Variations in Construction Contracts: NEC3 and FIDIC Compared

As the old adage goes, the only constant in construction is change. A departure from an original design is almost inevitable on any construction project, irrespective of its size. In turn, variations generate disputes, and have an acute impact on project performance. In fact, projects can be entirely derailed by excessive change.

When bidding for a job, contractors should be aware of the different ways in which variations are dealt with under the various standard forms. There is more risk in a variation clause than is immediately apparent. This article will explore variations as they are dealt with under the NEC3 and FIDIC forms.

Summary of the main differences

In short, the key differences between NEC3 and FIDIC in relation to variations might be tabulated as follows, each of which will be discussed in further detail below:

NEC3	FIDIC
Same contractual machinery for both i) variations and ii) contractor claims (i.e. Compensation Events – or ‘CE’s”)	Different contractual machinery for dealing with variations, on the one hand, and claims, on the other
Variations dealt with via core clause 6, ordinarily clause 60.1(1) [An instruction changing the Works Information…]	Variations are dealt with via clause 12 and 13 under FIDIC Red [Variations and Adjustments] and [Measurement and Evaluation]
Time and cost entitlement both flow automatically once a CE is established	Time and cost entitlement must be established separately
The burden of proof is more difficult – a balance of probabilities	The burden of proof is arguably easier because, at least in relation to Cost, a variation is not valued as a contractor’s claim
Valuing retrospective and prospective impact	Valuing retrospectively (mostly)
Not bound by BOQ rates in valuing (see detailed discussion below)	Bound by BOQ rates in valuing (see detailed discussion below)

NEC3

Mechanism for Claims

NEC uses the same system for variations and claims. Variations are merely a category of "compensation events" (CE), and are assessed by the Project Manager.

Scope and Burden of Proof

Although NEC3 does not limit the scope of variations, since a variation is considered a “CE” more broadly, the burden of proof under NEC is a "balance of probabilities" which in many instances proves more onerous than inFIDIC.

Time/Cost or Both?

Clause 62 provides that, if a variation is envisaged, the Project Manager should call for a quotation from the Contractor comprising inter alia, changes to the Prices. The quotation itself must deal with the effects of a CE on both time and cost, as once a CE is established, both time and cost entitlement flow automatically subject to proper quantification.

If the quotation is accepted, such acceptance will be followed by a formal instruction to undertake the works. As the work is pre-priced before it is carried out (often in theory only!), future disputes over quantum are mostly eliminated. This approach also encourages collaboration and risk management.

Valuation

In assessing the CE, the Project Manager will disregard both the rates and prices in the Activity Schedule as well as the Bill of Quantities. Rather, the assessment of a CE as it affects Prices, is based on its effect on Defined Cost plus Fee. As the Project Manager is not bound by existing rates in valuation, it is highly unlikely that the Contractor will unfairly benefit or suffer a loss if existing rates are too high or too low.

Retrospective/Prospective Claims?

As valuation entails an assessment based on the "effect" of the variation, the Contractor can claim for both retrospective and prospective loss.

FIDIC

Mechanism for Claims

Under FIDIC, claims and variations are separate concepts, and are dealt with under different contractualmachinery.

Scope and Burden of Proof

As a variation is not considered a claim, and is generally measured and valued in the ordinary course, which means that the burden of proof is likely less onerous than in the NEC3.

FIDIC also limits variations to 10 percent of the quantity. This is essentially because FIDIC is a re-measurement contract that assumes the project scope, works, drawings etc. are well defined prior to letting the tender documents.

Time/Cost or Both?

Contrary to NEC3, an entitlement to both time and cost does not automatically flow from a variation instruction - rather, each must be proved separately. Note, importantly, that time entitlement is treated as a contractor claim which means it is subject to strict notice requirements.

Valuation

In terms of valuation, a variation is to be valued at the same, or by considering rates and prices set out in the contract. FIDIC Red Book states that contract rates or "rates for similar work" apply. If neither of the two are available, or if other criteria are met, new rates are permitted at "reasonable cost plus reasonable profit". This process of valuation leaves a plethora of unanswered questions i.e. When is the new work "similar"? What constitutes "reasonable cost" if there are no contractual/similar rates? Does "reasonable cost" include secondary impacts of change?

FIDIC Yellow Book, offers little guidance as to how to value variations leaving this solely at the discretion of the Engineer.

Retrospective/Prospective Claims?

Claims can only be established on a retrospective basis i.e. by establishing the actual time / cost loss suffered.

Conclusion

The truth is that contractors come in low at tender stage, even under-pricing at times, so as to win work, and are generally operating often working off tight margins. As such, contractors often view variations favourably, as a source of additional income. In our experience, the NEC is often more helpful for contractors, as changes are treated firmly as employer risk events and contractors may price them on what is essentially a cost reimbursablebasis, outside the ambit of the BOQ. Where a contractor is bound the BOQ in valuing a variation, as in FIDIC, an under-priced job often comes back to bite and can cause serious financial strain to a contractor..Inevitably, there are pros and cons to both contracts, and the question of which contract works best will largely be determined on the type of project and the parties involved.