Large scale Contracts are often subject to significant amendment. The administration of amendments may result in a backlog, with those responsible for the closing out of the variation account either not authorising the variation or disagreeing on the value of the variations. Disputed variation accounts can give rise to the following issues:
- Competing views of what constitutes change and/or a slow recognition of change, with variations being sanctioned by the Contract Administrator, at a later stage, may impact Contractor cash flow.
- Alternative valuation methodologies in relation to the variation valuation rules (the “variation ladder”). These rules typically require an orderly valuation of similar works at similar contract rates, rerating for works where an applicable rate cannot be found, or build ups to new rates, and failing that, resorting to an actual cost-based or fair valuation with applicable mark-up percentages.
- Variations need to be backed up and fit for audit. This requires substantiation and records of measurement and a valuation of the ambit of the instructed works. Typically, industry contract forms require particulars to be provided in accordance with the valuation procedure, with records being furnished in a prescribed manner. Further, it is important to serve such particulars promptly.
In our experience, where there is a backlog of disputed variations or disputed value variations, the contract administration on both sides can reach an impasse because the parties become locked into their respective positions.
Disputed value variations stem from disagreements in principle as to the entitlement to a variation and regarding the appropriate valuation method to be applied. To alleviate or remove a backlog in the variation account, it can be helpful for the parties to benefit from expert determination.
Pervasive issues, such as the treatment of inflation, application of mark-ups, other common factors and adjustments can cascade throughout the variation account, giving rise to valuation differences arising from common issues where the parties hold consistent positions throughout the variation account. An analysis of the pervasive issues and a finding in this regard may help to unlock significant differences within the variation account.
Methodology disagreements can arise where the rates in the Contract do not cover work of a similar nature and the Contractor may seek to be reimbursed costs actually incurred plus mark-up or on a fair valuation basis. Employers may be reluctant to move away from the tendered rates as, understandably, those rates were incorporated when placing the Contract. Indeed, the original Contract rates may have been relied upon by the Employer. However, the Contractor may assert that the rates or star rates are not applicable because work is of a different nature and evaluate variations by reference to incurred costs.
The variation account may give rise to time-related costs and the parties may negotiate a settlement agreement to settle a value on the account up to a given point in time (potentially inclusive of the time cost consequences of those variations). Caution needs to be taken regarding such agreements, as often these interim arrangements can be subject to interpretation and the parties may subsequently disagree on matters caught by the settlement agreement.
Contracts involving remeasurement will require progressive agreement of quantities, and these may also cover the valuation of variations. Full remeasurement or admeasure by reference to progressive changes between the IFC and as-built drawings will require full records, ideally by reference to agreed take-offs.
A post facto examination of the disputed variations can be undertaken on a proportionate examination of a high value list of variations. An examination of the disputed variation account can be reviewed using the Pareto Principle, which will filter high value variations over a certain threshold. Thus, narrowing the time spent focusing on cost significant differences.