A contract variation occurs when parties amend parts of an existing contract rather than creating a new one. This adjustment helps modify terms or obligations to reflect current needs or circumstances while maintaining the original contract’s integrity. In construction, a variation typically refers to changes in the scope of works, which could include additions, substitutions, or omissions.
However, a contractor is not required to complete extra work and cannot expect payment for such work unless it has been specified in the original contract, through a variation of the existing contract, or via an order made under a term in the contract that permits variation of the work. It’s important that variations remain within the initial scope of the project. If the changes are of a vastly different nature or quality, they may be considered extra work rather than a variation. Almost all construction projects, whether small or large, will have variations.
The three critical aspects of a variation are:
For these changes to be implemented effectively, the construction industry uses a specific procedure known as a variation order.
In construction contracts, a variation order is a formal request for changes to the agreed scope of work. It could involve design, materials, or specification alterations. Variation orders require mutual agreement and proper documentation to prevent disputes and maintain project timelines.
The first step in identifying a variation to the scope of works is identifying the scope of works itself. The scope of works and services is defined by the contract, commonly by reference to documents such as plans and specifications or a project brief. If works or services are part of the scope of works, then they are not a variation.
A common dispute that arises in relation to variations is whether a variation is, in fact, a variation. These arguments are common where the scope of works is not clear. It is, therefore, important to define with as much precision as possible, exactly what the scope of works includes. Failing to do so could mean that work can be implied to be included within the scope of works if incidentally required.
For example, if a plan shows that the contractor is to install a door and the specifications do not specifically refer to any hinges on those doors, supplying the hinges are part of the scope of works as it is necessary for the completion of that work and likely to be the contractor’s responsibility.
Most written construction contracts will specify a process for instructing or claiming a variation. This is because at common law, the principal does not have an automatic right to instruct variations. So, unless the contract empowers the principal to instruct variations, the contractor can refuse to perform the variation and insist on performing the original scope of works.
For example, in Ettridge v The Vermin Board of the District of Murat Bay [1928] SASR 124, a contractor was engaged by the principal to construct a fence along a railway line. During construction, the principal instructed the contractor to deviate from the original line. The contractor refused to accept the deviation and abandoned work claiming that the contract did not give the principal a power to vary the contract. The Court held that as the principal did not have the power to instruct variations, it had repudiated the contract by insisting on the deviation. Accordingly, the contractor was entitled to terminate.
Most written contracts allow the principal to instruct variations and the contractor to claim for variations. In respect of the former, the process will normally involve an instruction from the principal, which can be written or verbal, to vary the works. Depending on the construction contract, this power could be very wide and can represent a significant risk for the contractor.
For instance, the contractor could be required to undertake extra works even though it may not have the necessary resources, or the work may be uneconomic. Furthermore, instructions issued at a later stage in the project may entail extensive redesign and rework which can also force the contractor to remain on site for significantly longer than envisaged. Accordingly, contractors would be well-advised to seek advice on the extent of this power before entering the contract.
In respect of a contractor’s claim for variations, depending on the contract, it may provide specific instances when a variation is claimable. Under NZS 3910 for example, it provides that a variation is claimable where there is a significant discrepancy, late instructions, nominated subcontractor defaults, incorrect information supplied by principal, early occupancy by principal and etc.
In our experience, it is common for disputes to arise because the correct process prescribed by the contract in relation to variation is not followed. A common issue encountered by contractors is non-payment for variation works requested pursuant to verbal instructions from the principal. This issue is especially prevalent in residential building projects.
Typically, this scenario involves a verbal agreement between the principal and contractor for works to be varied. However, once the variations have been completed, the principal attempts to avoid payment by denying that it had instructed the contractor to undertake those variations. If the variation clause requires the variation to be recorded in writing, and the contractor fails to document this, the contractor takes on the risk of not getting paid for the variation as there would be no clear evidence of an agreement for the contractor to perform them.
This could lead to a costly and time-consuming dispute to establish the variation.
While it may seem unfair, the contractor is not entitled to payment if it cannot prove that the variation was instructed. This situation can be avoided by insisting that all variations, large or small, be documented before undertaking the variation in question or refusing to carry it out unless it is formally instructed in writing.
The written construction contracts will usually have clauses setting out how a variation is valued.
The variation could be valued by agreement and if so, such agreement should be documented to prevent disputes in the future.
If not done by agreement, the parties should be aware of the valuation procedure in the contract. Typically, the contract will include a schedule of rates that will apply to most variations. Contractors should therefore check how variations are valued and whether those prices are feasible before entering the contract. Failing to do so could mean that the contractor is obligated to carry out a variation at a loss.
In the next article, we will discuss potential avenues available to contractors outside of the contract where the variation process has not been complied with. They include quantum meruit, estoppel and the doctrine of free acceptance.
Variations are an inevitable component of many construction contracts, and to ensure a fair outcome for all parties involved, the scope of work in the contract needs to be comprehensive. Our lawyers at Norling Law can review your scope of works and variations, and can assist with dispute resolution, as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-brent/.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
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