Robert Merry : Contracts
Robert Merry, a Member of the Chartered Institute of Building, is an independent stone consultant and project manager who ran his own company for 17 years. Here he offers more advice on avoiding the pitfalls of contracts.
“Variety is the spice of life that gives it all its flavour.” So wrote William Cowper in his poem The Task (1785). However, variety in standard building contracts is not a spice many clients find palatable. Flavoursome or not.
Variety means variation from the agreed contract and that usually means added costs and trouble.
Variations primarily emanate from instructions from the architect to the main contractor. They can also be created by instructions directly from the main contractor to the sub-contractor. Usually these are called ‘site instructions’. If you are used to contracting you will know they are the single most difficult instruction to obtain from the builder. But more of that later.
Instructions leading to variations are probably due either to incomplete design at tender stage, client changes or unforeseen site issues – particularly in refurbishment contracts. These might lead to changes of material and specification, and additional labour and management time. Invariably there is a cost attached to this.
Conversely, a variation that results in a loss of profit may give you grounds for recovery of that profit. These can be minor, if a small floor is changed from stone to timber, for instance. But if the client decides to buy all the materials directly themselves from the quarry to save money, after you have been awarded the contract, negative financial implications can be much greater.
Though this sounds like a slightly ridiculous scenario after the contracts are signed, it did happen on a contract I was working on.
The sub-contractor informed the client that it would be happy to accommodate the instructions, but only if the client agreed to pay it for the loss of profit on the stone.
For reasons I don’t fully understand, the client agreed to this – not sure where the saving was? The client became responsible for purchasing all the material, accepting the inherent risks involved in that, which we are all only too familiar with.
The JCT standard contract allows for instructions and variations and sets out a clear mechanism for dealing with them at 3.14 ‘instructions requiring variations’. This also refers to ‘definitions of a variation’ at 5.1. It goes on to explain the ‘valuation of variations’ at 5.2 and the ‘valuation rules’ from 5.6 to 5.10.
It’s a complicated business and contractors try desperately to place further barriers in the way of sub-contractors who claim additional costs, the main motive being money.
The client will resist variation costs submitted by the main contractor. If they pay the subcontractor before agreement with the client is reached, then the main contractor has to suffer the loss. Hence the difficulty in obtaining a site instruction from the main contractor, unless the main contractor feels it is covered by a back-to-back instruction from the client.
Design & build contracts positively discourage variation. The original idea of D&B was for simple buildings that didn’t require endless design and new instructions. They were virtually a fixed price. This type of contract is used extensively today and any client instruction and / or variation can lead to a substantial claim by the main contractor.
The guiding principal is that you should not proceed with any variation unless you have been instructed in writing. This phrase is embedded in most contracts.
Some instructions will lead to variations that will require pricing and agreeing before works commence. Others may result in minor costs, agreed with the quantity surveyor.
But having said instructions must be in writing, there has recently been a test case in court challenging the interpretation of verbal agreements and whether these constitute legally binding variations to the contract. For those of you interested enough, see Globe Motors and TRW Lucas Ltd.
This is a case about a change to a contract which was agreed verbally. All was fine and dandy until one of the parties decided to buy goods from another company, allegedly breaching the original contract. Then came the ‘he said, she said, you said’ arguments. The court found in principal that a verbal agreement could alter an existing contract.
In our world it is unlikely any verbal instruction or agreement will fundamentally change the nature of the contract, as it did in the above case. However, human frailty is never more evident than when someone is asked to recall a verbal instruction that will cost them money.
If there is no paperwork, create your own in the form of a ‘Confirmation of Verbal Instruction’ and send it to the contractor. This is a fairly standard and recognisable approach in construction. It’s no guarantee of payment, but you will have something in writing, with a date and a description, which could be invaluable come the final account meeting.
If variety is the spice of life, written instructions are the life of contracts!