increase in his overheads of 5% (being the excess over 15%) rather than the full 20%. It is considerably more difficult to see how the clause works where a Contractor has put some or all of his overheads into the rates. Despite the details to be provided under clause 57.2 (Breakdown of lump sum items), it will frequently be very diff icult to establish with any certainty how a Contractor's prices are made up in the absence of his co-operation. SUB-CLAUSE SUB-CLAUSE 52.4
Contractors are generally pleased to be able to execute works on a Dayworks basis. This is because of the high level of profit which it is normal to include in the daywork schedule of rates and prices. The Engineer can require "any varied work" to be done on Dayworks. Normally, this means occasions where there are no rates and where the amount of work is small. If the varied work was substantial, the Engineer would normally fix a rate. As Dayworks also provide corrupt Contractors with the temptation to exaggerate their claims, heavy emphasis is wisely put on the proof of the amount of labor and materials used. Nevertheless, it is remarkable that impracticality is an excuse for failing to provide lists and statements in relation to Dayworks when the condition precedent of prompt notice under sub-clause 52.2 admits of no exception. PART II
Offers additional wording for contracts providing for payment in foreign currency. There is also additional wording for sub-clause 52.2 which would greatly limit the circumstances under which the Engineer would be empowered to depart from contract rates: the suggested provision is that the item would have have to amount to more than 2% of the cont ract price and the actual quanti ty of work executed would have to var y by more than 25%.
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