Workshop for VSMC - Managing Contracts Under FIDIC Conditions PDF

‘s-Heer Hendrikskinderendijk 105, 4461 EA Goes, Nederland Tel +31 (0)113 246 400 Fax +31 (0)113 246 409 Web www.drivertrett.com WORKSHOP FOR VSMC “MANAGING CONTRACTS UNDER THE FIDIC CONDITIONS” PROGRESS REPORTING Progress reporting needs to be done regularly, whether by a string or perhaps in a m...

‘s-Heer Hendrikskinderendijk 105, 4461 EA Goes, Nederland Tel +31 (0)113 246 400 Fax +31 (0)113 246 409 Web www.drivertrett.com WORKSHOP FOR VSMC “MANAGING CONTRACTS UNDER THE FIDIC CONDITIONS” PROGRESS REPORTING Progress reporting needs to be done regularly, whether by a string or perhaps in a more modern fashion, electronically. It is important however, to retain the previous version and not overwrite it. We have witnessed projects where this has not happened and all that has remained at the end is a programme showing 100% progress, no good as a record of what actually happened. How should progress be measured? Percentage complete is difficult to ascertain, remaining duration is perhaps better. How should variations be treated? I would suggest by adding in new activities. As I have said, the value of reporting progress is two-fold; one for control of the present and future, and secondly to assist in investigations of problems, what was the cause, what was the effect. How do you measure progress? Does it vary during engineering, manufacturing and installation? Our experience shows that records of progress especially during engineering are not often kept. The following general issues will need to be considered: 1) The items the Contractor should include in its progress reports. These would include matters such as progress against activities and overall, areas where information/materials are awaited, possible delays to the works, financial matters etc. 2) Should the Contractor prepare different progress reports for internal circulation to that submitted to the Engineer? The progress reports should be the same however; companies may require additional information for internal reports. With respect to the specific requirements of the FIDIC forms, Clause 4.21 refers. FINANCIAL MATTERS - CONTRACT VALUATION AND VALUE ENGINEERING Valuation of the Works The three FIDIC forms value the works in different ways:


The Red Book on a re-measurable basis. The Yellow Book on a lump sum basis but with an option for re-measurement. The Silver Book on a lump sum basis. Re-measurement concerns the actual measurement of quantities of work undertaken. The contractor therefore gets paid for what it has undertaken (as long as it is has been carried out in accordance with the contract). Under the Red Book, the design is undertaken by, or on behalf of, the Employer. Driver Trett is the trading name of Trett Consulting B.V. BTW-nr: 808209814B01 | Rabobank 389383791 | KvK Middelburg 22044617 www.drivertrett.com Lump sum however, requires the contractor to state a fixed amount of money that it wants to undertake the specified works. Under the Yellow and Silver Books, the design is also undertaken by the contractor. These different concepts lead to different degrees of certainty of final price. The three FIDIC forms offer varied opportunities for the agreed contract price to be changed; the Silver Book offering the least possibilities, the Yellow Book a few more and the Red Book offers the most potential for change. This therefore translates into differing degrees of risk for the contractors. The Silver Book carries the most risk and the Red Book the least. The 1999 Red Book The General Conditions, Section 12, provide for measurement of the Works as the basis for Valuation, using rates and/or prices scheduled in the Particular Conditions. The Contractor is required to assist the Engineer in the physical measurement of the Permanent Works, but note that the Engineer alone is responsible for compiling and measuring recorded quantities, though the Contractor may "attend", and may disagree with the records. When making his valuations the Engineer is acting under Clause 3.5 (Determination), whereby he is not acting as the Employer's Agent, but is bound to "make a fair determination in accordance with the Contract". The Red Book provides for adjustment of scheduled Rates and Prices if there is significant difference between the actual measure and that stated in the Bill of Quantities. Any such revised rate is to be based on the scheduled rates, but varied to reflect the circumstances. In the last analysis, if no existing rates are relevant, then the work is to be valued at cost plus reasonable profit. The Guidance Notes to the Red Book show that the Works may be valued on a lump sum basis as an alternative to measurement, or on the basis of cost plus. The notes indicate how those provisions should be incorporated into the Contract by omission or substitution of certain Sub clauses. FIDIC suggest that Lump Sum is only appropriate where the design is finalised, rendering variations unlikely. The 1999 Yellow Book The Yellow Book is based on a Lump Sum Price which is not subject to measurement, but which may be changed by Employer Variations. Having said that, the Conditions also provide for payment based on measurement, such as may be provided for and defined in the Particular Conditions. The Guidance Notes show how such provisions might be incorporated, borrowing text from the measurement provisions in the Red Book. Changes in form or quantity resulting from changes to the Contractor's design will not, of course, affect the Contract Price, unless specific provision has been included in the Particular Conditions. The Silver Book Generally as the Yellow Book, but includes no alternative provision for measurement. The Contractor carries the entire risk on quantities and design. Pagina 2 van 34 www.drivertrett.com Value Engineering The concept of Value Engineering is new to the 1999 suite of contracts. The provision is included in the Red Book and slightly differently in the Yellow and Silver Books. (It is not included at all in the Green Book, the short form). The concept seeks to encourage the Contractor to propose changes to the nature or construction of the Works which will be of benefit to the Employer. Under the Red Book this is done by sharing any financial benefit between the Parties. The Yellow Book is subject to a Contractor’s proposal and under the Silver Book, the Employer shall 'take account' of any such proposal in determining the value, but there are no specific arrangements for benefit sharing. The calculation of the fee payable to the Contractor as his share of the benefit is based on an assumed reduction in the Contract Price - that is, that the Contractor's proposal will reduce the cost of the Works, either by shortening the construction time or simplifying the Plant. However, the Contractor could propose an increase in Plant cost which would result in post-contract savings to the Employer arising from extended life or reduced maintenance and/or operating costs. How this would be dealt with is not explained. Any design necessary to implement the proposal is to be done by the Contractor, under the Red Book as well as the Yellow and Silver, and would be fit for purpose at the Contractor's risk. The Employer must consider how the 'Value Engineering' provision could affect the Contractor's Tender. A Contractor might be better concealing any bright ideas until a contract has been signed and he can recover the 50% fee, rather than offering the benefit in his tender. The Employer may also have reservations with regard to the services of his Engineer. Had the Engineer carried out the Value Engineering when the initial design, or design concept, was being prepared, then the Employer would have received 100% of the benefit, not just 50%. Such a potential threat against the Engineer may encourage him (the Engineer) to tighten down the design and compromise factors of safety, for example. CONDITIONS FOR PAYMENT Contract Price and Payment is dealt with under clause 14 in all three books, though the provisions differ between them. One of the main reasons for the increasingly dispute ridden nature of the Construction Industry, certainly as experienced in the UK, has been a fundamental reluctance to pay promptly payments properly due. An attempt (generally successful) to remedy this legislation was introduced in the UK in the 1990's to ensure prompt payment under construction contracts, and to clarify determination of the amount which could be withheld at any time. Further legislation provided for substantial interest charges to become due in the event of a failure to pay on time. All standard forms of contract now published in the UK include payment terms which comply with this legislation, as they are bound to do. The 1999 FIDIC forms go some way to recognising this concern, principally by providing for evidence of the Employer's ability to pay, and by providing for finance charges at a prescribed high rate of interest in the event of late payment - in the earlier Fourth Edition the rate of interest was defined by the Employer in the Particular Conditions, now special provision for any Pagina 3 van 34 www.drivertrett.com other rate has to be made. The Contractor retains the sanctions of either suspending or terminating the Contract in the event of protracted payment default by the Employer. All three books contain a diagrammatic explanation of the sequence of payment events prescribed in Sub clause 14, to which the reader is referred. The Red Book
The Contract Price is subject to measurement.
The billed quantities are not to be taken as actual or correct
The Contractor provides a breakdown of any lump sum price which the Engineer may use for determining interim payments.
Any prescribed advance payment (as a lump sum or in instalments) is subject to receipt by the Employer of an approved guarantee from the Contractor in the amount of the payment. The advance payment shall be repaid by deductions from certified payments due, either per particular conditions or per Sub clause 14.2. The guarantee is usually issued by a bank on the basis of an unconditional or on-demand call. The amount secured by the guarantee may be progressively reduced as the work is executed.
The Contractor submits a Statement each month end showing his considered entitlement, per 14.3. It takes account of everything - retention, advance payments, work done, previous payments, acquired plant and materials etc. Provisions for payment of acquired plant and materials are dealt with under Sub Clause 14.5.
Subject to prior issue of a Performance Security (per Sub clause 4.2) the Engineer issues an Interim Payment Certificate setting out the Payment due, though subject to any prescribed minimum value stated in the Appendix to Tender. Note that a Payment Certificate does not comprise formal acceptance of the work. Such acceptance is only made by the Performance Certificate.
The Employer pays the Contractor within 56 days of the submission of the Contractor's statement to the Engineer. Note, payment is tied to submission of the Statement, not the date of certification.
Delayed payments entitle the Contractor to compound interest on the amount due at the prescribed rates unless particular provisions have been made otherwise under the Contract. Note, no notice is necessary from the Contractor under Sub clause 20.1. Continuing default by the Employer entitles the Contractor to suspend or terminate the Contract under Sub clauses 16.1, 16.2.
Within 84 days of receipt of the Taking Over Certificate the Contractor submits a statement of completion, setting out his considered entitlement under the Contract. The Engineer certifies as for any Interim Statement.
Within 56 days of receipt of the Performance Certificate (issued under Sub clause 11.9 and confirming that the Contractor has met all his obligations (including remedying defects), and deemed to constitute acceptance of the Works, the Contractor submits a draft final statement to the Engineer for agreement. When agreed, a Final Statement shall be issued, in which the Contractor confirms full and final settlement, and the Engineer shall issue a final Payment Certificate which shall be paid within 56 days of issue. Pagina 4 van 34 www.drivertrett.com 
The Employer has no liability to the Contractor unless the Contractor has provided for it in the Final Statement and the Statement of Completion. Thus any further claims raised by the Contractor not provided for in that statement would be time barred. The Yellow Book The differences to the Red Book are minor:
The Contract Price is a Lump Sum.
Any Scheduled quantities or price may only be used for the designated purpose, and any measurement will be subject to the relevant provisions in the Particular Conditions.
Application for Interim Payment Certificates shall be at the end of each payment period if stated, otherwise monthly as the Red Book.
Release of the first half of the Retention money depends on both the issue of the Taking Over Certificate, as per the Red Book, and also passing specified tests after Completion. Release of Retention in the event of a Taking Over Certificate being issued for a Section or part of the Works differs between the Yellow and Red Books, as set out in detail in Sub clause 14.9. The Silver Book The differences to the Red Book include:
The Contract Price is the Lump Sum.
There is no reference to Schedules - any requirement to pay on a measurement basis would require particular provision.
Any advance payment is subject either to particular provisions or to Sub clauses 14.2 (c) to (d). Provision of guarantees and Performance Security are unchanged from the Red Book.
Application for the Interim Payment Certificates as per Yellow Book but submitted to the Employer.
Interim Payments for plant and materials not yet on site differ from Red and Yellow Books, and are set out in Sub clause 14.5. Payment is subject to vesting the goods in the Employer, insurance cover and bank guarantees for the amounts paid.
The Employer shall pay the Contractor within 56 days of his receiving the interim Statement from the Contractor. CHANGE OR VARIATIONS I now want to look at changes or variations, a very important part of the overall process and one which contributes greatly to maximisation of commercial returns. What types of change occur on construction and engineering projects? What are we concerned with? When we are talking about change, perhaps those areas which come readily to mind are “additional, omitted, varied, modified or substituted work”. These tend to mean a change to the scope of work to be undertaken and include such matters as:



Some additional spare parts for a mechanical installation. Additional works. The provision of furniture not being required within the refurbishment of an office block. Omitted work. A different paint specification for certain parts of the ship. Varied work. A modification is made to pipework that has already been installed due to a clash with a cable tray. Modified work. Other changes to the scope of work can arise from: Pagina 5 van 34 www.drivertrett.com 

New or revised drawings. For example, a sub-contractor responsible for prefabrication and installation of pipework on an offshore module may receive a further 50 isometric drawings from the main contractor, which detail additional spools to be made. The requirements for the standard of work may be altered. A shipyard may be required to adhere to revised classification rules. Changes can also be categorised as affecting schedule, in other words the programme, timing or sequence of undertaking the works. Examples include:



Time of year work is carried out. The seeding of the football pitches for a new sports park is not undertaken at the planned time due to the amount of unseasonable heavy rain that has waterlogged the ground. Holds placed on drawings affect the time that a pipework prefabrication and installation subcontractor can actually carry out the work. Late access to site for the contractor prevents him from excavating the foundations for an extension to a hospital when he envisaged. Late issue of material. For example the delayed installation of air conditioning units by another supplier engaged by a shipyard means that the electrical sub-contractor cannot complete the cable terminations at the same time as those for other equipment in the same compartment. There is a third category of change, it is conditions i.e. the location the work is carried out; or the physical or geological or marine conditions encountered. By this I mean rock being found when excavating for a new tunnel under a canal. Other examples include:


The identity of the employer’s representative or consultants being changed. Different sub-contractors or vendors being used by other parties involved in the project. The contractor using a different project manager to the one it said it would use in contract negotiations with the employer. It is not as clear-cut as this though. Some of the examples may also be capable of being placed into all three categories. An example would be an employer changing the type of equipment it wanted as part of the mechanical installation of a new industrial building or factory. The contractor responsible for the mechanical and electrical installation may view this as a scope of work change as it has to provide additional or varied equipment. However, as the new equipment has a longer procurement period, in other words it takes longer to purchase and therefore is installed later; the contractor must undertake the cable connections at a different time, i.e. a schedule change. Furthermore, as the revised equipment is bigger, there is less space available for the contractor to undertaken his work, a change in the conditions that he operates under. What relevance is this however to the Management of Change? Well, its importance to contractual issues will become clear a bit later, but it is perhaps also helpful to use this categorisation approach to aid the understanding of the effects of change. In addition to categorisation by subject, changes can be made by the different parties involved in a project. The employer can clearly make certain of the changes I have already described:
The extent of spare parts for a mechanical installation. Pagina 6 van 34 www.drivertrett.com 


Late access to site for the contractor, which prevents him from excavating the foundations for the extension to the hospital when he envisaged. Prolonged drawing review or approval periods that inhibit the start of pipework prefabrication. The identity of the employer’s representative or consultants. A contractor is in a different position of course; it is on the receiving end of changes made by the employer, but can also initiate changes that affect the employer. I can demonstrate this by reference to example of changes that I’ve used earlier:

Using a different project manager to the one it said it would use in contract negotiations. This may be an important issue for the employer. The standard and quality of the finished works is not as required by the specification. From the employer’s perspective, he/she should be interested in where the contractor makes any change to its responsibilities under the contract. Take an example that I have referred to earlier:
The pipework, electrical and finishing sub-contractors are all brought in so that they are all working at the same time rather than in a sequential fashion resulting in overlapping of trades. As the work was done by sub-contractors, it may not matter why the contractor did this; the sub-contractors would address their requests for additional reimbursement to the contractor. The question for the contractor however, should be, why? Was there an original cause that would give the contractor entitlement to claim additional monies from someone else, i.e. the employer? In the same way as contractors, sub-contractors are on the receiving end to changes made by the employer and / or the contractor, but can also initiate changes that affect the employer and / or the contractor. The other parties are more likely to be interested in changes that the sub-contractor makes to its contractual responsibilities, but as discussed earlier, these may illustrate the effect of a change originated by others or be the cause of something that affects others. So pulling the discussion about change together, what we are talking about is something different from the contractual agreement that can be caused by any of the parties involved, that affects the scope and/or schedule and/or conditions and has an impact on any of the parties involved. The change is likely to be a revision to a parties’ obligations under the contract affecting others. The management of change As I said at the start of this workshop, the management of contracts involves a process. A part of this process is the management of change, and the management of change brings together many elements of the overall management of contract process. The management of change process is in 5 steps. Pagina 7 van 34 www.drivertrett.com Step 1 - Understand the Baseline The first step is to read the contract to understand the parties’ obligations. In other words, it is to understand the baseline i.e. that which changes are measured against. To understand what are the obligations or responsibilities the parties have under the contract? What can be changed? How does the change process work? Is it limited in any way? As with the effective management of contracts, the process of managing change does not start when the client wants to issue a variation order, or when the contractor receives a change order, but at tender stage. It involves the good practice that I talked about last time that should also be included in the company contract management manual: Pre tender
A tender document check list
A clean set of the tender documents kept in a master file available for future reference and retained by the estimating manager.
The file of all correspondence requesting clarifications or further information.
An electronic storage folder for all the emails and accessible to all working on the project. Pre-contract
A schedule summarising all the changes resulting from negotiations.
Signed minutes of meetings. Contract Signature
Checks that all the agreed changes are clearly noted within the documents comprising the agreement.
A list of all the contract documents with full references should be part of the agreement and copies of all documents within an Appendix. Contract Commencement
Contractors should have formal handover meetings from estimating to the project manager.
All the estimating files should be available to the project team. Of course, compliance with such a system will not prevent all problems. It is not until detailed design or planning work, for example, is undertaken, that some obligations are found to be unclear. Some contracts provide for anomalies between different contract documents to be dealt with i.e. FIDIC clause 1.5. The typical process is for the contractor to notify the client and for the client to clarify the matter in writing. If the clarification is considered to be a variation, then it is deemed to be so. If such a clause does not exist, I would still recommend the same process. Raise the matter and request clarification. If the response is considered to be a variation, then request a formal change order or whatever it is named. In cases where there is disagreement, the contract may have a procedure that must be followed. If there is not a specific one, then there is probably a dispute resolution process that can be referred to. Pagina 8 van 34 www.drivertrett.com Step 2 - Monitor the Obligations of the Parties Having understood what the parties’ obligations are, the second step is to ensure that they are constantly monitored to ascertain whether there have been any changes. This process can be achieved by using existing documents that should be part of the standard company procedure and described within a manual. Some examples of the documents are:







Design programmes and updates Construction programmes and updates Progress reports - internal and external Material / equipment delivery schedules Drawings – received, holds and approvals Payments Notices / requests for change Cost / value reconciliations An important point to consider is that the various documents will show different things. The programmes, progress reports and materials and equipment schedules give information relative to time and sequence and thus can only be used to monitor changes in time and sequence. What I mean by this is that progress reports and programmes showing progress will indicate when activities are done at different time or in a different order. They will not indicate any changed scope of work however. The drawings, payments, notices or requests for change however, are in relation to the scope of work, and therefore are useful in determining changes to scope. These do not show schedule and condition changes though. Cost/value reconciliations are different again. They compare the tender allowance (or value) with the forecast and then the actual cost of an item or section of work. It therefore shows where money is made and where money is lost on a project. This may either be a signal that a change may have occurred and that further investigation is required to be undertaken, or it may show the financial effect of a change. The organisations management manual should set out what documents are to be maintained and why. The issue is not about keeping records for the sake of it, but defining the records to satisfy the needs. Step 3 - Document the Change and Give Notice The systems and procedures that your organisation has in place have now enabled you to understand what the parties’ obligations are and to monitor these obligations and ascertain whether there have been any changes. The next step is to document the change; in other words, invoke the contract and conform to the procedures and constraints contained within. I mentioned earlier that change can be categorised into scope of work, schedule and condition effects. I now want to take this further and show the connection to the contract or the baseline for the purpose of documenting the change. Pagina 9 van 34 www.drivertrett.com These three categories of change; scope of work, schedule and condition also comprise the types of changes that are generally allowable or foreseeable within most construction and engineering contracts. By this I mean that contracts set out what changes can be made, who can make the changes and the process that must be followed in the event of a change. There are also changes that do not fit into this category and therefore, require different treatment. These are changes that are beyond the expectation of the contract and depending on the exact conditions of contract, may include:


The frequency of payments The period between issue of invoice and actual payment Acceleration There are some main issues surrounding what I have termed the allowable or foreseeable changes under a contract, that dictate how change is documented. The first issue is that concerning the right to make a change. Most contracts do make this provision, but does your contract include a changes clause? In other words, are changes allowable under your specific contract? Assuming there is a changes clause, let us consider the contents of it. Is there a limitation on the type of changes that can be made by a certain party? Contracts also limit the timing of instructed changes. For example, it may be restricted to the point at which completion is certified. What should the parties do if they want to implement a change that falls outside of the changes clause? Well, the change would not be compulsory and there would have to be agreement for it to be undertaken. A further cause for debate is the question of whether the correct contractual procedures have been followed. A good example of this surrounds the use of verbal instructions. Change clauses often state that instructions should be in writing and that only under exceptional conditions given verbally. In these exceptional circumstances, the verbal instruction should then be confirmed in writing by the recipient. The clauses then go on to typically say that if the written confirmation of the verbal instruction is not contradicted within a certain period, the verbal instruction shall be deemed to be the equal of a written one. There are clearly some very good reasons why instructions need to given verbally; safety and security being two. However, in my experience, constant use of verbal instructions potentially creates unfair risk for the recipients since the onus is on the recipient to follow the written confirmation procedure. There is also potential risk on the client however, as misunderstandings may occur in the exact content of the instruction and goodwill on the part of the other party would surely diminish if any verbal instructions were later contradicted. FIDIC Variations Clause 13 of the 1999 Suite of Contracts deals with Variations and Adjustments. A number of new concepts were introduced with the 1999 Editions, including: Pagina 10 van 34 www.drivertrett.com 




Variations can no longer be instructed after issue of the Taking Over Certificate. The Contracts provide a procedure whereby the Contractor may be required to indicate the likely consequences of a Variation being considered by the Employer/Engineer. The Contractor advises the extent of the work, its effect on programme, and his proposal for evaluation. The Contractor has limited rights to object to a Variation, but can nevertheless be overruled. Timely notice of intention to claim additional payment for a Variation is a Condition Precedent thereto. Omissions (Variations to omit) may be valued with regard to their effect on other Work. Procedure for Variations The Contractor may be instructed to carry out a Variation at any time and must comply therewith, subject to his grounds for objection discussed above. Alternatively the 1999 Forms provide that the Contractor may be asked to submit a "proposal" setting out the extent, effect on programme and his proposal for pricing the work, inherent in a proposed Variation. This procedure gives the Employer an opportunity to consider the effect of a Variation prior to confirming its instruction. The Contractor's proposal must deal with three issues: (i) A description of the proposed work and a timetable for its execution. Since the proposal will be taken into account in the determination of the Price, the description needs to be comprehensive, and the direct effect of the proposed work on any other part of the Works must be clarified. Thus the Variation might delay other work and result in an increase in cost thereto. Delay to completion of the Works would result in increased establishment costs. The timing of the additional work itself must be submitted — when and over what period will it be done. (ii) Proposal for any necessary modifications to the Project Programme and the Time for Completion. This requirement reflects the provisions under Sub clause 8.3 to warn the Employer of possible delay to the execution of the Works. That is, that it will delay actual Take-Over by the Employer under Sub clause 10.1. The Time for Completion, the contracted period for latest completion of the Works, shall be extended accordingly. The Contractor does not need to show that the Variation will cause him to overrun the Time for Completion, but only to take longer than would otherwise be the case to achieve Take Over. He can only do this by showing the Variation is a critical activity on his critical path programme. The cost of any such prolongation will be an element of the cost of the Variation. (iii) The Contractor's proposal for evaluation of the Variation. Under the Yellow and Silver Books this becomes "the Contractor's proposal for adjustment to the Contract Price". The Contractor is not required, apparently, to provide his proposed value of the Variation, but only his proposal for it's evaluation. Neither is this proposal bound to comply with the Method of Evaluation set out in Clause 12 which applies "unless otherwise stated", since sub clause 13.3 allows that a Variation may be valued otherwise if the Engineer so instructs or approves. Thus the Contractor might comply with the requirement by proposing that the Variation be valued on the basis of cost plus, or by negotiating a Lump Sum in advance. He is not bound to reflect Contract rates and prices in his proposal. The value is determined by the Engineer, wither in accordance with Clause 12 or as he otherwise thinks fit. Note that under the Yellow and Silver Books the evaluation shall include reasonable profit -the work Pagina 11 van 34 www.drivertrett.com shall not be done at a loss, whilst under the Red Book if the work is valued on a reasonable cost basis, then reasonable profit must also be included. The second issue I want to raise concerning allowable changes concerns the authority to make a change. Assuming a changes clause exists, to whom does it give authority to make changes? Is it the client or his representative? Are specific individuals stated? On a major project, the client may have a number of supervisors acting on his behalf. Do they all have the power to order changes? The answer, of course, lies in the contract wording and the contractual correspondence. Have powers been delegated? What if an order is received from someone without the authority to give it? Well, it would have no meaning and there would be no duty for the receiving party to adhere to it. A common example of this situation occurs when a sub-contractor receives an instruction direct from the client’s representative. Whilst the ‘giver’ of the order is likely to have the power to instruct changes to the contractor under the main contract, it is unlikely that he has the same power under the sub-contract. It is the contractor who is likely to have the power to order changes under the sub-contract. Many forms of contract stipulate financial limits for the value of changes instructed by certain people. Changes above this limit have to be authorised by other more senior individuals in the organisation. In the scenario where a change is instructed, but it later transpires that its value exceeds the maximum allowable for the person who gave the order; what should the parties do? As a contractor, I would formally notify the individual who gave the instruction as soon as possible and request that he/she obtain the relevant authority forthwith. As the person who gave the order, I would also want to obtain approval for the change as soon as possible as I would not want to be in the position of its legitimacy being questioned at a later date. The earlier Fourth Edition of the Red Book authorises the Engineer to order any Variations in his opinion "necessary" or "appropriate", and for that purpose he shall have authority to instruct any of the following: (a) Increase or decrease the quantity of work (b) Omit work (c) Change the character, quality or kind of work (d) Change levels, lines, position and dimensions (e) Execute additional work of any kind necessary for the completion of the Works. (f) Change any specified sequence or timing of construction of any part of the Works. Thus the Engineer is only authorised to instruct Variations which in his opinion are necessary or appropriate and which fall into categories (a) to (f). Note that, under (e), he can only instruct additional work necessary for completion of the Works. If the Works can be completed without the additional work, then that additional work cannot be instructed as a Variation. The fourth Edition is very clear as to what authority the Engineer has. However, the 1999 Red Book provides, differently, as follows: the Engineer may initiate a Variation at any time prior to issue of the Taking Over Certificate, and each Variation may include: Pagina 12 van 34 www.drivertrett.com (a) changes to the quantities (b) changes to quality (c) changes to levels, positions and/or dimensions (d) omission of any work (e) any additional work necessary for the Permanent Works (f) changes to the sequence or timing of the execution of the Works. Thus under the 1999 Red Book the Variations do not have to be "necessary" or "appropriate", except in category (e) where they do not now have to be necessary for the completion of the Works. The Engineer's authority is less clear under the 1999 Red Book, particularly with regard to the provision that "each Variation may include…" It is not clear whether the word "may" is permissive or illustrative - are any other categories than (a) to (f) excluded, or are categories (a) to (f) just examples of the sort of changes he is empowered to instruct? It is suggested that the former interpretation is the correct one, that the Engineer does not have authority to issue Variations which fall outside categories (a) to (f). Reference to Clause 19.1 is helpful. It provides that Force Majeure "may include, but is not limited to…” If the categories (a) to (f) in Clause 13.1 were illustrative, then the phrase "but is not limited to" would have been used. Under Clause 3.3 of the 1999 Red Book, the Contractor is bound to comply with any instruction given by the Engineer on any matter related to the Contract. If such an instruction is outside the scope of clause 13.1 (a) to (f), then it would not be a Variation under the Contract and the Variation provisions would not apply. Nevertheless, the Contractor would still have to comply with it. It is suggested that in such cases any reimbursement due to the Contractor should be assessed on a Quantum Meruit basis. The 1999 Yellow and Silver Books do not prescribe the authority of the Engineer or the Employer to instruct Variations other than to issue them at any time prior to issue of the Taking Over Certificate and subject to their comprising "a change to the Employer's Requirements". Note that under the Yellow and Silver Books the Contractor has contracted to carry out any work necessary to satisfy the Employers Requirement's, so any Variation necessary to complete the Works would be a nonsense - it is already inherent in the contracted scope. The 1999 Forms give the Contractor grounds for objecting to Variations on the basis of the restricted availability of materials, safety or their effect on his design responsibilities. However, the Engineer, acting as agent for the Employer, can overrule any such objection and instruct the Contractor to proceed. The effect of this provision appears to be that the Contractor is given an opportunity to advise the adverse consequences of a Variation when he has not been requested to do so under 13.3, and the programming and cost effects arising from his concerns and his obligations under the Contract will be taken into account when the Variation is valued. Whilst the Contractor can object to a Variation, either on the grounds discussed above or on the basis of the Engineer's authority, so can the Employer. In determining the value (if any) of any Variation which might be disputed the Engineer is bound to consult fairly with both Parties, he shall not then act for the Employer. If the Employer should challenge the Engineer's authority to issue a Variation, and the work has been done, is the Contractor entitled to be paid for it? The issue would, of course, be subject to determination by the Engineer, but if the Employer knew the Variation had been issued, but had made no objection to it, then that would be taken into account. When the Engineer issues a Variation instruction, then under 31.1 (a), he is deemed to Pagina 13 van 34 www.drivertrett.com act for the Employer. If he has acted beyond his authority from the Employer, then he may be answerable under his contract with the Employer on that count. It is hard to see how the Variation could be denied to the Contractor. Under the 1999 Red Book, Clause 13.1 category (f) the Engineer may instruct as a Variation "changes to the sequence or timing…", whereas under the Fourth Edition he was restricted to "changes to the specified sequence or timing....” The authority of the Engineer has thus been considerably extended in the 1999 Form, since he can now order any programme changes to any part of the construction process at any time. Sub-clause 8.3, Programme, specifies the activities for which sequence and timing must be included in the programme. It is an extensive list. Is he thereby empowered to order acceleration of the Works, or to bring forward the Completion Date? Under Sub clause 3.1 the Engineer has no power to amend the Contract. The Contract contains no provision of shortening the Time for Completion, nor can any Extension of Time be subsequently reduced (sub clause 8.4). Further, the Time for Completion cannot be reduced by definition (sub-clause 1.1.2.2), unless by an extra contractual agreement between the Parties to the Contract. Since the engineer can only act in accordance with the Contract, Category (f) does not, it is submitted, allow the Engineer to bring forward the Completion Date. However, there seems to be no reason why the Engineer cannot instruct acceleration within the Time for Completion, but only insofar as changes to sequence or timing will allow. He has no authority to order the Contractor to increase his resources, work premium time or pay incentives to his labour force, other than under Sub clause 8.6 when the Contractor is in default. Unlike many other Standard forms, the FIDIC Forms include no provision for Variations to be proposed by the Contractor, other than under the Value Engineering sub-clause 13.2. The Engineer's authority to instruct Variations, listed in 13.1 (a) to (e) applies to changes to the Permanent Works. The Contractor may not make any such change without a Variation Order. Changes to the sequence or timing, however, are changes to the manner in which the Contractor executes the Works, not to the Permanent Works themselves, and the prohibition does not apply in that case. No Variation is needed for the Contractor to alter his programme, though under Sub clause 8.3 he is obliged to work in accordance with the programme submitted to the Engineer. The authority of the Engineer to omit work is changed in the 1999 Red Book, such that it cannot be omitted to be carried out by "others" as opposed to by "the Employer or another Contractor" in the earlier Fourth Edition. The Employer cannot cherry-pick from the contracted scope omitting work he might be able to have done more cheaply or more quickly by others, or which might become the responsibility of someone else altogether. Does this provision apply to the work being done by others within the contract period, within the period of Limitation, or forever? Is refusal by the Contractor to omit work to be done by others a practical or legal option open to the Contractor? If he continued with it would he be trespassing, would he be paid for it? What if the Contractor would welcome the omission of unprofitable work? A more practical arrangement would be for the Contractor to be compensated for loss of profit or overhead recovery arising from any such omission. This is, in fact, a measure of his entitlement to damages in the event of the Employer breaching the present Condition. Pagina 14 van 34 www.drivertrett.com The 1999 Red Book assumes measurement based upon a Bill of Quantities, whilst Sub clause 14, provides that "any quantities which may be set out in the Bill of Quantities or other schedule are estimated quantities and are not to be taken as the actual or correct quantities". Sub clause 13.1 (a) provides that a Variation may include "changes to the quantities of any item of work included in the Contract (however, such changes do not necessarily constitute a Variation)". A traditional bone of contention has been whether changes to the billed quantities arising from inaccuracies therein comprises Variations and attract a revised rate. The 1999 Red Book avoids this issue by sub clause 12.3 (a) which provides for departures from in the billed quantities. Note, though, that for a new rate or price to become "appropriate" all the conditions listed in 12.3(a) (i) to (iv) must be met. A near miss is insufficient. The Sub clause effectively renders changes greater than a defined extent to be treated as Variations. The proviso in 13.1 (a) that ''such changes do not necessarily constitute a Variation'' must apply, therefore, to change below the limits set out in 12.3. A variation would be consequent upon quantities changing due to a change in design. Whether such changes in quantity entitle the Contractor to an Extension of Time is discussed elsewhere. Types of allowable changes I’ve already explained about different categories of change and that allowable or foreseeable changes can concern scope, schedule or conditions. I now want to introduce two further terms, ‘actual’ and ‘constructive’ changes, that fit above the scope, schedule or conditions level of categorisation. In other words, an actual change may affect the scope, schedule or conditions, or a combination. Likewise, a constructive change can have similarly affects. There is a need to recognise both types as it will determine the contractual procedure that needs to be followed once the change has been identified. Actual changes are more easily identified, perhaps arising from a piece of paper with ‘variation order’ or ‘change order’ on top. It is constructive changes however, that potentially create the most problems for all the parties as the change is not so easily identified. As a consequence, it is not acknowledged that a change has occurred and it becomes more difficult for the parties to manage the change process. So, what are constructive changes? They are often a consequential effect of an actual change and may cause additional work or prevent work from being undertaken as planned. Some examples include:




Untimely or defective client furnished specifications or drawings Failure of the client to disclose technical information Directive from the client to others that affects contractors work Orders from a government or other authority requiring work to conform to different standards than that in the contract Unreasonably strict contract interpretation by the client The first two examples can occur on projects requiring design or engineering input from the contractor or sub-contractor. It may not be immediately apparent that information is lacking or that it is incomplete as the design staff are just getting on with the design process. They or someone in the project management team may mention something to the employer but will probably receive the response that it is normal practice. This situation may continue for some Pagina 15 van 34 www.drivertrett.com time until the cost / value reconciliation or other commercial report shows that the forecast final number of manhours will be significantly more than envisaged. So what should be done in these situations? Well firstly by following the steps I’ve outlined so far, it should be easier to recognise a change. Then the contract should then be invoked, in other words follow the correct procedure for the given circumstances. If there is no specific procedure stipulated in the contract, the first objective should always be to notify the other party, i.e. to submit a notice. Give the Required Notice Notices are often misunderstood. They are a requirement of, I think, every contract clause that I have seen that concerns a potential claim for additional time and money. They are to be submitted for a good reason, that is, to inform the other party so that they can address the issue, pay appropriate attention to certain activities being carried out and maintain relevant records. Please remember, notices are submitted for the benefit of the recipient and not the issuer. Under FIDIC, notices are condition precedent to additional time or money, clause 20.1 refers. So a notice has been issued but the recipient responds saying he disagrees that there has been a change. What should you do? Firstly, consider the response and determine whether the recipient is correct or whether you maintain your view. The contract must then be reviewed to ascertain the procedure should be followed. If there is none stipulated and it is still believed that there has been a change, a further letter needs to be written setting out the reasons why and providing the appropriate arguments. Step 4 - Maintain Records In the meantime however, and notwithstanding that there may not be agreement as to whether a change has taken place, records must be maintained. I’m sure that this is not the first time that you have heard someone inform you about the importance of records. Why should they be kept?
Well, they show what actually happened and the effects of something occurring
They provide the main source of evidence in the case of disputes
Many contract clauses require them to be kept and / or submitted
It is good practice to do so and,
They have many uses. Records are not only for claims, although preparing claims without records is difficult to say the least. Records can also be used to report back actual outputs to the estimating department and to aid the identification of change. What type of records should be kept? Well, let’s think about what should be maintained as good practice and included in your organisation’s contract management manual. These include:

The contract and correspondence between parties E mails Pagina 16 van 34 www.drivertrett.com 



Site diaries - a daily record of the job in progress Design or engineering changes including superseded drawings and the reasons why changes were made Programme and progress reports - the original basecase programme, preferably agreed with the client / contractor, along with reports showing progress against this programme. It is important that programmes showing progress at a certain time should be saved rather than overwritten with the following period’s progress. Budgeted and actual costs / manhours Should records be agreed? It is more important to record what happens and why and to note the reasons for actions. With the passage of time, what is obvious at the time may not be so clear later. If possible, get signed agreement at the time but it is not mandatory or necessary. How should records be maintained for the future? Different methods should be used for different types of records, but generally electronic copies should be retained wherever possible. Analysis and interrogation is much easier with current computer software. Records should not be thrown away at the end of a project without very careful examination and then only if they are unmarked duplicates. Once all the final accounts have been finalised, a further review can be made. With respect to the specific issue of notified changes, a file should be set up containing copies of all the relevant correspondence and records. These are always easier to locate at the time rather than at some point in the future. These files should be accompanied by a schedule listing all the notified changes with brief details of the date raised, issue and their status. Under clause 20.1 of FIDIC, the contractor must keep records and allow the Engineer access to them. Step 5 - Isolate the Time and Cost Effects The final step in the process is to isolate the time and cost effects of the notified changes from the records that have been maintained. Let me introduce a framework of the effects of change. This shows the different effects of change that have to be considered in the valuation process. Broadly speaking, the effects can be split into three elements:
Time or schedule. In other words, change can cause revisions to the timing and sequence in which work is carried out. The effect however, may be direct, that is to say that the changed activities themselves suffer from revised timing, or indirect where a change to one activity causes revisions to the timing and/or sequence of other activities.
Cost. Change can cause revisions to the actual cost of carrying out the works; it may be increased, or decreased as a result of change. Once again, the effect may be direct, that is to say that the cost of the changed activities themselves are revised, or indirect where a change to one activity causes revisions to the cost of undertaking other activities.
Value. This means the amount of monies actually allowed for undertaking the works. In most forms of contract, this is quite different to the cost and indeed, needs to be higher in order to contribute profit to the business. Pagina 17 van 34 www.drivertrett.com Using Value rather than Costs So why should we consider value when evaluating change, why shouldn’t we just look to recover our costs then add a percentage for overhead and profit? I have suggested four reasons:



It may be a contract requirement to do so. Many forms of contract stipulate that variations in particular, are to be valued using rates derived from a build up to the contract sum. It is sometimes easier to value works using rates from a schedule rather than the time consuming requirement to make and agree records and then ensure the costs claimed actually include all the costs actually incurred. By this I mean all the various issues I raised earlier when looking at labour, materials, plant, equipment and subcontractor costs. Using value as the basis of evaluating change is often perceived to be fairer. It implies that the Contractor has taken some risk on board when doing the changed work and that the Contractor has a reason to work efficiently in undertaking the changed works. Interestingly and this is certainly backed up by my personal experience, a Contractor can also sometimes recover a greater amount when using value as the basis of evaluating change. The method allows the Contractor to retain any efficiency or other advantages in the rates. Valuation of Variations under the Red Book Variations are to be valued in accordance with Clause 12 unless the Engineer directs otherwise. Clause 12 provides: "for each item of work, the appropriate rate or price shall be the rate or price specified, or if there is no such item, specified for similar work" and “Each new rate or price shall be derived from any relevant rates or prices, with reasonable adjustment to take account of the matters described in sub-paragraph (a) and/or (b) as applicable. If no rates or prices are relevant it shall he derived from the reasonable Cost together with reasonable Profit". These provisions have changed significantly from the Fourth Edition which, if rates could not be agreed between the Engineer and the Contractor, required the Engineer to fix such rates and prices as he considered "appropriate". Sub paragraph 12.3 (a) deals with changes in billed quantities; (b) with Variations for which no rate or price is specified and no rate or price is appropriate. Precisely what deems a rate or price 'relevant' is not defined. Sub clause 12.3 seems to follow a circular argument - a new rate shall be appropriate for any work instructed as a Variation, and the new rate shall be derived from any relevant rates with adjustment to take account of it being a Variation. The essence of a variation is that it comprises a post-contract change to the Works requested by the Employer. The Contractor's tender/contract price is not required to include provision against such eventuality; such changes must be at the Employers risk. He has decided, late on, to make the change for his own benefit. It follows that it is unreasonable for the Contractor to be bound to execute such work at his contract rate, when that rate may have been found to be Pagina 18 van 34 www.drivertrett.com inadequate. The Contractor may have taken a risk on his tender rate in the context of the work then specified, but there is no reason why his risk should be increased by Post-Contract Variations which are the Employers risk. It is becoming increasingly recognised that applying contract rates to Variations does not reflect the due allocation of risk between the Parties, and that Variations should be valued by other means. The ECC Forms, recently introduced in the UK, provides that Variations be valued on the basis of cost estimated in the light of the Contractor's experience to date. It is submitted that the 1999 Red Book reflects this change, providing that the Variations be valued on the basis of reasonable cost plus reasonable profit. So the Contractor's Proposal, submitted under Sub clause 13.3, might advise that he proposes to value the Variation on the basis of the anticipated or recorded cost. Note that the Notice required under Sub clause 20.1 applies to the circumstances which have arisen. A proposed Variation is not, yet, a Variation, and no notice of intention to claim additional payment is relevant until the Variation has been instructed. Whether Clause 20.1 applies to a reduction in payment, following omission or Value Engineering is debatable. If the Engineer orders a Variation but does not invite the Contractor to submit a prior proposal under 13.3, then the work is to be valued by the Engineer by agreement or determination. In either case the Contractor has opportunity to advance his preferred or proposed method of Evaluation. The Red Book follows three established steps, which form the basis of good quantity surveying practice:


If the work arising from a change is of similar character and undertaken under similar conditions as the contract work, then the contract rates can be used without adjustment. If the work arising from a change is not of similar character or undertaken under dissimilar conditions as the contract work, then the contract rates can be used with adjustment. In other words, they can used as a basis for valuing the work arising from a change. If the work arising from a change is of different character or undertaken under different conditions as the contract work, then the contract rates should not be used and a fair valuation perhaps based on cost should be considered. There are various ways in which adjustments can be made to contract rates, some are more accurate than others and some potentially give a better return for the Contractor. Let us look at two ways:

The simplest way but perhaps least accurate, is by pro rata for the same work of different sizes. For example, a rate per metre for 25mm diameter copper pipework in the plumbing to the airport terminal can be amended for a 50mm diameter by multiplying the rate by two. A more accurate yet more complex way, is to adjust the labour and/or material and/or plant and/or subcontractor elements of the rate as required. For changing the 25mm diameter copper pipework in the plumbing to the airport terminal to 50mm; this would entail increasing the material and labour elements for the extra cost of purchasing and fitting the larger pipe. Using this pipework example, you can see that the pro rata method is likely to give a higher rate as neither the material nor labour cost per metre of a 50mm diameter copper pipe is twice that Pagina 19 van 34 www.drivertrett.com of a 25mm diameter. Furthermore however, the pro rata method would also double any overhead and profit included in the unit rates. Notwithstanding the obvious inaccuracies in the pro rata, you may be surprised to learn that I was able to use it extensively when I was working for a Contractor. Of course, I disagreed when subcontractors proposed using the same method. CLAIMS UNDER FIDIC 1999 FORMS The FIDIC Forms provide for claims by the Contractor against the Employer (Sub clause 20.1) and by the Employer against the Contractor (Sub clause 2.5). The former