KAREN GOUGH, Barrister,

39 Essex Chambers, London

VARIATIONSWhat are the three key elements of a construction

contract? Scope of Works Price Time

What is a Variation?(Also referred to as a Variation Order, Change Order or Instruction)

strictly a variation is an agreement supported by consideration to alter some term[s] of the contract.

a variation [order] in a construction contract is not intended to change or vary the terms of the contract.

THE RIGHT TO VARY THE WORKS

Without an express power or right to vary the works, neither the Employer nor the Contractor has any unilateral right to vary them.

A right to vary the works cannot be implied into the contract.

A right to instruct variations to the agreed scope of works needs to be expressed in the contract.

Thus standard forms of building contract, including the FIDIC forms, include terms which permit the contract administrator, architect, or engineer, to instruct variations to the works.

VARIATIONS AND CHANGE ORDERS

A variation in a construction contract results in an alteration to:

The design, Quantity, or Quality of the works,

by the addition, substitution or omission from the original scope of works;

which may also impact on the price and time for the execution of the Works.

EXPRESS POWERS TO ORDER VARIATIONS

A right to instruct variations is not without its limitations. To be effective the variation order must come within the requirements of the contract.

It is important to identify and understand the dividing line between those variations which are permissible and those which exceed the Employer’s lawful authority under the contract.

As such, regard must be had to:The terms of the contract [FIDIC COC];The general law, in particular – EU procurement law,

see Contractor’s duty under GCC clause 1.13.

IMPERMISSIBLE VARIATIONS - GENERAL

As a matter of contract law, variation orders may not (without the contractor’s consent):

Change the essential characteristic of the contract itself. Omit work so that it, or substantially similar work can be carried out by another contractor. Be instructed after practical completion.Require the contractor to carry out work that was the subject of a prime cost sum.

POWER TO ORDER VARIATIONSUNDER THE FIDIC GCC

“Variation” is defined in clause 1.1.6.9 as: “any change to the Works [Employer’s Requirements], which is

instructed or approved as a variation under Clause 13 [Variations and Adjustments]”.

Clause 13 of the GCC makes provision for variations to the works, subject to limits, including the requirement to issue variation orders before the Taking Over of the works. Variations may arise: At the Employer’s Request [clause 31.1];

Instruction or request for a Contractor’s proposal.

By a Contractor’s Proposal [value engineering – clause 13.2] if it: Saves time and/or money and/or improves efficiency or value;

POWER TO ORDER VARIATIONSUNDER THE FIDIC GCC

Other provisions in the FIDIC COC provide for certain matters to be treated as “variations”: clause 4.6: providing co-operation with Employer’s personnel,

contractors or public authorities requiring access to or near the works to carry out work not included in the contract; and

clause 11.2: cost of remedying defects in the Defects Liability Period not attributable to the Contractor under clause 11.2 (a), (b) or (c).

Other provisions also deal with the consequences of variations in terms of time and money: Clause 8.4(a) – potential entitlement to an extension of time; Clause 12.3 – evaluation of the cost of a variation; Clause 12.4 – evaluation of a variation omitting work.

TYPES OF VARIATION

Clause 13.1 GCC provides a non-exhaustive list of matters which may be the subject of a variation order, including:

Alterations to the design. Including the correction of errors in the contract documents

which result in the contract documents not properly describing the works actually required.

Alterations to quantities. Alterations to quality. Alterations to working conditions. Alterations to the sequence or timing of work.

PUBLIC PROCUREMENT – LIMITS ON VARIATIONS

Pressetext v Austria (Court report, 24 September 2009):

A statement of first principles [para 31]:•the principal objective of the Community rules in the field of public procurement is to ensure the free movement of services and the opening-up to undistorted competition in all the member states: see Stadt Halle v Arbeitsgemeinschaft Thermische Restabfall- und Energieverwertungsanlage TREA Leuna (Case C-26/03) [2005] ECR I-1, para 44. •That twofold objective is expressly set out in recitals 2, 6 and 20 in the Preamble to Directive 92/50.

PUBLIC PROCUREMENT – APPLICABLE PRINCIPLES

32. In order to pursue that twofold objective, Community law applies inter alia the principle of non-discrimination on grounds of nationality, the principle of equal treatment of tenderers and the obligation of transparency resulting therefrom: see Unitron Scandinavia A/S v Ministeriet for F¿devarer, Landbrug og Fiskeri (Case C-275/98) [1999] ECR I-8291, para 31; Telaustria Verlags GmbH v Telekom Austria AG (Case C-324/98) [2000] ECR I-10745, paras 60 and 61 and Commission of the European Communities v CAS Succhi di Frutta SpA (Case C-496/99P) [2004] ECR I-3801, paras 108 and 109.

PUBLIC PROCUREMENT –LIMITS ON VARIATIONS

Pressetext v Austria (Court report,24 September 2009) determined that:

“[para 34] In order to ensure transparency of procedures and equal treatment of tenderers, amendments to provisions of a public contract during the currency of the contract constitute a new award of a contract ... when they are materially different in character from the original contract and, therefore, are such as to demonstrate the intention of the parties to renegotiate the essential terms of that contract…”

PUBLIC PROCUREMENT - IMPERMISSIBLE VARIATIONS

The Pressetext case decided that variations would not be permitted where the effect of the change:

Would have allowed others to participate in the tender or a different tender to be accepted;

Would extend the scope of the contract considerably to encompass services not initially covered; or

Would change the economic balance of the contract in favour of the contractor in a manner not provided for in the terms of the initial contract.

[Decision paragraphs 35, 36 and 37].

PUBLIC PROCUREMENT -LIMITS ON VARIATIONS

See now also Directives EU 2014/24 and 25: Art 4: imposes a budgetary limit of Eur 5,186,000 (net of

VAT) after which an amendment will be regarded as “substantial”;

Art 72: sets out the limits on modifications to contracts during their term: 72.2.(a)-(e) describes circumstances which are excluded from

the need to retender; 72.2.(ii) Without reference to (a)-(e) if the value of the change is

below the limit in article 4, and… below 15 % of the initial contract value for works contracts, it need not be retendered.

CONCLUSION

1. The right to instruct variation orders under a contract concluded under the FIDIC COC is circumscribed by: The GCC and perhaps also the Particular Conditions;The general law under which the contract is to be interpreted;The principles of EU law applicable to public contracts.

2. When issuing variation orders Employers and Engineers need to have particular regard to the strict limitations imposed by EU procurement law which, while potentially clearer, still leave ample room for dispute.

THANK YOU FOR LISTENINGKaren Gough