How Should Variations Be Priced When There Has Been an Adjustment to The Tender Price?

An ICCP member recently asked my opinion on how an adjustment to the Tender Price agreed upon during tender negotiations should be applied when pricing variations. This is a matter that often causes contention so I thought it would make a worthwhile blog subject.

The following is a typical scenario:

  • The Contractor submits a tender accompanied by a priced bill of quantities for the tender price.
  • The Employer meets with the Contractor and negotiates a reduction, and the contract sum is agreed at a lesser figure than the tender price.
  • The contract documents are prepared and include a bill of quantities which shows the final price in the bill of quantities agree with the contract sum.
  • There is no clear record of the form of the price reduction that was negotiated.

The problems start when variations occur that are to be measured and evaluated at the contract rates and prices. The Contractor argues that the rates and prices should be those shown in the bills of quantities and the Consultants/Employer argues that the rates and prices should be reduced by the same percentage as the price reduction agreed during tender negotiations. I was asked for my opinion, on which is the correct way to treat this matter.

To resolve this, we must first look at the intentions of the parties during the tender negotiations. This would usually take one of two forms i.e. a lump sum reduction was agreed upon or a percentage reduction was agreed upon. In the absence of any records to clarify the situation, however, we must look at the signed contract documents and in particular the bill of quantities to ascertain the intentions at the time. The following are the likely scenarios and outcomes:

  • The agreed reduction is shown as a negative lump sum in the final summary of the bill of quantities. In this case, I would consider that the price reduction was made on a one-off lump sum basis and the rates and prices should remain as shown in the bill of quantities.
  • The bill of quantities is re-priced with the rates reduced by the agreed percentage, in which case, it is clear that the adjusted rates and prices should be used for the evaluation of variations.
  • The agreed reduction is shown as a percentage of the tender price in the final summary of the bill of quantities. The matter here is not so clear-cut, but I would conclude that if the rates and prices were not amended in the bill of quantities by the same percentage, then variations should not be subject to the same percentage reduction.

My opinion in the third case is supported by the legal principle of contra preferentem, for which Osborn’s Concise Law Dictionary offers the following definition:

‘The doctrine that the construction least favourable to the person putting forwards an instrument should be adopted against him’, where “instrument” is defined as ‘A formal legal document in writing’.

Simply put, this means that the drafter of the document had every chance to produce a clear and unambiguous document and if any mistakes, ambiguities, or conflicts exist in the document, they must be interpreted in the favour of the other party. In our situation, if the Employer, as the party responsible for compiling the contract documents, did not ensure that the contract rates and prices in the bill of quantities were adjusted to reflect the percentage price reduction, the reduction should be regarded as a lump sum and the unadjusted rates and prices should be used to evaluate variations.

The lesson to be learned here is that those responsible for the preparation of the contract documents should ensure that the principle and form of the negotiated reduction are very clearly shown in the bill of quantities and possibly also clarified elsewhere in the contract documents.

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt

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What’s the Difference Between a Claim Submitted to an Engineer and One Submitted to Arbitration?

I was recently asked if there are differences between claims submitted to the Engineer and those submitted for arbitration. My response was, “Yes, there frequently is, but there shouldn’t be.” Here is a very frequent scenario related to claims that explains why that is.

  1. The Contractor considers that he has a justifiable claim for either a significant amount of money or an extension of time which will negate delay damages.
  2. He delegates the claim preparation without determining whether the person has adequate qualifications or experience to prepare a claim to a suitable standard.
  3. The person given the responsibility does his/her best, but lacking the necessary experience and skills, the claim is not prepared to a good standard.
  4. The Engineer rejects the claim because:
    • he can’t understand it
    • it does not contain adequate information
    • it is not substantiated, or
    • it just does not prove that the claim is justifiable.

    Even an impartial Engineer would be correct to do so and a defensive Engineer will be happy to have an excuse to reject the claim.

  5. The Contractor still considers that he has a justifiable claim and also thinks that the Engineer has acted unfairly. So after several months of indecision or inaction, decides to elevate the matter to a dispute and calls in the lawyers.
  6. The lawyers examine the claim and response and advise the Contractor that they agree the Contractor has entitlement but that the claim would need to be expressed properly if the matter is to succeed at adjudication or arbitration.
  7. The Contractor still does not have anyone on the team with adequate qualifications or experience to suitably prepare a claim to present in dispute proceedings. So the lawyers either offer to prepare the claim themselves or recommend that the Contractor bring in someone with appropriate skills.
  8. The properly prepared claim is presented to the adjudicators and arbitrators who make an award in favour of the Contractor. The whole process by this time will have taken years rather than weeks and involved the Contractor in considerable time and cost.

This is why there frequently is a difference between a claim submitted to the Engineer and one submitted for arbitration, but there shouldn’t be such a difference. Had the Contractor just prepared his claim to a suitable standard in the first place, rather than trying to save money on the claim preparation, the matter would have been resolved quickly and for a reasonable cost.

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt

If you would like to learn more about claims, check out our training partner, Claims Class.

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Is the Contractor Entitled to Claim for Additional Preliminaries for Variations?

Variations and whether the Contractor has entitlement to payment for additional preliminaries arising out of variations are both topics of interest to many. The short answer is: it depends.

The preliminary section of the bills of quantities is where the Contractor is given the opportunity to price for his project overheads and running costs. These will include mobilisation and demobilisation; time-related costs for management, administration and non-productive labour; time-related costs for plant, equipment offices and temporary buildings; contractual costs; etc. Provided that there is no delay to the project and there is no significant increase in the amount of work, such costs will remain fixed.

If a variation is instructed, the Contractor’s payment for the additional or changed work will be picked up in the remeasurement in the case of remeasurable contracts or measured and evaluated separately in the case of lump sum contracts. The contract rates and prices will include overheads and profit, but they will not include any additional allowance for ‘preliminary’ costs, so is the Contractor being paid his due entitlement under such a procedure?

To answer this question, we need to look at the cause and effect and ask ourselves some questions:

  1. Has the variation had an effect on the time for completion? If so, the Contractor would be entitled to payment for costs incurred for providing site overheads for a longer period than originally envisaged and included for within the preliminaries.
  2. Has the variation caused the Contractor to mobilise additional plant, equipment, or personnel? If so, the Contractor would be entitled to the reimbursement of the costs in doing so, because he will not be compensated within the rates and prices used to evaluate the varied work.
  3. Has the variation caused the Contractor to deploy additional non-productive resources to carry out the work? If so, the Contractor would be entitled to the reimbursement of such costs for the same reasons.
  4. Has the variation caused the Contractor to defer the demobilisation of time-related resources? Again, the additional time that such resources were obliged to be retained would not be compensated through the rates and prices, so there is entitlement for additional payment here.

There is no blanket yes or no answer to the question. So, we must examine the matter carefully to determine whether the Contractor is entitled to additional payment for what may be regarded as being ‘preliminary’ items.

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt

If you would like to learn more about claims, check out our training partner, Claims Class.

Enjoying the ICCP's articles? Why not sign up to our mailing list and receive new articles straight into your mailbox. Or, want access to a library of members-only content on contracts and claims, check out our Membership page and join the ICCP community today.


Why do Your Final Accounts Become Disputes?

My consultancy practice was asked to advise on a dispute of some US$250M. This sum included variations, prolongation costs, acceleration costs, disruption costs, and delay penalties. The dispute emerged when the Contractor submitted his final account, which reminded me of the fact that a large proportion of disputes occur when the project is either nearing completion or when it has been completed.

Here is my list of reasons why this is the case. As usual, I have adopted the FIDIC definitions for the participants in the contract, but this advice applies to all forms of contract.

  1. Contractors do not submit notices of claim and/or early warnings, thus preventing the Employer or Engineer from taking mitigating action or from making financial provisions.
  2. Contractors do not give notice when they consider that an instruction constitutes a variation that gives entitlement to additional payment, thus preventing the Employer or Engineer from reversing the instruction or making financial provisions.
  3. Contractors do not submit detailed particulars of claims within the contractual time frames and often leave the submission to the end of the project, thus preventing the Employer or Engineer from accurately assessing liability.
  4. Contractors do not submit evaluations of variations in a timely manner, thus preventing the Employer or Engineer from accurately assessing the cost of the variation and from making adequate provisions for payment.
  5. Contractors do not submit extension of time claims within the contractual time frames and often leave these to the end of the project, therefore, allowing the Employer to consider that he/she will be entitled to claim delay penalties.

One can assume that all projects are subject to budget constraints. Having denied the Employer the opportunity to mitigate costs or to manage the project budgets throughout the life of the project by submitting timely claims only to inundated the Employer with claims at the final hurdle, are Contractors surprised when the Employer does not want to, or possibly cannot pay what may be a huge project overspend? In this case, an Employer with no remaining budget, must manage things as defensively as possible. This often means disputing the Contractor’s final account, regardless of justification.

I know I say this often, but if Contractors wish to avoid such a situation, they must avoid waiting until the final stages of a project and submit their notices and claims in a timely manner throughout the life-cycle of the project.

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt

If you would like to learn more about claims, check out our training partner, Claims Class

Enjoying the ICCP's articles? Why not sign up to our mailing list and receive new articles straight into your mailbox. Or, want access to a library of members-only content on contracts and claims, check out our Membership page and join the ICCP community today.


FIDIC 2017 Editions and Claims

While you may have not had the opportunity to examine the 2017 editions of the FIDIC contracts, because you have not yet come across any projects that are using them, this situation will gradually change.

Before too long, we will need to know what has changed and how it has changed. Therefore, I thought that it would be worthwhile to highlight the changes from a claims point of view.

Sub-Clause 2.5 (Employer’s Claims) has been deleted in the 2017 editions and Employer’s claims are now dealt with together with Contractor’s claims under Sub-Clauses 20.1 (Claims) and 20.2 (Claims For Payment and/or EOT).

The Employer is now obliged to give notice of claim no later than 28 days after the event or circumstances giving rise to the claim. This has now become a condition precedent to entitlement for both Parties.

If the Engineer considers that a notice of claim was not given within the stipulated 28 days, he/she is obliged to give a notice of such within 14 days of receipt of the notice of claim. Otherwise, the notice will be deemed to have been given within the stipulated time. The responding Party may also give a notice to the Engineer if they consider that the notice of claim was out of time.

Sub-Clause 20.2 (Claims For Payment and/or EOT) is a little more descriptive of what is meant by “a fully detailed claim” and requires the claimant to include ‘a detailed description of the event or circumstances giving rise to the Claim’ and ‘A statement of the contractual and/or legal basis of the Claim’. These requirements are just a matter of good practice. Unfortunately, in the past, many claimants have not included such basic information within their claims.

The period for submission of the fully detailed claim has been extended from 42 days to 84 days, but failure to submit ‘A statement of the contractual and/or legal basis of the Claim’ within this time period will result in the notice of claim becoming lapsed. FIDIC is not clear on what this actually means, but I believe that the intention is that the claim becomes time-barred.

The Engineer is obliged to consult with the Parties to try to reach agreement. If agreement is not reached, they must make a fair determination within 42 days of receiving the claim or additional particulars of the claim. If there is no agreement to extend this period, failure to issue a notice of either agreement of determination shall be deemed to be a rejection of the claim and the claimant may refer the matter as a dispute.

Previously, the Engineer only had to respond to the claim within 42 days; there was no time limit set on the period for agreement or determination. Now they have to bring the matter to a resolution within 42 days. Six weeks is not an onerous time frame to achieve this, provided that the Engineer takes action straight away upon receiving the claim.

Clause 21 (Disputes and Arbitration) is solely concerned with disputes. This clause differentiates claims and disputes, to reflect the fact that claims only become disputes if they cannot be agreed and, therefore, should not be regarded as being related.

The clauses dealing with claims and determinations have become much wordier and more complicated. In my opinion, they are not easy to follow or to understand and this seems to be a departure of FIDIC’s intention to write contracts for engineers rather than for lawyers. Personally, I see this lack of clarity as a route to contention.

Having said this, it is apparent that FIDIC has attempted to strengthen the procedures relating to claims and responses. If we consider the amount of time-consuming and costly disputes which arise because the Parties have not complied with either their obligations or with good practice when dealing with claims, this is definitely a step in the right direction.

Will it mean more work for Contractors or Engineers? I don’t think that the changes require any more work than should have been put in under the 1999 editions. However, the consequences of non-compliance are now more severe, so both Contractors and Engineers need to stop thinking that they can ignore their obligations to manage claims in accordance with the Contract without consequences.

 

This blog was written by ICCP Executive Officer and Fellow, Andy Hewitt, author of FIDIC 2017 Notices: A Guide to the Requirements, Content and Composition of Notices Under the Red, Yellow and Silver Books (FIDIC Construction Contracts Guides)

If you would like to learn more about claims, check out our training partner, Claims Class

Enjoying the ICCP's articles? Why not sign up to our mailing list and receive new articles straight into your mailbox. Or, want access to a library of members-only content on contracts and claims, check out our Membership page and join the ICCP community today.