Those six dreaded contractor words “… we need to change the scope …” ?

We have all been involved in projects where either the Employer or the Contractor utters those dreaded words of “... we need to make a change to the specifications …”

or my personal favourite “… you need to assist us with additional work, don’t worry about the paper work, we will sort it out later…”.

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Quite recently a client of ours, one of our favourite subbie’s, who had contracted under the 2018 N/S Subcontract, was asked verbally by the Contractor to perform additional scope.

Our client refused to perform the additional scope until the Contractor confirmed the instruction in writing, however, they came to us for some advice as understandably, they were concerned that the Contractor might hire another Subcontractor to carry out the work and attempt to recover the additional costs from them.

Whilst a headache indeed (and nothing that a panado could fix), the nature of Construction and Engineering contracts are unique in that variations to the initial scope of works are almost inevitable because –

There are almost always incidental events that occur during the construction and commissioning periods which often require design and specification changes
The typical reasons for these changes are:
- changed requirements of the Employer
- development and execution of a detailed design
- additional work or omissions from the original scope of work

When looking at variations in the context of these contracts, we must always keep in mind the type of contract in play and the obligations of each party – lump sum vs measurement and where the liability for design lies – which may complicate where the risk lies in so far as whether or not something constitutes a variation.

What constitutes a valid variation in terms of the 2018 N/S Subcontract?

This was the first question that we needed to answer for our client.

Unlike the FIDIC suite of contracts, the JBCC Principal Building Agreement, Edition 6.2 of 2018 and the Nominated / Selected Subcontract Agreement, Edition 6.2 of 2018 (the 2018 N/S Subcontract) do not have one dedicated clause that deals with variations and adjustments.

The 2018 N/S Subcontract provides that a contractor may issue contractor’s instructions, in relation to alterations to design, standards or quantality of the subcontract works provided that such contractor’s instructions shall not substantially change the extent of the subcontract works.

A valid contractor’s instruction is defined as “… a written instruction issued by or under the authority of the contractor to the subcontractor that may include drawings, photographs and other construction information …”.

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Simply put, a valid contractors instruction is one where -

Architects write home designs on the desk.

the contractor’s representative issuing the instruction is authorized to do so
the instruction must be in writing (oral instructions are of no force and effect)
the instruction must expressly relate to alterations to design, standards or quantality of the subcontract works provided that the is not a substantial change to the subcontract works
the instruction may include and refer to drawings, photographs and other construction information, which gives body to the variation and are meaningless without the express instruction

It is extremely important to remember that if a Subcontractor fails or refuses to comply with a valid contractor’s instruction, the Contractor may engage the services of a different subcontractor to carry out the instructions and recover the additional costs incurred from the subcontractor who refused to comply.
An important exception to the general requirement to comply with a valid contractor’s instruction is that a Subcontractor is not obligated to carry out contractor’s instructions issued after the certified or deemed date of practical completion.

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How are variations valued in terms of the 2018 N/S Subcontract?

In a nutshell, the 2018 N/S Subcontract states that:

Work of a similar character executed under similar conditions shall be priced at the rates in the subcontract priced document
Work not of a similar character shall be priced at rates based on those in the subcontract priced document and adjusted to suit the changed circumstances
In the event of neither of the above applying, work shall be prices at rates based on the necessary labour, construction equipment and/or materials and goods for executing the work plus an allowance of 10% mark-up

Our experience has shown that a cost-plus 10% mark-up often leads to situations where a subcontractor executes additional work at a loss.
We urge you to consider qualifying your tenders to guard against this risk!

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What to do when you receive a contractor’s instruction amounting to a variation

Variations may give rise to (i) additional time needed for completion and (ii) additional cost to the project.

NB – did you know that you can claim for any unforeseen additional costs?

Follow these 2 simple steps to claim these unforeseen additional costs:

Submit a notice for a revision to the date for interim completion as well as for the unforeseen additional costs within 15 days of becoming aware or when you reasonably ought to have become aware of your entitlement to claim.

NNB – if you don’t submit your claim in time you are time barred!

Submit the fully substantiated claim within 20 days from the date you are able to properly quantify the claim (remember – if you can’t quantify within the 20 days, then every 20 days write to the Contractor and let him know you will quantify just as soon as you can).

The Principal Agent then has 20 days to make a fair assessment. Should the PA not make an assessment, you are entitled to issue a notice of disagreement and proceed to dispute resolution.

How do you go about proving the time and costs associated with a variation?

Maintain a delay disruption schedule – the impact of all CI/Variations should be carefully detailed.

Produce monthly variation schedules – to be submitted on a monthly basis with the approximate cost of the variation, on a without prejudice basis.

The importance of good record keeping cannot be underestimated, often the side with the best records in a dispute is the side that wins!

Let’s go back to our client’s scenario – was there a valid contract instruction constituting a variation ?

NO – the instruction was given orally and was of no force or effect and therefore the Contractor was not able to hire another subbie to do the additional work at our client’s costs.

Maintaining good relationships is very important and so our client went back to the Contractor on our advice and explained the importance of the written instruction, thankfully in this scenario, the result was positive.

THE TAKE HOME MESSAGE?

Ensure that you receive a valid contract instruction.
If you act on an instruction which does not amount to a formal variation, you may find yourself in a situation where you execute additional work for which you will not be paid.
If you receive an oral instruction – get it in writing.
Guard against the risk of having to execute additional work on a cost-plus basis by qualifying your tender.
Submit your claim notices on time to avoid being time barred in respect of claims for additional time and unforeseen additional costs.

Dear Subcontractor, how does that headache feel when the Contractor utters those six dreaded words “…we need to change the scope…” ?