Variations under construction contracts are changes or alterations to the original scope of works that may entitle the contractor to additional payment and/or extensions of time. If parties frequently dispute over whether the works had been varied, it is usually caused by the lack of clear definition of what constitute variations. Under traditional procurement route of design-bid-build, variations are self evident by comparing the original scope of works depicted in contract drawings against construction drawings issued by the Employer or its agent. Where there are differences by comparison in these drawings, the scope of variations can therefore be readily identified graphically. Under design and build (D&B) contract, drawings for the original scope of works are produced by the contractor based on its interpretation of the Employer’s requirements. Likewise the Employer and its agent do not generally issue construction drawings. In the absence of traditional means of comparison, are variations still as self evident as before? Do D&B contracts cause clarity or ambiguity in the identification of variations? Do parties dispute more often over whether variations had been instructed under D&B contract? These issues are worth examining in further detail.

This is part 2 of a series of articles comparing PSSCOC D&B (seventh edition published in 2020) with REDAS D&B (third edition published in 2010). The changes made in fourth edition of REDAS in 2022 do not meaningfully affect the scope of this article. The purpose of this article is to examine how are variations defined under both these standard forms of contract and whether such differences material to contract administration?

Availability of Contractor’s Design Drawings At The Point of Contract

As pointed out earlier, one of the more effective ways of identifying variations is by simply comparing contract drawings with construction drawings for identification of differences. This is because, contract drawings represent the original scope of works which give rise to the basis of the initial contract sum. If the D&B contractor had produced extensive design proposals which are in compliance with the Employer’s Requirements prior to entering into an agreement, these drawings are listed as contract drawings which are subsequently included as part of the contract documents. Under such arrangement, there is an extensive pre-contract design requirement. On the other hand, where the D&B contractor’s design proposal are exhibited via an abbreviated initial concept designs with expectation of further design development post contract, the extent of contract drawings available at the point of contract is limited. This on the other hand represents a brief pre-contract design requirement.

In an earlier article entitled ‘Part 1 of PSSCOC D&B vs REDAS D&B’, it was pointed out that these two contract forms adopted very different pre-contract design requirements. To recap, there is an extensive pre-contract design requirement under the PSSCOC form and a more abbreviated pre-contract design requirement under the REDAS form. Consequently, there is a clear list of contract drawings under the PSSCOC approach which in turn facilitates definition and identification of variations. The REDAS form does not have an extensive pre-contract design requirement because the expectation is to have the D&B contractor develop its design after formation of contract. Design drawings developed post contract are subject to approval by the Employer’s Representative. If it can be objectively demonstrated that design developed post contract is in compliance with the Employer’s Requirements, the Employer’s Representative is not at liberty not to approve these drawings. 

Assuming the Employer or its architect decides to inform the D&B contractor of its preference in terms of the layout plan of a particular floor area which departs from the contractor’s proposal, it can be tricky in determining whether this constitute an instruction for variation under the contract. Under the PSSCOC, the D&B contractor could rely on the contract drawings as a means of comparison and may well argue that the “preferred layout” represents a substantive change from the basis of its contract sum. This may be advantageous for the D&B contractor if it decides to advance any claim for additional payment or extensions of time. However, this approach may not be available to the D&B contractor under the REDAS form. The D&B contractor under REDAS form will alternatively rely on the Employer’s Requirements as its basis of identifying any variations. To the extent that the Employer’s Requirements are worded specifically and prescriptively, it will be clear to both parties whether or not the original scope of works had been varied. In the absence of contract drawings, the Employer’s Requirements or its design brief can be instrumental in defining what are variations under D&B contract.

Employer’s Requirements

Under Clause 1.1.17 of the REDAS form, the Employer’s Requirements mean those requirements issued by the Employer to the Contractor, describing the Works that the Contractor has agreed to design and construct and identified in ‘Appendix 2’. Such Appendix 2 is a placeholder for a list of documents agreed by the parties which may include certain drawings. Since this list of documents varies based on project specifics, the REDAS form does not impose any restrictions as to which document should be included. The Contractor’s Proposals are listed separately under Appendix 3 where these are specific documents submitted in response to the Employer’s Requirements. 

The meaning of the Employer’s Requirements under the PSSCOC is relatively more defined as found in its Clause 1.1(p). In essence it shall mean (i) all requirements set out in the tender document setting out the design and/or purpose of the Works, either with or without specification or other details (ii) all requirements not specifically set out in the tender document but a reasonably experienced contractor would consider to be necessary for the satisfactory design and completion of the Works and (iii) all requirements not specifically set out in the tender document but a reasonably experienced contractor would consider to be necessary for the purpose and integrity of the Works. It is clear that the three bullet points included in the definition of Employer’s Requirements are aimed at ensuring the D&B contract is structured as a lump sum contract.

Whilst the definitions under both forms of contract set out above provide an overarching narrative of the purpose of Employer’s Requirements, it may be of limited help to an D&B contractor looking for an objective litmus test on whether the original scope of works had been varied if a preferred layout or design is communicated by the Employer’s Representative. This can be further illustrated by the following example. Let us assume a D&B contractor is engaged to design and construct a proposed workplace for a financial institution which is intended to occupy the entire floor of a commercial building. To this end, the design brief issued and accepted included a list of functional spaces that are required for this workplace which comprises meeting rooms, private offices, workstations in an open layout format, pantry/ pantries, toilets, reception area etc. The design brief stipulated 20m2 of pantry area to which the contractor proposed a single pantry located at the center of the floor in its concept design. This was approved by the Employer but prior to commencement of construction, the Employer informed the D&B contractor to split the pantry space into two separate locations consisting of 10m2 each. The D&B contractor reckoned that this constitute an instruction for variation since it is a departure from an approved design and believed that such alternative layout should give rise to entitlement to additional payment and extension of time. The Employer disagrees in that any approval does not relieve the D&B contractor’s obligation to comply with the design brief and the split into two locations is in adherence to the very same Employer’s Requirements. 

The ultimate question is whether the original scope of works had been varied? Is the definition of Employer’s Requirements under both contract forms sufficiently helpful in clarifying whether there was a departure from the original design brief? Clearly both disputing parties could interpret the existing definitions in a manner that is helpful to their respective case. This explains why the identification of variations under D&B contract can be tricky depending on whether there are sufficient contract drawings and if not, whether the Employer’s Requirements are defined prescriptively. 

Definition of Variations Under D&B For PSSCOC And REDAS

Apart from making reference to Employer’s Requirements and contract drawings, another method of identifying variations under D&B contract is to understand how ‘variations’ are defined contractually. In this regard, the PSSCOC and REDAS form offer two distinctly different approaches.

Under Clause 1.1.33. of REDAS form, variations means any alteration and/or modifications to the Employer’s Requirements, which is instructed by the Employer’s Representative or approved as a variation by the Employer’s Representative in accordance with Clause 26.1. In this regard, Clause 26.1 is a provision which deals with three separate matters namely the Employer’s Representative’s right to vary the the scope of works, the agreement on variation and the valuation methods on variations ordered. Clause 26.1 mainly addresses the manner in which variations are administered rather than how to define or identify variations. Based on the provisions cited above, it is clear that variations under REDAS form are mainly defined as changes to Employer’s Requirements, which in turn requires a prescriptive and clear design brief. The primary reliance on Employer’s Requirements, as alluded to earlier is due to the absence of contract drawings included as part of the contract documents. 

The PSSCOC on the other hand adopts a more precise definition of variations given that the D&B contractor should have its design significantly developed at the point of contract formation or at least no later than commencement of construction works. Therefore whether variations had been instructed should not attract much contentions and disputes between the parties. The availability of contract drawings becomes an objective source of reference in respect of variations. Clause 19.1 of the PSSCOC defines variations in at least six different ways. Under this clause, variations shall mean (1) an increase or decrease in the quantity of any part of the Works, (2) an addition to or omission from the Works, (3) a change in the character, quality or nature of any part of the Works, (4) a change in the levels, lines, positions and dimensions of any part of the Works, (5) the demolition of or removal of any part of the Works no longer desired by the Employer or the Superintending Officer (SO), (6) a requirement to complete the Works earlier than agreed. Further, variations shall include any alteration to the use or purpose of the Works.

Using the earlier example of a potential dispute between the D&B contractor with the Employer over the split of the original provision of single pantry into two separate locations, it appears that Clause 19.1 of the PSSCOC seems more advantageous to the D&B contractor as compared to Clause 1.1.33. of the REDAS form. This is because the PSSCOC offers multiple ways for the D&B contractor to establish that variations had been instructed to the original scope of works. Whilst the total pantry area remain unchanged at 20m2, variation shall include any increase in quantities of any part of the Works such as the length of copper pipes connecting the water supplies to two separate pantries, the additional number of sanitary wares and fittings supplied and installed to serve two pantries etc. All these can objectively be considered as additions made to the original scope of works. In fact, any change in positions and dimensions of any part of the works could also qualify as variation according to Clause 19.1. Given the relative ease with which variations can be established under the PSSCOC, it is also understandable why certain Employer may favour the REDAS approach. Under the REDAS form, since design development occurs progressively and in tandem with the construction process, it offers the Employer more flexibility in shaping its design without getting penalised with additional payment claims. Therefore, it is quite clear using this example that under certain occasions, what may be deemed variation under the PSSCOC may not be the case under the REDAS form. In the next section of this article, the implications of how variations are defined on other contract provisions will be examined in further detail. Does the ease with which variations are defined affect how contracts are administered in general?

Definition of Variations And Its Effects On Contract Administration

Variations is one of the more common grounds for various entitlements under the contract including additional payments, extensions of time, loss and expense etc. Therefore if the very definition of variations is frequently in dispute, it can have a broad ripple effect across the contract administration regime. Does the way variations are defined impact the way in which variations are valued? Yes, but in a limited way which will be elaborated further in later part of this article. Given the above, it is worth reviewing how contract administration under both the PSSCOC and REDAS are affected by the respective ways in which variations are defined.

Clause 22.1(a) of the PSSCOC entitles the D&B contractor to recover loss and expense where it will be reimbursed for loss, expense, costs or damages incurred arising from any material disruption and/or prolongation due to the issue of an instruction for a variation. This is often claimed in the form of prolongation costs, disruption costs, acceleration costs etc which could be derived from additional preliminaries costs amongst others. Whilst there are no equivalent express provision under the REDAS form for loss and expense, the D&B contractor could rely on its common law rights to recover damages which provide entitlement to similar form of financial compensation. So what is the contractual correlation between the issue of ‘definition of variations’ and the claim for loss and expense? In essence, the claimant will need to firstly establish that the scope of works had been varied, namely identifying the variation in issue. Secondly, the claimant need to prove that the variation caused financial damages in the form of loss and expense. This is akin to the primary “issue of liability” and the secondary “issue of quantum”. Therefore, if one is unable to establish the issue of liability, the issue of quantum gets automatically disposed of. Taking this argument to its logical conclusion, the harder it is for one to define or identify variations, the harder is should be for one to be successful in claiming loss and expense. 

Another provision that is interwoven with the definition of variation is the valuation of variation mechanism stipulated under the contract. In this regard, the PSSCOC and the REDAS form are fairly similar in their valuation of variation mechanism. Under Clause 26.3.1. of the REDAS form, variations are valued based on the four-tier rule. Under tier 1, if the variations is of similar character to or is executed under similar conditions or does not involve significant change in the quantity of the works, the prices and unit rates under the contract shall be used for valuation. Under tier 2, if the variation is of a similar character to the original works but not executed under similar conditions to the original scope of works, the prices and unit rates under the contract shall be subject to adjustments with due allowance for the change in conditions and quantity. Tier 3 shall be used if tier 1 and tier 2 are not applicable where variations are valued based on market rates and prices. Tier 4 is where all the above tiers are not applicable and the valuation shall be based on cost of the necessary plant, materials, goods, labour and additional equipment to carry out the varied works. Clause 20.1 of the PSSCOC prescribes a fairly similar mechanism under a four-tier rule as well.

It is worth noting that whilst the PSSCOC and REDAS adopt a significantly different approach to defining variations, these forms share an almost identical valuation mechanism. There could be an explanation as to why the definition of variation does not materially affect the rules of its valuation. As regards the definition of variations, it is both a factual enquiry and legal issue of interpretation on whether there is a change to the original scope of works agreed by the parties based on proper construction of the terms. On the issue of valuation of variation, it is only relevant when the varied works are identified and available for valuation based on the applicable quantities and unit rates. The valuation rules are decided primarily based on the timing in which the varied works are instructed once the issue of variation is established. Using the earlier example of split of original pantry provision to two separate locations, if such decision was made prior to commencement of construction, the valuation method should be tier 1. However if the decision was made after the original pantry had been constructed, it is likely that tier 4 rule will be used for its valuation. This is because the extent of disruption inflicted on the on going construction works are different under both scenarios. This analogy in turn raises an interesting observation on the REDAS form – let us assume that the decision to split the original pantry of 20m2 to two equal pantries of 10m2 was made prior to construction. In this case there is a good argument that there is no variation instructed since it is still in adherence to the Employer’s Requirement. However if the same decision is made after the construction of the original pantry of 20m2, will this decision be construed as a variation simply because of its timing? It is quite fair to say that no Employer in good conscience would deny additional payment to the D&B contractor if the decision was made after construction is completed. However, why should the definition of variation change as soon as the timing of decision is different? Should the definition of variation not be based on an objective comparison between Employer’s Requirements and the actual works done? It appears that there is perhaps an opportunity for variations to be defined more robustly by taking into consideration of the contractor’s approved programme apart from its design proposals that is responsive to the Employer’s Requirements.

Conclusion

The issue of whether variations had been instructed can be contentious even under the traditional procurement route of design-bid-build. However, it appears that the very same issue could be magnified under the D&B contract especially if the design brief is worded broadly. Whilst design brief is not meant to be overly prescriptive in order to provide the D&B contractor with the appropriate design latitude and flexibility, there could be unintended consequences. The consequences in this regard can be felt in many other provisions under the contract.




Koon Tak Hong Consulting Private Limited