From the author’s experience, in more cases than not, Contracts Consultants are generally brought in at, or towards, the end of a project as a consequence of the following typical approach from a contractor:

‘We have a problem on this project, we need you to prepare a claim for us.’

Moreover, the request for assistance is usually caveated with: 

‘The Employer has said they will assist us by granting EOT, but our claims for additional payment are time barred.’

The author has been faced with this problem many times but, to date, has always managed to assist the contractor in achieving a negotiated settlement of the Final Account without recourse to either the contractual Dispute Resolution Procedure or to third party arbiters. The key to this is to think outside the box and to be wary of the‘standard Claims strategy’.

The basis behind the contractor’s predicament is always the same – it has undertaken additional works or has undertaken the Works in a different manner than that reflected in its Tender, thus increasing its cost, which it needs to recover. In this respect, any balanced construction contract provides two basic mechanisms for the contractor to claim additional compensation for the consequences of events that are the Employer’s risk under the contract:

1.     Variations;
2.     Claims.

Simply put, the contract requires the contract administrator to issue and value the necessary variations to the Works, whilst the contractor is required to notify, particularise and substantiate claims for additional payment to recover costs not recovered under any other provisions of the Contract – and therein lies the crux of the problem.

Given the complex and intertwined nature of the design and construction activities within many projects, it is often the case that the nature of the change that the contractor has to implement and the manner in which the change comes about are such that the contractor is entitled to compensation both under the variation and the claim provisions. However, in the absence of an immediately referable variation instruction, the standard approach for contractors is to pursue their entitlements through the submission of a claim. But is this the best approach?

Variations

All construction contracts should provide for the issuance of variation instructions on behalf of the Employer. This is primarily an essential safeguard to protect the Employer’s interests since, unless the contract specifically empowers the contract administrator to instruct variations to the Works, the contractor can refuse to carry them out and can insist on performing the original scope of works. Moreover, if the contract administrator insists on a variation being undertaken without such express provision, the instruction will constitute a breach of contract which, if it is sufficiently serious, may also provide grounds for the contractor to terminate the contract.

 

Standard Variations clauses in the most commonly used contracts in Hong Kong generally follow some or all of the wording similar to:

Such variations may include [or] The variations may include but shall not be limited to:

1. additions, omissions, substitutions, alterations, changes in quality, form, character, kind, position, dimension, level or line specified in the Contract;
2. changes to any sequence, method or timing of construction specified in the Contract;
3. changes to the Site or entrance to and exit from the Site;
4. limitations of working space or working hours.

In this respect, it is important to note the actual wording used, namely that the definition of variations includes, but is not limited to the items expressly stated in the operable Variations clause.

Thus, variations are not expressly limited to only those changes stated in the operable clause, which is sometimes a position erroneously stated by contract administrators, unless it is expressly stated so. This absence of a rigid definition of a variation to the Works provides the contractor with a wide arena in which to pitch its strategy.

Claims

The principal purpose of a claim is to provide reimbursement to the contractor of additional expenditure arising out of specified Employer’s defaults or events that are the Employer’s risk, that it has not recovered under any other provisions of the contract. In simple terms, it is intended to put the contractor back to the position it would have been in had the Employer’s default not occurred.

The contract requires the contractor to submit claims and imposes strict timeframes and criteria for the submission of initial notices and of both interim and final particulars. Moreover, such timeframes are often stated to be conditions precedent to the contractor preserving its entitlements to seek both temporal and financial compensation, with any failure to strictly comply with such obligations rendering the contractor’s claims invalid.

However, herein lies the contractor’s dilemma. Whilst Employers generally consider variations to be a necessary and commonplace occurrence on any construction project, claims are considered to be an aggressive and adversarial action on the part of the contractor, notwithstanding that it is the contract imposed on the contractor by the Employer that expressly requires the submission of such claims – and woe betide any contractor that doesn’t follow the stipulated requirements to the letter.

To redress the balance back towards the Employer’s side, it is also fair to say that contractors generally do not enhance their positions by adopting the standard strategy of saturating the contract administrator with what are generally meaningless “Notices of Claim” each and every time a variation or other alleged instrument of change is introduced into the project. In the author’s opinion, this simply diminishes the credibility of the claim notices since they are generally auto-generated templates devoid of any meaningful content, which simply obscure and dilute the genuine notices that need to be taken seriously.

The Problems

Notwithstanding that the contract provides clear mechanisms for the payment of additional sums for genuine changes to the contractor’s scope of works, it is seldom the case that the administration of such matters follows a smooth path.

Whilst the common forms of construction contract require the issuance of a variation instruction to be in writing, experience shows that:

1. The issuance of variation instructions is largely reactive on the part of the contract administrator, rather than proactive;
2. There is sometimes a reluctance on the part of the contract administrator to state under which clause of the contract the instruction has been issued. That is to say, is it a variation or not?
3. Coupled with item 2 above, the wording of the instruction can be ambiguous or lacking in detail, adding further uncertainty as to the instruction’s contractual status;
4. Contract administrators often refuse to issue variation instructions on the grounds that the claimed ‘additional works’ are part of the contractor’s original obligations, or arise under ‘design development’, or other reasons negating the contractor’s entitlement to additional compensation;
5. Many changes to the Works arise out of “back door” variations improperly introduced either as alleged ‘concessions’, or within Responses to Contractor’s Submissions, RFIs and the like, or by verbal or other improper channels of communication. The author has also seen changes introduced into Contract issue drawings which change the scope from that shown on the Tender drawings, and also revised Contract Drawings where the full extent of the changes are not clearly indicated, requiring the contractor to undertake a ‘spot the difference’ exercise in order to identify the changes. Given the manner in which such changes are introduced, it is very easy for them to slip passed all but the most observant contractor’s reporting procedures;
6. In some instances the contract administrator has been known to say to the contractor that if it considers it to be entitled to additional time and money for an item of claimed additional work, it should submit a claim notice and pursue a Claim, which the author considers to be completely contrary to how the contract requires the matter to be administered.

Notwithstanding the problems identified above in respect of receiving clear, written instructions for varied works, the contractor, in the real world, is often constrained by the fear (and sometimes clear threats), that if it submits notices of claims it will be considered to be adversarial, aggressive and ‘claims conscious’, so it avoids issuing such notices for fear of upsetting the Employer and prejudicing future business opportunities. Inevitably, these factors generate, and perpetuate, exactly the adversarial relationship between the parties that the contractor felt its deferential actions would avoid – but by then the contractor has already conceded the contractual high ground and is forced to operate in a position of defence.

In general, most of a contractor’s entitlements arise from variations to the Works, whether they be expressly instructed as formal variations or not. Quite often, the contractor’s commercial team is not contemporaneously aware of the introduction of the change because it is introduced under the radar via ‘back door’ variations as noted earlier in this article. This is particularly so when the change relates to a requirement stipulated in the Particular Specification, the Particular Technical Specification or Tender Addenda thereto.

Consequently, by the time the effects of the variation are discovered, not only is there no formal variation in existence, but any attempted notification of claim is generally going to fall well outside the stipulated timeframe.

The Solution

Given that, in all likelihood, the event causing delay and additional expenditure has arisen as a variation to the Works under the wide definition of a ‘variation’ referred to earlier herein, the contractor should pursue its entitlements through the variation mechanism in the contract, rather than as a claim.

More often than not, a contractor will only belatedly become aware of changes incorporated in amended drawings, site instructions and the like, and will automatically issue a notice of claim seeking additional payment for these additional works. However, as stated previously, this immediately puts the contractor in conflict with the notice provisions for claims since it is likely that the actual change was introduced weeks, if not months – and perhaps years, earlier.

In order for the contractor to enhance its chances of preserving its entitlement to recover additional financial compensation, a better approach is for it to write to the contract administrator identifying the change it considers to be a variation, and to request the issuance of the necessary variation instruction so that the contractor’s entitlements can be properly administered under the contract. This will result in one of two alternative scenarios:

1. The contract administrator will agree with the contractor’s position and will issue a variation instruction; or
2. The contract administrator will not agree with the contractor’s position and will refuse to issue a variation instruction.

Given the more than likely occurrence of scenario 2, the contractor should then initiate the procedure for claiming its entitlements as a valuation of a variation.

To give one practical example, the late issuance of drawings, information and instructions is automatically considered to fall under the heading of a claim. But how many contractors look deeper into the matter to determine the cause of the late issuance – it can often be found to have its genesis in an event covered by the wide definition of a variation contained within the contract, but this requires the whole event to be viewed and approached from an entirely direction than the ‘standard Claims strategy’.

The Procedure

The precise procedure to be followed will be determined by the specific terms and conditions of the contract and it is important for the contractor to strictly adhere to these. In addition, it is important to note that there is not a ‘one size fits all’ approach that can be followed for every claimed event – each one has to be advanced on its own merits. The important principle to remember however, is that the contractor is pursuing its entitlements through the basic provisions of the contract, which provides the following benefits:

1. Normally, variations must be valued by the contract administrator even if the contractor provides little or no substantiation of the figures claimed. It is often in the contractor’s interests to understand the contract administrator’s approach to valuing such valuations before committing to the provision of volumes of supporting documents;
2. The quantum assessment of variations is to be based on a valuation basis rather than a cost basis, and therefore the contractor is entitled to recover overheads and profit, unlike cost claims where profit is excluded;
3. The burden of proof is lower and should be based on the balance of probabilities;
4. The rates and prices in the Contract should generally be used as basis of the valuation, with the proviso that the contractor can argue that they have been rendered inappropriate by other factors. Where there are no appropriate rates and prices, reasonable rates are to be agreed with the contract administrator;
5. Many contracts provide for the contract administrator to review any contract rates that are rendered unreasonable or inapplicable by the variation. This provides the contractor with the opportunity to push for a re-rating of critical items of work, wherein the re-rate can also take account of the associated prolongation and disruption costs, thus avoiding the necessity to submit a claim for unrecovered costs;
6. Subject to the terms of the contract administrator’s appointment, not all variations may need to be referred to the Employer for agreement, resulting in a more expeditious settlement;
7. The payment of variations can generally be administered under the project budget/contingencies whereas funding for claims often attracts special interest from the paying party.

Critically, it is only in the event that the contractor and contract administrator cannot agree that the matter constitutes a variation, or there is disagreement on the actual valuation of an agreed variation, that the contractor needs to turn to the Claims mechanism within the contract. This may be well after the actual variation was introduced into the project, thus overcoming the time-bar problem. Again, careful adherence to the specific terms and conditions relating to the pursuit of cost claims will be required to preserve the contractor’s entitlements. 

By necessity, the detailed workings of such a strategy must remain confidential. Suffice to say, that with many years of successfully pursuing such a strategy, the author has compiled a tried and tested set of document templates that can be adapted to suit the particular contract requirements.

It cannot be stressed enough that irrespective of whether the event is pursued as a variation or a claim, the key to enhancing the chances of success is records, records, and more records.

Summary Points

1. Overcomes the time-bar problem;
2. Keeps the event within the basic contractual mechanisms;
3. Preserves entitlement to introduce and pursue the event(s) as part of the Final Account process;
4. Keeps the event open and referable to the Dispute Resolution Procedure even after Substantial Completion of the Works;
5. Overcomes the perception that the contractor is claims conscious;
6. Can be applied to the majority of events that are otherwise pursued under the Claims mechanism;
7. Permits the grouping of multiple events into consolidated particularisations;
8. Permits more collaborative dialogue with the Employer in order to identify which doors may be unlocked to facilitate early settlement.

Closing Thought

This article considers the approach of advancing the contractor’s entitlements under a variation to the contract. In more extreme cases, the problems caused by the changes to the Works may be sufficient to justify advancing an argument for a variation of the contract. However, that is a matter for a separate discussion.

 

If you would like more information on this topic or would like to discuss any other matter with our team, please do not hesitate to get in contact with us

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