What is – and what isn’t – a variation?

Variations to the scope and specifications of the building project as originally agreed, occur on virtually every project, and they complicate what would otherwise be a straightforward process. They occur for a variety of reasons, including the discovery during construction that aspects of the design are impractical or can be improved upon, site conditions proving to be more difficult than anticipated, clients changing their mind about structural or aesthetic components part-way through, some of the intended materials becoming unavailable, or the Council insisting on changes.

In the larger projects in the highly competitive commercial construction sector, contractors often underbid to secure the job and then hope to make up the deficit in variation claims. There is a rigid process for directing and pricing variations, and either party can end up missing out if they fail to follow the rules. The project then becomes a fractious contest where competing teams of designers, quantity surveyors and lawyers battle it out on a more or less continuous basis from commencement to practical completion.

It is a much more contentious issue in fixed price projects rather than cost-reimbursement projects, because in a cost-reimbursement project, the owner pays the same whether the work is a variation or not. In a fixed price project the building owner naturally argues that the work in question isn’t a variation, or if he loses that argument, then it isn’t worth the amount the builder is asking for it. The builder naturally argues that it is a variation, and it is worth every cent he says it is, because otherwise the builder ends up doing extra work for free or at least at a substantial discount.

Because this process is so common and has been going on for centuries, you would think that the law would be very clear on what is a variation and what isn’t. But surprisingly, the Courts haven’t been called upon to make a ruling on it that often. Possibly that is because these debates usually get settled by negotiation, arbitration or adjudication, all of which are confidential processes where the outcome is rarely disclosed. The starting point is generally your building contract, because that will invariably define what a variation is. New Zealand Certified Builders (NZCB) contracts define a variation as “any Building Work or materials that are not, whether expressly or by necessary implication, provided or allowed for in the plans, drawings or specifications forming part of the Contract Documents at the time this Contract is signed by the Builder, or any other event or circumstance described in this Contract which is, or is to be treated as, a Variation, and includes any preparatory work done in connection with a proposed Variation whether or not it proceeds.”

Master Builders contracts, New Zealand Standards contracts, NZ Institute of Architects contracts and Building Hub contracts all have their own definitions, but they are all pretty general. Variations are often talked about as being work outside the “scope” of the project or outside what was “contemplated” by the contract, which doesn’t help much either.

The rule of thumb that I suggest you use is to compare what you actually built and the materials you actually used, to what was shown on the plans and what was stated in the specifications at the time you signed the contract. Whatever the differences are, should be variations. Where it gets more complicated, is where the designs are vague or lack detail, in which case you have to make it up as you go along. In those cases, you will struggle to claim a variation even though the job proves to be a lot more complicated than you thought it would

be, as long as the end result you achieved was what the plans and specifications called for.

In the residential sector the process for making variations is a little less formal than in the commercial sector, and changes are often requested by the clients or recommended by the contractor, on the spot, and without any formal documentation or pricing. In both fixed price projects and cost reimbursement projects these variations are often responsible for the price ballooning out beyond the parties’ expectations, frequently leading to payments being withheld and disputes having to be resolved.

It might surprise you to know that under the common law, a variation that is insisted upon by just one of the parties, is not binding. That is because a deal is a deal, and the deal the parties struck at the outset of the project was to build – and pay for – the structure that was originally designed and specified. Unless you have a contract that allows for variations, or you both agree, then the clients cannot make the builder deviate from the plans and specifications, and neither can the builder do so at his own discretion.

For that reason, and because there is usually a sensible reason for variations, all of the standard-form building contracts in common use in New Zealand allow the client to require the contractor to carry out variations to some extent or other. The contractor is then entitled (or obliged, in the case of variations which make the job cheaper) to adjust its charges accordingly, and to claim an extension of time.

However, even if there is a variation clause in the building contract, there are still limits on what the building owner can demand of the contractor – unless the contract makes it very clear that there are no such limits. If that isn’t made clear, then the common law will not permit the owner to direct variations that place an unreasonable burden on the contractor or require the contractor to do something well outside the general nature of the responsibilities the builder took on at the outset. Nor will it allow the owner to remove work from the builder’s scope so that the owner can do it or give it to another contractor.

There is a rigid process for directing and pricing variations, and either party can end up missing out if they fail to follow the rules.

Geoff Hardy is a partner in the Auckland law firm Martelli McKegg Lawyers and is a construction law specialist. Geoff also operates the Business Related Legal helpline for NZCB members, contact Geoff on 09 379 0700 or geoff@martellimckegg.co.nz for 20 minutes of free advice.

This article is not intended to be relied upon as legal advice.