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The document discusses a court case that provided judicial guidance on valuing variations in construction contracts. The court found that a lump sum adjustment agreed to post-tender modified the bill of quantities and could be used as the basis for valuing additional work. While the contractor argued using the rate from the lump sum would be unreasonable due to a mistake in the original tender, the court stated reasonableness should be determined based on the work itself, not external factors. Employers are advised to carefully scrutinize tender rates as contractors may load rates to their advantage for potential variations.

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Mahesh Jayawardana
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49 views

Home Organisational Structure About Us Services Staff Projects Client List News and Events Reference Materials Contact Recruitment Links

The document discusses a court case that provided judicial guidance on valuing variations in construction contracts. The court found that a lump sum adjustment agreed to post-tender modified the bill of quantities and could be used as the basis for valuing additional work. While the contractor argued using the rate from the lump sum would be unreasonable due to a mistake in the original tender, the court stated reasonableness should be determined based on the work itself, not external factors. Employers are advised to carefully scrutinize tender rates as contractors may load rates to their advantage for potential variations.

Uploaded by

Mahesh Jayawardana
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Valuing Variations http://www.cannonway.com/web/page.php?page=84

How to Value Variations - Judicial Guidance


The valuation of variations is a near daily task on large construction contracts. The standard
fonn building and civil engineering contracts contain a variety of complex mechanisms for
valuing variations, often ~eferring to the use of "reasonable" rates or a "reasonable" basis
of valuation. Those responsible for applying such provisions have adopted sometimes
diverse approaches, assisted, until recently, by little relevant case law. A barrister, acting as
arbitrator, recently applied what he considered to be a fair and reasonable approach to
value variations. The Technology and Construction Court in the English case of Henry Boot
Construction v Alstom Combined Cycles said his approach was wrong.

At issue in the case was the rate to be applied when valuing the additional work required by
a tender addendum and also substantial additional work instructed of a similar nature. The
applicable rate was unusually high because a lump sum adjustment post tender had been
mistakenly expressed as covering only part of the work for which it was calculated.

The Conditions of Contract (based upon the ICE 6th edition) provided:

"the rates and prices in the Bill of Quantities shall be used as the basis for valuation so far
as may be reasonable failing which a fair valuation shall be made."

Alstom first argued that the lump sum adjustment could not be used to extrapolate a rate,
as it was not "a rate or price in the Bill of Quantities" or, alternatively, that to do so would
require a notional breakdown of the price. The Court held that the post tender agreement
had the effect of modifying the Bill of Quantities, even though there was no express
agreement to do so, and so the lump sum adjustment was a price in the Bill of Quantities
for the purposes of the valuation of a variation. Further, the Conditions of Contract did not
oblige the contractor to provide any information as to how a rate or price was arrived at (it
is interesting to note that the West Rail Conditions contain an express requirement for the
contractor to provide a breakdown).

Alstom's main argument (which found favour with the arbitrator) was that it would not be
"reasonable" to use the price as a basis for valuing a variation, because the price was high
due to a mistake in the tender. The Court stated that what was reasonable in this context
was to be determined by looking at the nature of the work itself and not extraneous
economic or financial considerations. That the result of the use of the rate or price might be
unreasonable was irrelevant, because the rate or price was already unreasonable before the
variation was ordered; the rate or price was not made unreasonable by the execution of the
variation. The Court ordered that rates derived from the lump sum adjustment should be
used for the valuation of the variations.

The Court acknowledged that:

"It is one of the skills of tendering for a construction contract ... to anticipate where there
may be departures from the estimated quantities or item descriptions which might prove to
be to the contractor's advantage."

This is a clear statement that it is legitimate to load rates, and the burden is on the
employer to scrutinize the tender with care to see that no advantage is taken by such
means.

In summary, the Court was keen to provide commercial certainty to construction contracts,
whilst acknowledging their approach may lead to rates being applied that resulted in
substantial profit or loss for a contractor. The moral of the story for employers is that they
should give as much attention to the rates set out in tenders as to prices.

Lovells, Asia Focus


May 1999

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