De-scoping of Works: Employer’s Entitlement under FIDIC types of Contracts

De-scoping of Works: Employer’s Entitlement under FIDIC types of Contracts

It is generally considered as an essential element of a construction contract, the Employer’s right to vary or change the works after the contract has been entered into. Therefore, it becomes apparent that without such a provision or right stipulated in the Contract, the Contractor would be bound to execute and complete the works as specified in the Contract, and no more or no less. Nevertheless, in actuality the decisions as to the detailed specification of the works are often made after the Contract has been awarded and the needs of the Employer may change. Therefore, in the absence of a right to vary, the Parties would be necessarily required to enter into a submission agreement as to the proposed changes to the works together with the time and cost consequences. Nevertheless, in reality, even though an agreement is preferable, this is not always achievable. Accordingly, the Contracts are being comprised with express provisions for securing both Parties rights to govern the Variations. At the outset, it shall be flagrantly noted that each Variation introduced to a Contract shall not go to the root of the Contract, hence otherwise the Contract would come to an end.

In FIDIC types of Contracts, Variations are being primarily governed by the Sub-Clause 13.1 to 13.3 of the Conditions of Contract. Accordingly, a Variation can be instituted by an instruction or by a request for the Contractor to submit a proposal. The Contractor is expressly required to execute each Variation unless he considers that he has a valid ground to object. Under Sub-Clause 13.3 sets out the basis for evaluating the Contractor’s

entitlement to payment in respect of Variation in the event that the Contractor’s proposals have not been approved.

In practice, Variations can have significant time and cost implications to the Contractor and thus disputes relating to Variations frequently arise following instructions. The most common types of disputes involve:

  • Whether the instruction constitutes a Variation;
  • Whether the instructed change is within the scope of Variations permitted under the Contract or under the governing law;
  • Where the Contractor has the responsibility for the design of the Works and/or where the Works are specified in terms of performance requirements, the effect of the Variation on design responsibility and/or the performance guarantees; and
  • Ultimately, the Contractor’s entitlement to time and money.

Who can order Variations?

The power to initiate Variations is reserved to the Contract Administrator/ the Engineer. Consequently, the Employer has no power to instruct Variations directly, but instead must direct such instructions through the Engineer. A direct instruction from the Employer will be invalid under the Contract and thus the Contractor is under no obligation to comply with it. Nevertheless, in light of the direct agency role of the Engineer, when initiating Variations, the Employer may wish to place constraints on the Engineer’s authority by requiring the Employer’s prior approval before the instruction of certain types of Variation. To provide some protection to the Contractor, where the Engineer instructs a Variation, with which the Contractor is expressly required to comply under Sub-Clause 3.3 [Instructions of the Engineer] and 13.3 [Variation Procedure], but for which instruction the Employer’s approval is required, the fourth paragraph of Sub-Clause 3.1 [Engineer’s Duties and Authority] provides that “However, whenever the Engineer exercises a specified authority for which the Employer’s approval is required, then (for the purposes of the Contract) the Employer shall be deemed to have given approval.” 

Right to vary

Sub-Clause 13.1 stipulates;

Each Variation may include:

a) Changes to the quantities of any item of work included in the Contract (however, such changes do not necessarily constitute a Variation),

b) Changes to the quality and other characteristics of any item of work,

c) Changes to the levels, positions and/or dimensions of any part of the Works,

d) Omission of any work unless it is to be carried out by others,

e) Any additional work, Plant, Materials or services necessary for the Permanent Works, including any associated Tests on Completion, boreholes and other testing and exploratory work, or

f) Changes to the sequence or timing of the execution of the Works.

In very broad terms, these matters represent changes to the work to be carried out by the Contractor from that which was specified in the Contract. It is also clear from the commencing words “each Variation may include” [Emphasis Added] that this list should be considered to be non-comprehensive.  Further, the Contractor is expressly prohibited from making any alteration and/or modification of the permanent Works without a Variation.

Changes in quantities of any item of work included in the Contract

The wordings of sub paragraph (a) of the Sub-Clause 13.1 provides ‘changes to the quantities of any item of work included in the Contract (however, such changes do not necessarily constitute a Variation)’. The intention behind the qualification is to confirm the underlying principle that the Contractor is required to carry out all work that is included in the Contract and is to be paid on a measurement basis for this work, by applying the rates and prices in the Bill of Quantities (or other schedule) to the measured quantities of work actually carried out (and not on the basis of any quantities set out in the Bill of Quantities (or other schedule). Where the quantities of work exceed the quantities in the Bill of Quantities, such a change does not automatically amount to a Variation. The character point shall be the quantity of any item of work that the contractor was required to carry out in order to execute and complete the Works as specified in the Contract at the time that it was awarded; or, in other words, the issue involves around whether the Contractor was required to carry out this work in any event or whether it represents extra work not included in the scope of the Works as specified in the Contract.

Nevertheless, it should be well understood that in a Contract, the BOQ is the document which defines the quantities of the Works that has been entered into between the Parties. FIDIC 1999 stipulates two provisions for compensating the Contractors for excess quantities of the BOQ for the time and the cost where it provides under the Sub-Clause 8.4 (for time) and 12.3 (for cost) of the Conditions of Contract.

Omission of Work

The wordings of Sub-Clause 13.1 provide an express power to the Engineer to omit work but subject to the most important qualification ‘unless it is to be carried out by others’.  In reality, this prohibition provision reflects the position of Law where the decision has been delivered in

Commissioner for Main Roads vs. Reed & Stuart Pty Ltd while imposing limitations for the Engineer’s power to instruct Variations.

Therefore, it becomes apparent that de-scoping of the Works would result to reduce the Contract Price as agreed upon by the Parties. Accordingly, it becomes arguable that up to what extent an Engineer can omit/de-scope the works since the Contractors have entered into the construction industry to earn profits and by doing so to sustain their businesses. So, it becomes questionable that even though the Contractors did not incur expenditure due to cost of plant, material and workmanship for the planned works, allocated profit for a particular project cannot be earned through this project. Hence in order to sustain the business in the industry, how should the Contractor recover the loss of profits. Rather than a measure and pay type of Contract, this becomes more crucial in a lump sum Contract. 

In the recent Hong Kong case of Ipson Renovation Limited vs. the Incorporated Owners of Connie Towers [2016] HKCFI 2117, the Employer pursued to eliminate certain items from the Contractor’s lump sum scope of works (reducing the contract sum by around 13%). The project concerned the performance of important works of a structural, fire safety and public health nature to existing residential towers. The works that the Employer sought to omit included significant aspects of these works. The Employer also refused to make any payment to the Contractor in respect of the omitted works.

The Clause dealing with Variations in the Contract attentive on the Employer’s privilege to instruct additions, variations or alterations of work items required to complete the restoration and maintenance project, and included a power to omit works. The Hong Kong Court of First Instance found that:

  • Perfect and express contractual language is compulsory to provide the Employer the authority to omit items of the Contractor’s work. Although there was an authority to omit works, the root of the matter was whether, as a matter of construction, the parties projected the authority to be implemented to omit works that characterised important pieces of the project.
  • In this particular case, the court held that the contractual authority to omit works was not enlisted in adequately broad terms to authorisation the Employer to omit the key works in question.
  • The Employer’s unlawful attempt to omit the works, without compensating the Contractor in any way, combined with other factors (the Employer also suspended the works) led the court to conclude that the Employer had repudiated the contract.

The extent of possible omissions

As clearly explained in the above case, the Employers shall have no authority / permission / entitlement to de-scope the entirety of the original scope of Works or a substantial portion of it.  The reasoning is that the de-scoping by an Employer of all or a large part of the works denies the Contractor of the opportunity to make a profit on the omitted works; often the basis for the Contractor’s entering of the contract.

Additionally, it may be considered a breach of the Employer’s duty of good faith to the Contractor, particularly under contracts governed by civil law regimes. However, provided the Contractor benefits from a suitably-drafted Variations Clause that adequately compensates it for the work taken away, then opportunity exists for de-scoping of works.

This Post Has One Comment

  1. QS

    Great article!

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