The rates in a construction contract are central to the commercial bargain between the parties. But do these rates always have to be used when valuing variations?
Most fixed price contracts contain a breakdown of the contract sum from which rates can be extracted or a standalone schedule of rates for valuing changes to the scope of works. Similarly, measurement contracts are centred around a priced bill of quantities or schedule of agreed rates used to determine the final contract sum based on the measured quantities. However, contractors and employers alike will often try to argue that the rates are not applicable when their use results in the contractor being paid more or less than it considers fair.
Fixed price contracts sometimes allow for a ‘fair valuation’ of variations where it is not possible to extrapolate a rate from the contract sum, and this will typically involve a cost based approach. However, where a fixed price or measurement contract specifies a rate for a particular type of work, the rate is normally considered sacrosanct. The rates are at the centre of the commercial bargain reflected in the contract and parties cannot escape that bargain because they perceive the result to be unfair.
Unless a contract provides otherwise the agreed rates are strictly applicable to additional work where it constitutes ‘more of the same’ of the type of work contemplated by the contract. It does not matter if a unilateral error was made when fixing the rates, which results in the contractor gaining a windfall or suffering a loss. The English Court of Appeal has confirmed that errors in pricing do not enable the parties to adjust the rates (see Henry Boot Construction Ltd v Alstom Combined Cycles Ltd1).
A contractor will sometimes try to claim higher rates where the additional work is not of a ‘similar character’ or is not executed under ‘similar conditions’. Some contracts (e.g. ICE Conditions of Contract 6th Edition) allow for reassessment of rates in these circumstances. However, in the absence of a clause specifically providing for re-rating, changes to the character or conditions may give rise to a loss and expense claim (which must be substantiated), but such changes will not typically allow the contractor to apply new rates.
Similarly, some measurement contracts state that the contract rates will only apply up to a maximum or down to a minimum final measured quantity, or a maximum percentage change to the estimated quantities. If the final quantities are outside these limits, measurement contracts often allow for a reassessment of rates or a fair valuation.
However, where a contract allows for either reassessment of rates or a fair valuation of additional/varied works, this does not mean that the parties can abandon the commercial bargain embodied in the rates altogether. English courts have held that where a contractor becomes entitled to a fair valuation based on rates or actual costs, those rates/costs must be ‘tempered’ so that they are “not too far out of line with the contract rates” (see Weldon Plant Ltd v Commission for the New Towns2).
If a party can justify departing from the contract rates, then any fair valuation or reassessment of rates must therefore strive to preserve the essence of the original bargain. So, for example, if a contractor offers rates in its tender that were particularly keen, it may follow that any subsequent ‘fair’ valuation under the contract should also be on the low side. Conversely, if an employer agrees to pay over the odds under the original contract, a ‘fair’ valuation could in the circumstances mean a generous valuation when compared to market rates.