Risk in building contracts
As all contractors will know, building contracts are fraught with risks. The contractor is at risk that he has or has not priced the job properly. Risks in relation to ground conditions usually fall on the contractor.
Delays by circumstances which do not carry an entitlement to an extension of time at all are at the contractor’s risk. Other delays carry an entitlement to an extension of time but not to money in the form of additional preliminaries or loss and expense, such as weather related delays.
Responsibility for surveying existing structures or previous works usually lies with the contractor. Responsibility for temporary works and the “how” of the construction process is almost always at the contractor’s risk.
Variations are a mixed blessing
On top of all that, the prudent contractor understands that the scope of his works is largely beyond his control, because he may be issued with instructions which significantly “vary” or change the scope of his works. So, for example, it is quite possible that the contractor has reasonably agreed a contract price of, say, £2 million based on tender documents, only to find that he actually has to carry out £4 million worth of work after taking into account variation instructions.
Variations are a mixed blessing. Sometimes they are welcomed as a source of more work and more profit. However, a major variation to an element of work which has been priced at a low rate can spell disaster, where the varied work is of similar character and performed in similar conditions to the original contract works and therefore the rate cannot be increased.
It may be possible to secure improved rates where there is a significant change in quantity or a substantial change in the conditions under which works are done. There may also be an entitlement to additional preliminaries. Fair rates can be applied where the varied works are not of similar character to the initial contract works. Nevertheless, the commitment to carry on with an unexpectedly large increase in work scope can create difficulties for the contractor.
In the past, contractors had some success with the argument that a very substantial change, or series of changes, goes to the root of the contract, totally changing the identity of the contract, so that the contract had to be regarded as vitiated or destroyed. Then, a reasonable price could be applied.
This argument is not now likely to succeed. In the case of McAlpine Humberoak Limited v McDermott International,  58 BLR 1, the works related to a vast off-shore installation. The contract was for 7 pallets for a weather deck for a tension-leg platform. 22 drawings became 161 drawings. The first judge to try the case apparently sat for nearly a year in court and concluded that these were not just changes but a total transformation. However, the Court of Appeal decided that even these very substantial changes did not destroy the identity of the contract. In short, you are likely to be stuck with the original contract, even if the works are greatly varied.
This makes it vital for JCT contractors and sub-contractors alike to appreciate that in certain circumstances they can give notice of reasonable objection to a variation instruction.
Wright Hassall was told by a major client working on a hospital that if only he had appreciated that he could have given notice of reasonable objection to a variation instruction, he could have saved £250,000. So the point is worth driving home.
Reasonable objection to a variation
As so often with the JCT forms, different JCT contracts contain different clauses with different rules. So check your contract or sub-contract carefully.
The 2011 Standard Building Contract Without Quantities says at 3.10.1,
“Where an instruction requires a Variation of the type referred to in 5.1.2, the Contractor need not comply to the extent that he notifies a reasonable objection to it to the Architect/Contract Administrator”.
Clause 5.1 of the contract is broken into two parts.
5.1.1 deals with what you might expect a variation to be –
the alteration or modification of the design, quality or quantity of the Works including changes to any work, alterations of the kind or standard of materials or goods and the removal from site of work or materials which are not in themselves defective. Variations of this kind, under 5.1.1, do not carry a right of reasonable objection.
It is 5.1.2 which carries the right of reasonable objection and, in broad terms, relates to the Employer making changes to access to site, limitations of working space, limitations of working hours and changes to the specific order of the works.
In one case in which Wright Hassall was involved, on a very large site, a very important person came to open the project. Works were still going on and to satisfy decorum the site village had to be moved. This caused changes to access, hours, and working space and also to the sequence of works. This was the sort of case in which notice of reasonable objection could be given – resulting in a reasonable compromise solution and proper compensation to our client.
In the 2011 JCT Design and Build Contract, clause 3.9 provides that the Employer cannot issue an instruction requiring a change in the design of the Works without the Contractor’s consent. That consent is not to be unreasonably delayed or withheld. So an objection to a design change must be reasonable. The Contractor may also, pursuant to 3.9.4, reasonably object to an instruction requiring a change or the expenditure of a provisional sum, if it interferes with his health and safety obligations, either as a CDM Co-ordinator or, otherwise under CDM Regulation 22. The Employer must then vary his instruction to remove the reasonable objection and a Contractor need not comply until this is done.
As regards Sub-Contractors, under SBC/C 2011, the Sub-Contractor can give notice of reasonable objection under clause 3.5.1 where the variation is of the type referred to in 5.1.2 which relates to instructions issued under the Main Contract and passed down but is otherwise similar to 5.1.2 under the Main Contract. So the JCT Sub-Contract regime follows the Main Contract regime as far as possible both for Traditional (With Architect) and for Design and Build Contracts.
Rights of reasonable objection can give the Contractor or Sub-Contractor vital relief against a potentially limitless scope of work. Careful consideration needs to be given to whether these rights should be exercised.