Valuing variations retrospectively
Although the JCT family of forms provide for the use of quotations in the valuation of variations the traditional method is to value variations retrospectively in accordance with rules set out in the contract.
The benefits of this approach are that work can commence on the variation as soon as the instruction is given, thereby avoiding delays caused by waiting for the quotation to be requested, prepared, submitted and agreed.
Given that many variations issued under a building contract are for relatively minor, low value work or work that is easily valued by reference to the bills of quantities or other cost data, this approach is pragmatic and has generally served the building industry well over a considerable period of time.
JCT Standard Building Contracts, such as Standard Building Contract with Quantities (SBC/Q 2016) provides that variations are to be valued by measurement or using dayworks.
Valuation by measurement
To value variations by measurement the rates used must either be:
- bill rates;
- adjusted bill rates; or
- fair rates.
Bill rates
Valuation of variations using bill rates is the simplest method of valuation. If there is an item or items in the contract bills of quantities for similar work then, subject to certain exceptions, the variation is valued using bill rates. For example, if the variation is for the provision of additional internal doors and there is a bill item for supplying and fitting doors of the same size and specification, then the bill rate will generally be used to value the additional doors.
Adjusted bill rates
If the conditions under which the work is carried out or the quantities of work are changed by the variation, the valuation of that variation is based on bill rates with a 'fair' allowance made for the difference in conditions and/or quantity.
A change in the timing and/or sequence could lead to a change to the conditions that render the bill rates inappropriate. For example, the bill rate for internal doors is likely to be based on the assumption that doors will be fitted during the 'second-fix' stage of the project, that is after plastering but before decoration. If a variation to provide additional doors is given after decoration has been completed the conditions under which the work will be carried out will be significantly different from those envisaged at the tender stage and the bill rate is unlikely to be appropriate. In this case it is suggested that a fair allowance would take account of any increase in the costs of sending a joiner back to site, protecting finished works, cleaning up after completion and any other additional costs reasonably incurred.
Changes to conditions may also include carrying out excavation works in mid-winter when the contract clearly envisaged all excavation works to be carried out in mid-summer. The contractor's rates for excavating in summer months are likely to be lower than excavating in winter, when it is likely to be wetter, colder, darker and more prone to disruption. Therefore, in these circumstances the rates used to value the variation may have to be revised.
Clause 12.3 of the FIDIC conditions provides a set of conditions for determining when a change in quantity requires the formulation of new rates or prices. In contrast to FIDIC the JCT conditions do not define what constitutes a 'significant' change in quantities. The costs of some construction operations are more sensitive to changes of quantity than others; a change in quantity of plus or minus 10% may be significant in some cases, whereas a change of plus or minus 50% may be insignificant in other cases.
For example, a small change in quantity may be significant where the rate is based on a high fixed cost. If the rate for surfacing a small area of road on a site is based on the cost of hiring a road laying machine for a minimum period of one day, the cost of the machine is likely to account for a large part of the bill rate for the surfacing. If the quantity of work required goes down the contractor will recover less towards the fixed cost of machine hire but if the quantity increases the contractor will recover more. In these circumstances it might be argued that anything more than a very small variation in quantity ought to be deemed to be 'significant' and the rate revised.
Significant increases in quantity often produce lower unit rates due to economies of scale. However, this is not always the case. If the bill rate for an item of work required one full load of ready-mixed concrete the unit rate for the work would be based on one delivery of concrete, with no part-load charges. If the quantity was increased (or decreased) by a quantity that was less than a full load the contractor would then incur part-load charges and the original rate would be inadequate. In this case the unit rate may go up even if the overall quantity of work increased. It is suggested that in this example a 'fair' allowance would reflect the cost incurred by the contractor of part-load costs.
In practice the unit cost of many construction operations is not likely to be greatly affected by changes in quantity and even relatively large changes in quantity may be insignificant to the rate. This is particularly the case where the rate includes no fixed costs element and the costs of labour, plant and materials are directly related to the amount of work carried out.
Sometimes a contractor enters an incorrect rate into a bill of quantities for an item of work. In these circumstances a variation will exaggerate the impact of that error. If the rate is too high then the contractor would recover a disproportionate profit; if the rate is too low then the contractor would incur additional loss. In Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2000] BLR 247, the Court of Appeal came to the view that rates entered into a bill by mistake cannot be opened up or disregarded on the basis of there being an error.
Fair rates and prices
Where the variation relates to work for which there is no bill item, the work should be measured and valued at 'fair rates and prices'. Usually the parties agree to use actual cost as the basis for establishing a 'fair rate'. In these cases the employer or its quantity surveyor may ask the contractor to provide copies of invoices and details of labour time and cost for doing the work. Once the cost is established a reasonable percentage is usually added to provide an allowance for contractor's overheads and profit.
In Weldon Plant v Commission for the New Towns [2001] 1 All ER (Comm) 264 the court held that in the absence of special circumstances, a fair valuation, under the terms of the ICE Conditions, had to include an element on account of profit and an element to cover the contribution the contractor made towards the fixed or running overheads.
There is clearly a broad basic fairness to this 'cost-plus' approach but, if the JCT contract intended this approach to be used, it could have used the words 'actual cost', rather than 'fair rates and prices'. Furthermore, the use of actual costs may be unfair. If the contractor is very efficient in carrying out the varied work it will get no benefit from any cost savings it is able to generate through the variation. Conversely, if the contractor is very inefficient in carrying out the work the employer will have to pay for those inefficiencies. Either way appears to be unfair.
The judge, in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [1999] BLR 123 (paragraph 36) emphasised that fairness is an objective test and that:
‘a fair valuation when used as an alternative to a valuation by or by reference to contract rates and prices generally means a valuation which will not give the Contractor more than his actual costs reasonably and necessarily incurred plus similar allowances for overheads and profit for anything more would confer on him an additional margin for profit and would not be fair to the Employer. Fairness is an objective test which takes into account the position of both parties. It is surely not right to use a fair valuation to compensate a Contractor for a loss suffered elsewhere and unconnected with the work in question.’
Some people argue that a 'fair rate' is one that is built up on the same basis as the rates in the contract bills. So, for example, if the specification for internal doors changes, the bill rate is adjusted by the difference in price of the 2 doors but the labour element remains the same (assuming that the time required for fixing both doors is similar).
Others argue that a 'fair rate' is one based on rates obtained from an industry price book or pricing service. For example Spons, BCIS Guide to Estimating for Small Works, BCIS Comprehensive Building Price Book or BCIS Online can be used. They provide average industry prices which may be deemed to be ‘fair’ for the purposes of valuing variations.
Another option is for the quantity surveyor to build-up the rate using their general experience and expertise. This may be based on typical rates of pay/outputs and known material prices for similar works. Most experienced quantity surveyors have a good idea of approximately how much major items of work should cost.
Rates derived from bill rates or taken from major price book rates ought to produce a 'fair rate' but where an item of work is unusual, actual cost may well be the fairest way to value the variation.