Variations to Building Works 3

Thursday, September 1st, 2016
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Variations to contracts often arise in the construction world, but the nuances surrounding such variations are seldom fully understood.

The first question should always be, what does or does not constitute a variation? Even when it is clear that changes to a contract constitute a variation, they are often harder to apply – hence the frequency with which variations are disputed. The other critical fact in a case is what exactly the contract says as to variations and when they can be claimed.

Basically a variation is either a change in what is agreed to be done or a variation to the terms of the contract in some way (except for minor things such as names of the parties). These two senses of the word “variation” often go hand in hand. A variation is a ‘not a variation’ if the change made was or is in fact included within the original scope of the works themselves. This is the area which often generates the most disputes.

A fundamental principle here is that one party to a construction contract cannot force on the other party a change to their mutually agreed contract. This is called a “unilateral variation.”

A builder for example, cannot provide an extra item in the works, or cannot supply an item at a higher cost to the owner and then simply charge the extra cost to the owner without the owner’s prior agreement. An exception to that could be where the extra item is indispensably necessary to the works which are in fact agreed. By way of example, say the builder fits smoke detectors to a residence but the charges relating to this are not specifically included in or referred to in the agreed contract. In such a case, as such ‘safety devices’ are in fact a legal and safety requirement, a valid variation could be held to have occurred by their later inclusion.

Most of the standard form building contracts in the industry define the scope of ‘agreed’ or valid variations very broadly. Nevertheless, disputes can still occur. The uppermost aim is surely to avoid disputes wherever possible.

Either party can request a variation, but the request must be in writing and the notice has to contain certain bits of information such as the description of the change, its cost, its reason, its general effect and the variation’s effect on any time periods applicable, such as the length of any delay resulting from it. Generally, a variation does not trigger an automatic right to payment for it; the above requirements must at the least be complied with. The extra cost resultant therefrom is typically added to the next progress payment amount.

If the builder is at fault, for example where extra rock is discovered whilst preparing the site and or commencing the build, and the builder knew about or should have discovered the situation prior to commencement, then the law would not permit the extra cost incurred as a consequence to be validly claimed as a variation.

Any variation claimed by the other party should be disputed in writing as soon as the other party is aware of the claimed and disputed variation. The earlier parties can agree on a variation, including its scope and effect, and comply with any procedural requirements and raise any disputed issues or potentially disputed issues, the better it is for all.

Where the Building and Construction Industry Security of Payment Act applies, a detailed set of requirements apply, and it is best to consult the act yourself directly, or receive advice.

As always, there are traps for the unwary in this ever increasing fertile ground for disputes, so if in doubt seek out professional advice.

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  1. Branko Mladichek

    Great article from Paul
    I still find that many people, even well-educated ones and experienced in business ,that should know better, will sign building contract without independent review and in the blind trust in the builder. A review should pick up not only any contract and drawing anomalies but also unfair inclusions and special conditions favoring builder. It will also be educational preparing owner for the journey ahead. A good lawyer or a very experienced building consultant would be suitable as both will know dispute hot spots and how to avoid them and they will be in the cloud to assist you.
    As Paul says, the paramount objective is to avoid a dispute and I have some very simple guidance not only for owners abut also for the builders.
    If you are the owner then make sure you know what you want then put it in the freezer and don't change anything during your build.
    If you don't change anything there can be no owner-generated variation disputes. It may be hard but you have to be disciplined about it because if you are not, blowing your budget will be a reward.
    Think of your house as a car on the production line. Every variation you make is customising and could stop the line and will blow costs.
    If you are the builder you should have a special condition in your contract that any owner generated variations are signed off and prepaid before they commence. This will give owners a cold shower up front and will quickly stop them if they have not thought it through. And always carry a variation notice book in your back pocket and synchronise pulling it out as you hear. "Could we change".
    As Paul says there are traps. Traps of the unknown. Traps set by the builder and your own snares.

  2. Anne Paten

    Paul, thank you for your very clear explanation.
    I am working with clients at the moment who have been presented with, and under duress paid for what were NOT variations – i.e. NOT either agreed to verbally nor signed by them in agreement. And in two instances, these were already charged for and paid for in the contract! The owners were forced illegally to cough up money to which the builder was not entitled. After being coerced, they did not object in writing, partly because of the slight change of wording from that loosely specified in the contract by the builder's inspired 'confusion' to pretend that the works were additional to the contract, and partly because of the extreme, ongoing pressure applied by every single person they have come across (two builders, surveyor, insurer, etc.) over 7 years. And worse, their nightmare is promising to go on for another 7 years!
    This is but one example of abuse through the 'dominance of power' in the inequitable building arrangements (and as for all owners, they signed what the ACL approved as unfair contracts), together with long-term bullying and the costs of this abuse being transformed into a 'dispute'. This whole case is simply beyond belief, the builder's actions plainly intentional, and it demonstrates yet again the plight of owners in a system devised to subjugate them to the rank of powerless and prey for any predatory cowboys who come their way!

    • Branko Mladichek

      I fully understand what you are saying Anne and there will always be inequality simply because builders are finely oiled money making machines and owners are lambs to the slaughter. How can they compete? They can't! But there is a way to even the playing field. The answer is to get a really good building consultant (preferably experienced builder and contract administrator) to look after your build. Someone who can stand up to the builder and make builder blink. This will change everything and builder will know not only that build will be monitored but also that any claims will be scrutinised. I have for over a decade looked after people building with pre-contract review and four stage inspections during the build. It works well and is a sweet point between cost and value. The road behind me is littered with roadkill of builders claims, BS variations and PS adjustments blown to smithereens. There are other benefits too. Only yesterday I was told at pre slab inspection by builder's SS that they allocate their best tradies to jobs they know will be independently monitored. I knew that but it was the first time I heard it from SS. Presumably other owners get leftovers. I still get stupid questions from owners. Are inspections worth it? Which are more important I want to skimp on some. Cars have four wheels, try taking off one.
      For as long as owners are reckless with their build, don't do diligence and build in blind trust they will be just builder's roadkill.