Changes in scope analysed

Change of scope in the modern construction contract is a ‘grey area’,
Chris Binnington advises.

The ability to vary the scope of the works via instructions of the Principal Agent provides one of the peculiarities of the modern construction contract. The fact that at the time of the award of contract the Contractor is unaware of the final scope of work which may be required and consequently unaware of the date for completion consequent upon the necessity to extend the contract where additional work is required may well present significant difficulties to Contractors who have limited resources.

The power to vary the works by additions and omissions is a very significant power given by most standard form contracts. To refuse to carry out a lawful instruction would be a breach of contract and cancellation together with damages flowing from the increased cost of bringing the works to completion using alternate Contractors could very well result from such a refusal.

Principal power
    Most standard forms of contract avoid the establishment of specific targets limiting the scope of increase by way of additions to the contract, or decrease by way of omissions.  The New Engineering Contract (ECC) Clause 14.3; for example, states that  “the Project manager may give an instruction changing the Works Information”. The FIDIC 1999 Clause 13.1 state: “Variations may be initiated at any time by the Engineer prior to issuing the Taking-Over Certificate for the Works…. Each Variation may include:
a) Changes to the quantities of any item of work included in the Contract
d) Omission of any work unless it is to be carried out by others”.
The GCC 2004 Clause 36.1 notes “he [The Engineer] shall have the power to order the Contractor to do any of the following:
36.1.1 Increase or decrease any of the quantities of work included in the Contract, 36.1.2 Omit any such work”.
And the proposed new GCC 2009 Clause 6.3.1(not yet released) will probably be identical to GCC 2004.

What characterizes all of the above provisions is the very significant power given to the Principal Agent to vary the Works and the unlimited scope changes which may thus flow from the exercise of such powers. Yes, Contractors will be entitled to claim additional time and cost where the scope is increased but the real question is by how much can the contract be increased or decreased. In the absence of a contractual limitation on these changes, and the only limitation is that the changes must be similar in nature to the original scope, the answer given in Court cases around the World is that the extent is almost unlimited! No Court has ever applied a fixed upper percentage for the permissible increase in scope and similarly none has been fixed for omissions.

 

Define omit
    In Guncrete (Pty) Ltd v Scharrighuisen Construction (Pty) Ltd 1996 (2) SA 682 (N), similar variation provisions to those cited above were included as part of the general conditions of sub contract. The Court was called upon to determine whether an instruction issued by the main contractor, Scharrighuisen, to omit the entire scope of the sub contractor’s work (Guncrete) was a lawful instruction. The Court found that the word “omit” was not defined in the contract and accordingly must be given its ordinary grammatical meaning, that the ordinary meaning of the word ‘omit’ would include total exclusion of work and that the use of the word ‘variations’ in the clause did not warrant giving the word ‘omit’ a restricted meaning. Guncrete’s claim for damages being the loss of profit it alleged it was thereby deprived from earning was accordingly dismissed since there had been no breach. The Court effectively stated that by agreeing to include the word “omit” in their sub contract the parties had effectively accepted that the entire scope of work could be omitted by instruction.

If the entire scope of work can be omitted how much work can therefore be added in by way of an instruction increasing the scope of work. The simple answer, a lot!

Contractors who have been awarded work including items having uneconomic rates will generally be bound by their contract and thus will be held to the uneconomic rate even if there is a substantial increase in the item of work. There is no room for the frequently made, but incorrect statement, that the rate will apply for the quantity in the Bill but the Contractor will be entitled to a revision to the rate to correct the error for the increased quantity. Whilst some adjustment may be permitted where the contract provides a formula which may be triggered to permit an adjustment, (see for example FIDIC 1999 clause 12.3) these types of provisions will be of little real assistance to the Contractor.

The moral of the article; Contractors must know and understand their rights and more particularly understand the risks that they undertake when entering into standard form contracts which do not stipulate upper or lower limits regulating change through the variation provisions. All four of the CIDB approved forms of contract have such unlimited provisions.
 

Chris Binnington