Articles

31 October 2023

A:   General Nature of Variations

1. One rationale underlying the practice of recognising and implementing “variations” (synonymously, “changes” or “change orders”^[1]) in contracts has its roots stretching back into the 19^th century, where, as an example which the principle was upheld in Russell v Viscount Sa da Bandeira,^[2] Erie CJ explained that “….[I]t almost invariably happens that in the course of the construction of a house or a ship or other extensive work, the party for whom the work is done from time to time desires to have additions or alterations, and it is by no means an unusual thing to insert a clause providing that the employer shall not be liable for extras or additions unless there be an order in writing fixing the price or the certificate of the architect for the work so done.”     
2. It may be thought in equal terms to be invariable, outside the category of short order minor works such as removals and renovation work in the built environment, that larger scaled engineering and construction projects, being comparatively complex in nature, and which therefore take considerably longer periods of time to execute and deliver are additionally susceptible to unanticipated factors which may act to affect the developing works and require changes to the made to the works, as the contract is being performed. Such factors may include changes in regulatory compliances on plant output, improvements in construction methods and technology, economic conditions affecting the usage or saleability of production, as well as encounters with unforeseen ground or seabed conditions impacting the design, or specifications of the works themselves.
3. Amongst the standard form contracts published in the industry under the auspices of the PSSCOC, FIDIC and LOGIC,^[3] extensive and broadly ranging powers are given to office bearers of the Superintending Officer, the Employer’s Representative, and the Company Representative respectively, to act on behalf of the employer to directly order the variation of the contractor’s works. These powers are expressed in terms of the types of variations that may legitimately be ordered to vary the dimensions, or the location, or quantities, and character of the works. They are inserted alongside provisions which deal with how such variations may be evaluated as to their additional cost to the employer by way of how much more the contractor may be entitled to claim and receive in addition to the hitherto agreed contract sum for carrying out the variation. Where a variation takes the form of an omission from the original scope of the contractor’s works, the savings taken in favour of the employer are similarly adjusted in the contract sum by way of how much less the contractor may expect to be paid because of the omission in question. In varying the contract, the employer and its agents must consider what impact that the variation will have on the time hitherto planned for completing the overall works, and to order correspondingly, an extension or a truncation to the programme, again in each instance considering various factors such as, and without limitation, the timing of the order (where a variation ordered late, or after the contractor has already carried out a majority of the work is for obvious reasons more impactful towards the contractor’s planning, resourcing logistics and programming, than one which is ordered early in the programme), the availability of resources or substitutive materials (related as such to the foregoing concern); and proportionately speaking, the magnitude of a variation (or multiple similar variations cumulatively ordered) in contrast to the typography and common intent underlying the contract as a whole (which leads to our further discussion below in connection with the title of this article).
4. There are other contractual sources from which an indirect right to vary may be exercised by an employer. In modern versions of the FIDIC and PSSCOC forms, value engineering^[4] as a concept is recognised and provisioned in the form of contractually binding financial incentives to allow the contractor to identify and propose improvements and optimisations to the work, which, if approved by the employer and implemented as variations, entail a fee to be paid to the contractor and cost savings to the project may additionally be shared between the parties. In Singapore, a comparable form of contractor-led value initiative is promoted as part of a modernizing scheme of collaborative contracting^[5] for the industry within which, so-called “pain share/gain share” arrangements, contractor performance incentives and the usage of KPIs are encouraged. Value engineering in today’s context may be contrasted with older, cruder forms of provision in certain forms of public sector contracts which purportedly allow for design corrections initiated by the contractor to be approved by the employer, but where they are implemented and result in savings by way of omissions to the contractor’s scope, or by way of a reduction in contract sum, the whole of either benefit accrues solely to the employer. Savings in terms of time are also not explicitly dealt with in many cases, and in as many forms of value engineering provisions, but it is suggested that optimisation of works could in some cases convey benefits of “savings” in terms of adding to the project’s float;^[6] and in other ordinary applications result in the usual adjustments of time for completion.
5. Given their potential for significant impacts to cost and time, whilst it is in Erie CJ’s words in Russell that “….it is by no means an unusual thing to insert a clause providing that the employer shall not be liable for extras or additions unless there be an order in writing fixing the price or the certificate of the architect for the work so done….” it is striking to observe that in most standard form contracts there are no express limits^[7] as to the number of variations that may be ordered directly or indirectly within the tenure of a project, irrespective of whether they are variations of a similar type or multiples of different types; provided, needless to add, that they are amongst other things ordered in accordance with the correct enabling provisions within the contract, and where they are not ordered after the time for completion of the works has passed.

6. In other cases, instructions from the employer may appear, obviously or impliedly, to fall within the general description of permissible variations, but their precise nature or size may render them outside the scope of the contractor’s works. Where applicable, standard forms such as the PSSCOC do provide costing mechanisms to deal with these outside-of-scope “variations” by means of a separately agreed quotation of cost, or else by applying a cost-plus approach, or else based on fair market value, or quantum meruit. Impacts on time are accordingly in those forms capable of being dealt with by the employer’s officers under a system of time limits presented as conditions precedent for the processing of notices, submissions, and substantiation of detail for the purposes of time extension relief which may be ordered “….within a reasonable time.” Nevertheless, any express limits that could theoretically be imposed on the number, or recurrences in the ordering outside-of-scope “variations”, remain absent.

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Contributed by:

Glenn G Cheng - Managing Partner, Arbitrator, Glenn G Cheng Law Chambers

^[1] To avoid unintended confusion, this article uses the term “variation” to denote the collective meanings of “variations”, “change” and “change orders”.   

^[2] [1862] 143ER59, 13 CBNS) 149.

^[3] Standard form contracts reviewed for the purposes of this article included the PSSCOC 2014 Construction and 2020 Construction and Design and Build forms, the FIDIC Red, Silver EPC and Gold DBO suites, and the LOGIC second edition for Construction.

^[4] The term may well have entered the broad lexicon of contracting as a term of art; but care must be taken to distinguish it from the idea and practice of design development work, as well as other “inclusively priced” items, or works “deemed included in the lump sum”. The latter categories of work involve less in terms of changing a scheme of works in the interest of optimisation or improvement, than they do so, for instance in a turnkey/design and build setting, to interpret the employer’s requirements and to amplify and detail the feasibilities and workings of the contractor’s proposal at bid clarification stage, as well as through the course of the works. The question of which category applies to any tranche of work in question is a mixed question of expert fact and law.        

^[5] The Guide on Collaborative Contacting in the Construction Industry, published in January 2022 by the Law Reform Committee of the Singapore Academy of Law, describes the collaborative contracting model has “[having] been successfully implemented, particularly, in public sector projects in various countries, including, the UK, USA, Australia and Hong Kong ….[and] is intended to address problems typically associated with the traditional contracting model that is used in Singapore.”

^[6] This is a topic which the writers propose to be covered elsewhere or consulted separately with both writers of this article.

^[7] See also: for comparison, Sir Lindsay Parkinson & Co Ltd v Commissioners of His Majesty's Works and Public Buildings [1949] 2 KB 632, in which the variation clause was upheld that it could, on a literal interpretation, be said to be unlimited.