Your Systematic Approach to Variation Valuation
Once entitlement is established, understanding the contractual principles and mechanisms governing variations gives you powerful tools to navigate the valuation process. If you missed part one of this series, where we covered how to establish entitlement, read it now.
Understanding Your Contract’s Valuation Hierarchy
Many standard construction contracts establish clear hierarchies for valuing variations. While specific language differs between contracts, they generally follow similar principles:
1. Applicable Contract Rates
When the varied work is the same as the work already described in your contract’s pricing document or schedule of rates, these established rates will typically apply. This approach provides certainty and efficiency, allowing both parties to quickly determine values without extensive negotiation.
2. Contract Rates as a Basis for Adjustment
When work differs in character or conditions but remains somewhat similar to the contracted work, the existing rates serve as starting points for adjustment. The contract rates aren’t applied directly but provide a foundation from which adjustments can be made.
3. Fair Valuation
When no existing rates can reasonably apply, contracts typically call for a “fair valuation” based on actual costs reasonably incurred, plus appropriate allowances for overhead and profit.
Contract Rates Remain Binding even when Incorrect or Unfavourable
Courts have established important precedents that clarify how variations should be valued.
In the judgement Henry Boot Construction Ltd v. Alstom Combined Cycles [1999] EWHC Technology 263 it established that contract rates must be used even when they contain errors. In this case, the contractor had mistakenly included a highly favourable rate for temporary sheet piling. When additional piling was required, the court ruled this rate must apply, resulting in a potential “windfall gain” for the contractor.
As Judge Humphrey Lloyd stated, contract rates are “sacrosanct and not subject to correction” even when they prove unusually profitable or uneconomic. This principle protects both parties from after-the-fact rate adjustments.
The Test of “similar character and conditions”
When determining whether contract rates apply to varied work, you must examine whether the work is of “similar character” and executed under “similar conditions.”
The character of the work may change in relation to the material used, which may be a different product but the same installation methods. Keating on Construction Contracts3, a leading authority, suggests dissimilar conditions might include:
- Wet versus dry conditions
- High versus low-level work
- Confined spaces versus ample working areas
- Winter versus summer working conditions
- Sequential disruptions to workflow
Fair Valuation, which Includes Reasonable Profit
When a fair valuation applies, it does not necessarily mean the recovery of all actual costs. In Weldon Plant v The Commission for New Towns [2000] EWHC Technology 76, it addressed the issue of a fair valuation which would be based on actual costs “reasonably and properly incurred” where HH Judge Humphrey Lloyd confirmed:
“the contractor would be entitled to a fair valuation which would ordinarily be based upon the reasonable costs of carrying out the work, if reasonably and properly incurred ……. Clearly if, in the execution of the work, cost or expenditure is incurred which would not have been incurred by a reasonably competent contractor in the same or similar circumstances, then such costs would not form part of a fair valuation.”
The courts have established that contractors are entitled not just to their costs, reasonably and properly incurred, but also to reasonable profit. As Judge Lloyd stated in Weldon Plant v The Commission for New Towns:
“a fair valuation must, in the absence of special circumstances, include an element on account of profit… a contractor is in business to make a profit on the costs of deploying its resources.”
TAKE ACTION NOW: Don’t Let Another Variation Go Unpaid
Are the non-payment of variations eating into your profits? Our team of construction contract specialists can help you establish entitlement, prepare robust valuations and recover the money you’re owed.
Contact us today for a free 30-minute consultation to discuss your specific challenges and discover how our proven approach can transform your variation management process.
Call 01727 861510 or email us on [email protected] to improve your project’s profitability today.
