An employer’s contractual right to vary the scope of the works will normally be subject to express or implied restrictions. This article examines these restrictions as well as the limitations on the omission of work from the scope.
Contractual obligations cannot be varied unilaterally unless the contract contains express provisions. An employer will often want, or even need, to change the scope once the works begin. It would be unrealistic to work on the basis that such changes can be negotiated and so an employer needs the power under the contract to order the changes it wants.
However, an employer’s contractual right to vary the scope of the works will not be unlimited. It must be exercised in accordance with certain contractual restrictions, which may be either express or implied. These restrictions can broadly speaking be divided into 3 categories: (a) restrictions regarding the type of change; (b) restrictions regarding the volume of change; (c) restrictions as to when an employer may instruct a change. This article examines each of these restrictions. We also look at special considerations in relation to the omission of work from the scope and where an employer wants to bring a new contractor on to the site.
(a) Type of Change
Neither party to a construction contract will know, on entering into the contract, what changes will subsequently be necessary or desired. Accordingly, an employer will want a wide discretion as to the variations it can instruct. On the other hand, the contractor is signing up to undertake a specified scope of works and may have good commercial reasons for wanting to refuse to undertake certain additional types of works not contemplated by the scope.
Express restrictions as to the type of changes an employer may instruct are relatively uncommon in standard form contracts, although they do exist. For example, the ICC Measurement Version 2011 Form of Contract permits only the instruction of variations which are desirable for completion or the improved functioning of the works.
Similarly, the ENAA 2010 Form of Contract permits an employer only to instruct a variation which “falls within the general scope of the Works and does not constitute unrelated work and that it is technically practicable, taking into account both the state of advancement of the Works and the technical capability of the change, modification, addition or deletion with the nature of the Works as specified in the Contract”.
In contrast, the FIDIC Silver Book entitles the contractor to object in specific instances, being where (i) it cannot readily obtain the Goods required, (ii) the safety or suitability of the Works will be reduced, or (ii) the achievement of the Performance Guarantees will be adversely affected.
Both the ENAA and FIDIC Silver Book are contracts where the contractor takes significant design risk. Under such contracts it is important that the contractor has the right to refuse to undertake instructed changes because the proposed alteration may undermine the integrity of the design for which it is responsible. The right to veto a variation under these contracts is therefore often linked to deficiencies in the technical validity of the proposed change.
(b) Volume of Change
A contractor will normally be willing to undertake variations because such work will be profitable. However, a large number of changes may be difficult to resource. They may delay completion of the project in circumstances where the contractor needs to move resources onto a new job. However, express restrictions on the amount of variations that may be instructed are rare.
The MF/1 form of contract (intended for projects involving supply and installation of electrical and mechanical plant) is one example. It includes a cap on the value of variations which the employer may instruct. The cumulative value of variations may not amount to a net change to the contract price of more than 15%.
Rather than imposing a strict percentage cap on the value of permitted variations, the Norwegian Fabrication Contract (NF/07) which is used in the oil and gas industry instead prohibits the employer from instructing variations which cumulatively exceed that which the parties could reasonably have expected on entering the contract.
Each of these approaches has its own limitations. The rigid 15% might prove obstructive where a change is necessary, whilst the NF/07 can be uncertain in its application. After all, what the parties could reasonably have expected on entering the contract may be far from clear.
(c) Timing of Change
The timing of a variation will impact on the progress of the works. A variation instructed during the design phase will not have as much of an impact as the same instruction issued during construction. Generally speaking, the later a variation is instructed, the more disruptive and costly it will be.
In recognition of this, the ENAA Contract states that an employer’s right to instruct a variation depends upon the “state of advancement of the works”. This is quite an unusual approach and most forms of contract adopt a specific cut-off date for variations.
The FIDIC Red, Yellow and Silver Books permit the instruction of variations prior to the issuing of the Taking-Over Certificate. Such an approach is understandable because following this certification the contractor will demobilise and hand over the site to the employer.
Where a contractor is appointed to design, build, operate and maintain a facility then, perhaps understandably, it would be inappropriate to effectively sever the employer’s right to instruct variations upon completion of the build period. The FIDIC Gold Book recognises this and permits the employer to continue to instruct variations throughout the operational phase.
A construction contract not only obliges a contractor to carry out the defined scope of work, but also entitles the contractor to undertake the work in exchange for the contract price. Whilst the variations clause may allow the employer to omit work from the scope, it cannot take advantage of this power to effectively re-write the parties’ commercial bargain. After all, the contractor has negotiated a contract price on the basis of a certain volume of work and if that is dramatically reduced the project may become uneconomic.
Most legal systems therefore imply limitations on the employer’s power to omit, such that it may not take work out of the contractor’s scope and re-distribute it to other contractors. However, this is normally imposed as an implied restriction and is therefore subject to express terms to the contrary. An employer might therefore be able to omit works and re-distribute it if express wording is included in the contract providing for this.
Supplementing the contractor
There is no implied obligation that an employer must instruct the original contractor to undertake extra work on a project. The employer may instead want to bring a new, additional, contractor onto the job and there is no reason in principle why the employer should not do this.
However, in following such a strategy, the employer may breach the rule concerning the omission and re-distribution of works discussed above. Whether the introduction of a new contractor puts it in breach of the “omit and re-distribution” rule depends on the nature of the change. If the re-design involves the change of materials then it may well be caught. For example, suppose the construction of a building involved a particular type of flooring. If the employer changed the specified flooring material and brought in a new contractor to undertake the work then it is likely that a tribunal would find that this violated the rule about omitting and re-distributing. However, an employer would probably be free to bring a new contractor onto the project to undertake a new added element of work following a substantial re-design.
The contract with the original contractor may, of course, place express restrictions on the employer’s power to bring a new contractor onto the job by giving it exclusive possession. Safety management issues will also need to be considered. An employer should always be cautious about such a strategy because of the risk of delay and disruption claims where there are parallel contractors on site.
Variations mechanisms giving the employer the freedom to alter the scope unilaterally are a commercial necessity. They are included in construction contracts in order to allow the employer the flexibility it requires to take account of unexpected site conditions or commercial developments during the lifespan of a project. However, such powers are often subject to implied limitations. In addition, contractors will also insist on restrictions to the power to vary in order to safeguard their commercial interests.