Construction Contract Law

Variations and Certificates (I)

Dr. Sandy Tang

BRE329
D
Department
t t off Building
B ildi andd Real
R l Estate
Et t
The Hong Kong Polytechnic University
Hong Kong SAR

Introduction
Variations
Thinkk about
Thi b
• If there is no express term in dealing with variation in a
contract what will be the contractual situation if one of the
contract,
contract party wants to make a change to the scope of works
in a contract?

Certificates
Think about
• What is the contractual position of the Employer if she does
not agree with the Architect’s certificate?
• As a client of the Architect,
Architect can the Employer request for a
change of judgement in a certificate?
 Expected
p learningg outcome
• Able to interpret and apply the general principles in relation to contract
administration under the Standard Form of Building Contract
• The learning focus is to develop your critical thinking skill and domain
specific knowledge in the context construction contract administration.
Approach
• Introduction of key terms and concepts
• Outline of key provisions in the SFBC
• Develop the skill in the interpretation of contract by analysis of specific
clause in class
The learning focus
• Variations: The stipulated procedure, the rules of valuations
• Certificates: The stipulated
p p
procedure and their implications
p
• Discussion of the differences between the old and the new SFBC

Variations

Let’s start our discussion

f
from a look
l k att the
th Final
Fi l Account
A t off
a typical small scale fitting out contract
Background and concepts
Comment by Allan Ashworth
• “The
The vast majority of forms of contract used in the UK and in different countries around
the world allow for variations or change orders arising at some stages during the project.
The absence of such a clause within the contract conditions would necessitate a new
contract being arranged if variations did arise.
arise.”

• “The disadvantage of such a clause is that it allows the architect, or the other designers,
to delay making some decisions almost until the last possible moment. This can have
serious repercussions on the planning of the project and in executing the works
efficiently by the contractor.”

• “The
The building owner (Employer )will be bound by any variation give by the architect as
long as the architect does not exceed the powers under the terms of contract.”

Think
Th k about
b
• What constitute a variation? How do we known the limit of the power?
• What if the nature of the variation is substantially different from the contract
document?

Background and concepts

“In order to change the specification of the work, a contract would, in
principle have to re-negotiated.
principle, re negotiated ” (Murdoch & Hughes,
Hughes 2000,
2000 p.215)
p 215)

“Most building contracts are entire contracts. The significance of an entire

contract is that there is no obligation to carry out variations or to pay for
variations: this is known as the doctrine of entirety.” (Hill, 2001, p.90)

Therefore, the purpose of Variations Clause in SFBC is to

– to set out the procedures to deal with the complexity and uncertainties in
construction contract, and

– to set out the rules governing the adjustment of the contract sum with
reference to the original contract works and contract price.

• This relates to the “valuation of variations”

Variations under the Standard Form
Variations Provisional and Prime Cost Sums
Variations,
(SFBC the old version)

1. The definition
2 The
2. Th administration
d i i i
3 The rules of valuations
3.
4. The provisions for direct loss and / or expenses

Variations under the Standard Form

Variations, Provisional Quantities, Provisional Items and Provisional Sums

• Architect’s authority to issue instructions requiring a variation

• I
Instructions
i for
f Provisional
P i i l Quantities
Q i i Provisional
P i i l Items
I andd Provisional
P i i l SumsS
• Valuation of Contractor’s work
• Valuation rules
• Adjustment of Contract Sum
• g to be present
Contractor’s right p duringg measurement on Site
• Variation necessitated by fault of Contractor
• Valuation of NSC’s work or NSC’s materials and goods
 Variations
Cl.13 Variations, Provisional Quantities, Cl.11 Variations, Provisional and
Provisional Items and Provisional Sums Prime Cost Sums

• Architect’s authority to issue instructions 1) The Architect may issue instruction

requiring a variation requiring a variation …

• Instructions for Provisional Quantities 2) The term “variation” …means the

Provisional Items and Provisional Sums alternation or modification of design,
quality or quantity of the Works …
• Valuation of Contractor
Contractor’ss work
3) The Architect shall issue instruction in
• Valuation rules regard to expenditure of prime cost and
provisional sums …
• Adjustment of Contract Sum
4) All variations …shall be measured and
• Contractor’s right to be present during
valuated by QS … The valuation of the
measurement on Site
works …unless otherwise agreed shall be
• Variation necessitated by fault of made in accordance with the following
Contractor rules

• Valuation of NSC’s work or NSC’s

materials and goods

Variations under
V d the Standard
d d Form
Architect’s Instruction

(1) “The MC shall …comply with all instructions issued to him by the Architect in
regard to any matter in respect of which the Architect is expressly empowered by
these Conditions to issue instruction.”
 MC’s obligation to comply

 The Architect’s authority and the subject matter are defined and limited by the
express provisions stated in these Conditions
See Hills (2001) p.89 for a detailed list of provisions
Variations under the Standard Form
The definition
“The term “variation” … means
• The alternation or modification of the design, quality or quantity of the Works as shown
upon the Contract Drawings and described by or referred to in the Contract Bills, and include
• The addition, omission or substitution of any work,
• The alteration of the kind or standard of any of the materials or goods to be used in the
Works, and
• The removal from the site of anyy work, material or goods
g executed or brought
g thereon
by the MC … other than work, material or goods which are not in accordance with this
Contract.”
™ The Works = The contract works defined byy the Contract Document
• Therefore, under a “Contract with Quantities”, it refers to the
Contract Drawings and the Contract Bills
™ Removal of works, material not in accordance with Contract is not a
variation. Why?
• Cl. 6(4) “The Architect may issue instruction in regard to the removal from the site of
any work, materials or goods which are not in accordance with this Contract.”

Variations under SFBC: The valuation

Cl.11(3)
g
The Architect shall issue instruction in regard to the expenditure
p of p
prime cost and
provisional sums …
Cl.11(4)
All variations required by the Architect or
- sanctioned by the Architect in writing
- worked
k d executedd by
b MC iin respect off provisional
i i l sums ((other
h than
h a
tender has been accepted)
- shall be measured and valued by the Quantity Surveyor
- MC shall have an opportunity of being present at the time of measurement
as the MC may require.

™ How about Prime Cost Sum?

™ How about a tender has been accepted
p for works in respect
p of Provisional
Sum?
 Variations under SFBC: The valuation
Cl.11(4)
g
The valuation of variations … unless otherwise agreed shall be made in accordance
with the following rules: …..
a) The price in the Contract Bills….
b) The said price … as the basis … fair valuation …(star rate)
c) Daywork rates…
d) Omission of works … substantially vary the conditions

™ The following three questions help to select the appropriate rules to be applied.
1. Can the work be properly measured and valued?
2. Is the works of a similar character?
3. Is the works being executed under similar conditions?

START

Can the work be measured No Daywork rates

Yes

Is the work the same in character,

character
Yes Contract bill rates
conditions and quantity?

No

Is the work the same in character but Contract bill rates are to be used as a basis
Yes for valuation i.e. pro rata rates
executed under different conditions?

No

Are there significant changes in the

Yes Pro rata rates are used as above
quantity of works?

No

Is the work different in character,

Yes Fair valuation i.e.star rate
conditions and qquatity?
y

Ashworth A. (2006) Contractual Procedures in the Construction Industry, p.314

 Variations under SFBC: The valuation
The classification of the nature of works and the conditions of the works

1. Works of similar character executed under similar conditions

 The price in the Contract Bills
2. Works of not a similar character or executed under similar conditions
 The price in the Contract Bills shall be the basis of prices
• so far as may be reasonable
 A fair valuation shall be made
• if the price shall not be treated as a reasonable basis for valuation
3. Works cannot be properly be measured and valued
 Daywork rates shall be allowed
• Labour: The rates in the Contract Bills
• If no daywork rates in the Contract Bills
• The Standard Day Labour and Plant Hire Schedules
• Material: Valued at cost plus delivery plus 15% for overhead and profit
4. The omission of works vary the Conditions in which the remaining items
 Clause 11(4) (b) shall apply

The concept of pro-rata

pro rata rate and star rate calculation
Pro-rata rates (proportionally valued rates)
Examples of methods by Martin Hills
1. Derivation from 2 or more similar rates in the bills

If 40mm s/c screed $40 / sq.m.

sq m

Pro rata rates for s/c

Then, 30mm s/c screed ?
screed

If 20mm s/c screed $30 / sq.m.

 The concept of pro-rata
pro rata rate and star rate calculation
Pro-rata rates (proportionally valued rates)
Examples of methods by Martin Hills
2. Analysis and transfer cost components from items of different description with
some relevant
l components iin the
h material
i l or operations.
i
3. Reconciliation analysis, decompose the unit rate into
• Material
M t i l
• Labour
• Plant
• O h d & profit
Overhead fi

The critical issue is the knowledge of the operations and the application of reasonable
professional
f i l judgment
j d supportedd by
b sensible
ibl analysis
l i andd iinformation..
f i

Some useful terms in common practice

p
In practice: Lump sum contract = 100% measured works ?
Some terms commonly
y used in lump
p sum contract
• Contingencies
• Provisional sum
e.g. A sum of %500,000 allowed for signage works
• Provisional quantities

e.g. 12mm dia. Reinforcement 10,000 T (subject to remeasurment)

• Prime cost sum

e.g. P.C. sum of $5,000,000 for the life sub-contract

• Prime cost rate

e.g. P.C. rate of $200 for ceramic tile

• Lump sum item

e.g. Allow
ll for
f the
h design
d i andd construction
i off temporary working
ki platform
l f
 Loss and expense in regard to Variations
Cl.11(6) If upon written application being made to him by the MC, the Architect is of
p
the opinion that a variations or … has involved the MC in direct loss and //or direct
expenses for which he would not be reimbursed by payment in respect of a
valuation made in accordance with the rules contained in sub-clause (4) of this
pp
Condition an dif the said application is made within a reasonable time of the loss
and expense have been incurred, then the Architect shall either himself ascertain or
shall instruct the QS to ascertain the amount of such loss or expenses.
( l 11(6) removedd from
(cl.11(6) f the
h 2005 edition)
di i )

• Wh iis the
What h ground
d ffor entitlement?
il ?
• How to apply?
• H to assess??
How
• Who will assess?
• Wh t iis th
What the difference
diff from
f 11(4)?

Think about
Are there any change in aspects of
((1)) the definition of variation,
(2) the administrative procedure, and
(3) the rules of valuation, in the new version of SFBC?
 REFERENCE
F NC
Contractual Procedures in the Construction Industry, 2006, Allan
Ashworth, Pearson Education Ltd. Ch.23

Building Contract Procedures in Hong Kong, 4th Edition 1993, M.J.Hills,

Ch.11

Construction Contracts, Law and Management, Murdoch and Hughes,

Published by E & FN Spon. Ch.14

Aqua Group,Contract Administration for Architects and Quantity

Surveyors, Granada Publishing Ltd.

Architect’s Job Book:Volume 2 ‘Contract Administration” 5th Edition.

RIBA Publication.