Construction contracts - Research Paper Example

?Introduction Construction contracts are created in order to document the various specifications set out between the employer and the contractor as well as any other involved parties. Even though most details are settled before the actual construction begins, it is generally true that most construction contracts require modifications and changes. As construction proceeds, any changes introduced in the construction process are termed as “variations”. Any forms of variations in construction are reflected in the construction contract through the utilisation of variation clauses settled in the original contract. Even though the variation clauses provide for any modifications but the very nature of the variation clauses has often been called into question. It has not been made clear as to which forms of modifications constitute a “variation” and which ones do not. The varied nature of modifications and their routes of introduction into the contracting environment often mean that variations are settled on a case to case basis as per dispute resolution methods. A comprehensive method of dealing with variation is provided by the FIDIC Red Book (1999 edition) under sub clause 13.3. As per the subject clause, the engineer must specify the variation in writing to the contractor who is bound to respond as early as “practicable”1. The contractor has been provided with the authority to reject any variation proposals forwarded by the engineer as long as practicable reasons are provide in writing for the declination. In addition, if the contractor chooses to accept the variation proposed by the engineer, the contractor has to provide a written variation proposal as per necessary modifications, their cost and the expected timeline. Once the contractor’s proposal has been submitted, it is up to the engineer to approve or disprove of it with cogent written reasoning. One of the most noticeable things in the sub clause is that the contractor cannot delay the work being executed based on the variation proposal of the engineer. Other than the information provided above, the variation clause in the FIDIC Red Book (1999) does not provide what kinds of changes and modifications constitute a variation. The multiple methods in which variations are defined only add to the complexity of the situation. Variation Types Variations are not restricted merely to the work specification, the cost specification or other quality aspects. Instead, variation can constitute a number of different aspects a few of which are2: an addition to work specifications; an omission to work specifications; a change of materials; changes to construction sequence; working hours change; corrections in the contract documents; corrections in the Bill of Quantities (BoQs) for descriptions and / or quantities of materials used; changes to third party work schedule and scope; changes in the timeline agreed upon in the original contract; changes required to deal with unforeseen circumstances / force majeure. In addition to describing variations as changes to the work, its scope, its cost, quality and other aspects, another potent method of defining variation is as per the party that initiates the variation. CEBE3 has provided a comprehensive method to describe variation as per the initiating party. The causes for variation as per the initiating party have been used to classify variations in an attempt to cover as many variations as possible. The major classifications of variations provided are owner related, consultant related, contractor related and other variations. The research by CEBE provides that there are approximately 53 discernible types of variations that might occur in any construction contract situation4. The various types of variations are shown in detail in the diagram provided below: Figure 1 - Causes of variation as expounded by CEBE (2006) Impacts of Variation Types on Contract Dimensions It would not be possible to discuss all the different types of variations and to analyze them as per FIDIC’s Red Book (1999) interpretations. A few major variations, including variations that are controversial as being variations or not, are discussed as per CEBE classification presented above. Owner Related A variation in project scope by the owner is one of the most common causes behind variation especially for construction projects5. The owner is not onboard in typical construction projects planning and design stages and this leads to changes in planning and scoping later6. In such circumstances, since the originating party is the owner, the engineer is required to submit a proposal for variation to the contractor as per sub clause 13.3 of the FIDIC Red Book (1999)7. Processing of the variation requested is subject to the contractor’s choosing and the owner would have to convince the contractor to comply. Additionally, the condition of the Red Book’s sub clause that the contractor cannot stop work as variation proposals are being shuttled seems unreasonable. For example, if the owner requires an extensive change of scope that involves the current work, the contractor still has to keep working in the agreed direction even though he proposes variations simultaneously. The lack of clarification for major scope changes makes sub clause 13.3 ambiguous and open to dispute between contracting parties. Another area of contention for variation may arise if the owner’s cash stream is somehow affected. In case that the owner runs into fiscal trouble, they may request variations to reduce project costs that would in turn affect the quality8 and advancement of the project9. In such a situation, the contractor would be proposed for variation(s) by the owner’s engineer. Any such variations would affect the contractor directly as the contractor’s committed materials, resources and labor may not be required anymore or its amount may have to be reduced. Sub clause 13.3 makes it clear that the contractor has the right to reject any variation motive by the owner10. Such a position is encouraging but it leaves the contractor hanging in the balance as the owner may choose to pause the project and remove the contractor altogether by cancelling the contract. This would tend to leave the contractor fiscally at risk and exposed. A variation on the owner’s end may also be required if construction procedures are to be changed. For example, the owner may request the contractor to accelerate or slow down construction progress. Similarly, the owner may request the contractor to adopt different construction practices such as using different technology than is available with the contractor. In any case, such changes would require a variation of already established procedures and their application11. In this instance, it is noticeable that sub clause 13.3 of the FIDIC Red Book (1999) does not provide coverage to the contractor for any such changes. In contrast, the owner’s engineer has been provided with the privileges to decide on work procedures as referred to clause 12 under sub clause 13.312. This tends to expose the contractor who has no other option but to reject the proposed changes by the engineer. In such a case, the possibility of a dispute between the owner and the contractor is high since no other means of settlement are provided. Consultant Related Consultant related changes especially with respect to design enhancement are commonplace13. This is all the more true for projects where construction commences before the design has been finalized14. Changes in design initiated by the consultant may have mixed effects for the overall project depending on when the changes are proposed. In case that the changes are proposed earlier on in the project, the amount of variation is understandably low and hence a variation clause as per FIDIC Red Book (1999) sub clause 13.3 could be used for settlement. However, in case that the design changes are introduced later on such as the addition of new features to an already constructed floor, the variations would be more disputable. In such a case, there are chances for disputes to arise. Moreover, such variations would automatically lead to losses in productivity and negative schedule variances15. Contractor Related Variations may occur from the contractor’s end on a number of different accounts such as the lack of clarification of design16, lack of required resources such as equipment17, lack of skilled manpower, fiscal problems of the contractor18, differences in the contracting conditions and the site conditions19 etc. The various reasons leading to variation on the contractor’s end have been provided with no coverage under sub clause 13.3 of the FIDIC Red Book (1999) since the engineer is the only official authorized to initiate a variation proposal20. Given this position, it could be postulated that the contractor can only inform the engineer that they have a problem and may not be able to proceed unless provided with variation(s). This in turn also tends to indicate that the contractor would be exposed to risk since the contractor can only request the engineer unofficially at best for variation. It is up to the engineer to deal with the variation proposal at will and since the contractor can only reject the variation proposal once it is issued, this leaves the contractor pretty much helpless. In such a case, the project could end up stalled and losses in quality and cost variance would be observable. Other Variations Variation may be warranted on account of weather changes for the worst21, geological disturbances, political upheavals and any other force majeure event(s)22. Another important type of variation could arise from changed governmental regulations that prompt changes in both design and documentation for the concerned project23. In such circumstances, there are no forms of coverage provided under sub clause 13.3 of the FIDIC Red Book (1999) except that the engineer would propose the variation24. In this sense, the Red Book fails to provide much for unforeseen circumstances and the arising variations. This also leads to the idea that unforeseen circumstances prompt large changes so could be treated as being differentiated from simple variations under the FIDIC Red Book (1999) framework. Conclusion The FIDIC Red Book (1999) provides a standard variation clause but fails to qualitatively expound its limits and bounds. Moreover, in most cases that a variation is desired, the contractor is left open to risk exposure alone since the contractor has little involvement in the overall variation initiation process. The contractor can only reject or accept a variation proposal once it has been provided by the engineer. Hence, it could be surmised that the sub clause regarding variation tends to favour the owner in preference to the contractor since negative cost and schedule variances must arise out of a variation. References 1. CEBE, Effective Management of Contract Variations using a Knowledge Based Decision Support System (CEBE Working Paper No. 10, 2006) 2. CII, Scope Definition and Control: Publication 6-2 (Austin: Construction Industry Institute, 1990) 3. D Chappell and A Willis, The Architect in Practice (8th edition, Blackwell Science Ltd 1996) 4. E R Fisk, Construction Project Administration (5th edition, New Jersey: Prentice Hall 1997) 5. FIDIC, Red Book (1st, FIDIC, 1999) 6. F M Arain, S A Assaf and S P Low, ‘Causes of discrepancies between design and construction’ [2005] Architectural Science Review 47(3), 237-249 7. H R Thomas and C L Napolitan, The Effects of Changes on Labor Productivity: Why and How Much? (Pennsylvania State University, 1994) 8. J J O’Brien, Construction Change Orders (New York: McGraw Hill, 1998) 9. MDA Consulting, 'FIDIC: The Effects of Variation and Change Under Modern Contract Forms' (MDA Consulting 2010) accessed 8 April 2013 10. R H Clough and G A Sears, Construction Contracting (6th edition, New York: John Wiley and Sons, 1994) 11. S A Assaf, M Al-Khalil and M Al-Hazmi, ‘Causes of delays in large building construction projects’ [1995] Journal of Construction Engineering Management 11(2), 45-50 Read More