Variations

The limits on what the client and the contractor can ask for

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. Variations 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 commercial projects in the highly competitive 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.

In the residential sector, the process is a little less formal 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.

Variations aren’t automatic

It might surprise you to know that under the common law, a variation that is insisted upon by just one of the parties, is unlawful. 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 standardform 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 his 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.

What the standard contracts say

The New Zealand Standards (“NZS”) suite of commercial building contracts limit variations to those “within the scope of the contract”. The NZS Housing, Alterations & Small Buildings Contract, and the New Zealand Institute of Architects contracts, prohibit variation orders which are so peculiar, unexpected or different from what was anticipated that the scope of the builder’s responsibilities is significantly altered. In the Master Builders contracts, the builder must give reasonable consideration to the owner’s written request for a variation, and cannot arbitrarily withhold consent. And in the Certified Builders contracts, the builder must carry out all requested variations provided they don’t impose an unreasonable burden on the builder.

Sometimes the contractor does something that is not found in the agreed plans and specifications and yet it is not a variation. That commonly happens where the plans are simply not detailed enough, so the contractor has to use his own initiative or call for more detail from the designer, but what the contractor ends up doing is still consistent with the original design. In those cases the contractor might be denied an extra payment and extension of time, unless he can prove that his pricing simply could not have contemplated the additional work that the extra design entails.

What if the building contract specifies a process for directing and claiming variations, but the parties ignore it? For example, they don’t record the variation in writing, the contractor doesn’t price it before starting work on it, the contractor doesn’t claim an extension of time until a dispute arises, or the parties don’t observe the time limits in the contract. All of those are very common in residential projects where the parties aren’t that familiar with the contractual terms, but it is surprising how often it happens in commercial projects too. The short answer is that where the Principal knows about the informality or lack of process but goes along with it, it will be too late to deny the contractor an additional payment or a time extension simply on a technicality, if a dispute erupts later.

Variations under subcontracts

Interestingly, in a subcontracting situation if there is no formal subcontract other than the initial quote (which is frequently the case), then technically neither the head contractor nor the subcontractor can force the other to accept a variation. However, the form of subcontract in most common use in New Zealand (SA 2017) allows the head contractor to direct the subcontractor to do any kind of variation, and can even terminate the subcontract if the Principal removes that work (or a substantial part of it) from the head contract. The subcontractor is left with no claim for damages or loss of profit, unless the head contractor can claim them from the Principal.

Even if the subcontract does allow the head contractor to direct the subcontractor to carry out variations, sometimes that isn’t as easy as it seems, as was illustrated by the 1984 South Australian case of Chadmax Plastics Pty Ltd v Hansen and Yuncken (S.A.) Pty Ltd.

Hansen and Yuncken won the head contract to construct an 8 storey office building. The design called for the stairwells and corridors to be coated with Wallflex and the head contractor subcontracted that work to Chadmax. Then the Principal changed its mind about the wall coating and directed Hansen and Yuncken to paint the walls instead. Both the head contract and the subcontract provided that all variations had to be within the general scope of the contract and be of a character and extent that is contemplated by it. These were standard form contracts in common use in South Australia at the time.

Ironically, the change in wall coating was held to be within the general scope of the head contract (because it was only a minor change to the overall project) but the Court said it was not within the general scope of the subcontract (because it meant deleting 98% of Chadmax’s work, which it was already committed to). That put Hansen and Yuncken between a rock and a hard place, because it had to comply with the Principal’s variation, but could not impose it on Chadmax. So it ended up paying damages to Chadmax, which it was not able to recover from the Principal.

What do we take from all of this? First, even standard-form construction contracts can let you down at times. And secondly, there is a limit to the extent that your superior can order variations that either increase or decrease your work.

by Geoff Hardy

Auckland Commercial Lawyer

Geoff Hardy has 45 years’ experience as a commercial lawyer and is a partner in the Auckland firm Martelli McKegg. He guarantees personal attention to new clients at competitive rates His phone number is (09) 379 0700, fax (09) 309 4112, and e-mail geoff@martellimckegg.co.nz This article is not intended to be relied upon as legal advice.