Valuation of Variations - Detailed Study Notes

Construction Engineering Management II

Course Code: ENBU 708
Topic: Valuation of Variations
Instructor: Dr Funmi Rotimi
Institution: AUT

Valuation of Variations

Overview of NZS3910:2023 Clause 9.3

  • The valuation of each variation should be determined by an agreement between the Contractor and the Contract Administrator (CA) as much as possible, as outlined in clause 9.3.4.

  • The CA has the responsibility to issue instructions based on the agreement reached within a period of 10 working days.

  • It is important to note that the absence of an agreement or prior valuation does not invalidate or halt the execution of variation work.

  • Note: Wording from the standard NZS3910:2023 is subject to amendment for clarity.

Implications of Absence of Agreement

  • The lack of agreement does not eliminate the existence of variations but may lead to an increase in administrative work and disputes.

  • There's a risk of inadequate or no payment being processed, emphasizing the need for effective communication and negotiation between involved parties.

  • The primary aim of any valuation method is to establish a value that fairly compensates the Contractor in a manner consistent with the Contract Price for the additional work and the associated impacts on time and costs.

Valuation Procedures

Pre-Work Valuation

  • Variations should, where feasible, be valued before the commencement of work (Cl.9.3.1).

  • Measurement responsibilities fall to the CA unless agreed otherwise (Cl.9.3.3).

  • Both the Contractor and CA should efficiently share their respective estimates of value without undue delays.

  • In situations where agreement cannot be achieved regarding valuation, the procedures specified in clauses 9.3.4 to 9.3.14 should be adhered to.

Decision by Independent Consultant (IC)

  • If there's a lack of agreement between the Contractor and CA, or if the Contractor fails to propose a value within 20 working days as required by clause 9.3.2, then the value will be determined by the IC following clause 9.3.

  • The IC's decision will provide reasoning, along with the basis for any variances between the Contractor's proposed value and the IC's resolution.

Attempts at Agreement

  • When total agreement isn't feasible, both the Contractor and CA should endeavor to reach consensus on the following:

    • Applicable schedule rates,

    • Suitability of derived rates,

    • Rates for specific items,

    • Pursue maximum agreement to facilitate easier resolution.

  • A point of caution: neither the Contractor nor the Engineer should selectively dispute certain measurements while favoring others.

Base Value Determination

Schedule of Prices

  • If Contract Documents have a Schedule of Prices applicable to the nature of the work, the Base value should be derived from those rates (Cl.9.3.6).

  • In instances where direct matches aren't available but analogous rates exist, those rates should be the foundation for calculations, considering other costs mentioned in clause 9.3.8 (Cl.9.3.7).

  • There may be circumstances where no applicable items exist under the Schedule of Prices, necessitating new pricing or rates which may not be reasonable due to the nature of variation (Cl.9.3.8).

Factors Inhibiting New Pricing

  • Situations where new rates under 9.3.7 cannot be developed include:

    • The variation significantly differs from the original work,

    • It has to be executed under substantially different conditions,

    • Timing impacts the Cost of the work,

    • Quantity adjustments differ from the original work or scheduled quantities.

  • In cases where new rates are untenable due to such differences, the Base Value should revert to the Net Cost basis (Cl.9.3.8).

Examples of Additional Costs Due to Variation

  • Various extra costs may arise from a variation, some of which include:

    • Rescheduling material supply,

    • Recruitment or layoff of workforce,

    • Increases to unit costs or overhead costs,

    • Complications brought by the variation,

    • Disturbance to the critical path,

    • Escalation of health and safety costs,

    • Additional expenses for bonds and insurances.

  • Reductions in work may also unfairly reduce profit margins.

Guidelines for Base Value

Determining Inclusions/Exclusions (Cl.9.3.9)

  • Identifying costs when determining Base Value based on clauses 9.3.6 or 9.3.7 includes the following:

    • Full allowance for all Preliminary & General (P & G) costs unless exceptions specified in clauses 9.3.12, 9.3.15, and 9.3.16 apply.

    • If conditions denote that Schedule prices exclude P & G costs, clause 9.3.10 will be the guide instead.

    • The Base Value should include full allowances for all Margin costs too, following the same exceptions as above.

    • This is critical to ensure no necessary cost elements are omitted from considerations of Base Value.

Allowance for P & G (Cl.9.3.10)

  • When such costs are not captured in the Schedule of Prices or when clause 9.3.8 is applicable, an allowance will be added to the Base Value to accommodate P & G costs (with some exceptions).

  • Methodology for determining P & G allowance includes:

    • If a specific percentage for P & G costs is indicated, that percentage must be applied (subject to 9.3.13).

    • In instances where no percentage is designated, a reasonable allowance must be calculated.

    • No additional allowance will be needed if Schedule prices already encompass P & G costs, establishing fair pricing principles.

Determining Margin or Profit (Cl.9.3.11)

  • Instructions on determining the margin or profit for variations particularly when Schedule prices are marked exclusive of margin or clause 9.3.8 applies include:

    • If a margin percentage is defined, include that percentage in the Base Value (subject to 9.3.13).

    • In the absence of specified margin percentages, a reasonable margin percentage is to be added.

    • If Schedule prices account for margin, no further percentage will be appended ensuring accurate profit representation.

Compensation for Time-Related Costs (Cl.9.3.12)

  • Contractors entitled to an Extension of Time (EoT) due to variation-induced changes can claim compensation for additional time-related costs.

  • This will cover compensation not included in previous Base Value assessments, and can be determined by the following methods:

    • Application of a specified Working Day Rate if defined (which encompasses time-related P & G and margin) (subject to 9.3.13).

    • Reasonable compensations for the time-related costs and margins if no Working Day Rate is identified.

    • Avoiding double compensation by ensuring any allowances already considered in Base Value calculation are acknowledged.

  • The contractor shall receive the larger allowance from related clauses versus what’s determined here, ensuring fair compensation practices.

Nominated Percentages or Working Day Rate (Cl.9.3.13)

  • If percentages or rates are proposed, yet their application results in inequitable outcomes, reasonable adjustments should be made.

  • This ensures the flexibility to ensure fairness in unique circumstances that do not conform to the expected standards determined by the contract.

Negative Base Value (Cl.9.3.14)

  • Should the Base Value be negative, deductions should not entail additional charges for margin or P & G costs unless actual reductions in related costs occur.

  • This clause safeguards against unjustified extra deductions when contract value adjustments happen, ensuring that reductions reflect true cost implications.

Additional Compensation for Delays (Cl.9.3.15)

  • Compensation claims arising from delays due to variation should cover time-related costs specific to those delays, including profit on those costs.

  • Computation must avoid double counting of costs already factored into original prices/rates, maintaining consistency and fairness in valuing delays.

Processing Variations (Cl.9.3.16)

  • If Conditions of Tendering stipulate costs for processing variations, the Contractor should be compensated a percentage of the variation value regardless if the variation proceeds.

  • Time spent on assessment and organization should be rewarded appropriately to reflect the efforts involved in the process.

Deletion of Work

  • In cases where Contract Works are deleted, the Contractor cannot claim the deleted work's value; however, they are entitled to P & G allowances associated with that work under the terms of the contract.

  • The Principal cannot reassign the deleted work to another party, ensuring that project management and claimed costs are restricted under defined contractual frameworks.

Case Study: Blue Circle Industries v Holland Dredging Co. (1987)

  • This landmark case highlighted instances where requested variations could effectively represent a distinct contract rather than a simple variation.

  • The case revolved around dredging operations at Larne Lough, which shifted the objective from establishing suitable disposal sites to creating an artificial bird island due to external pressures.

Court Judgment

  • It was contested that the creation of the bird island transcended the bounds of the original dredging contract, thus qualifying as a separate contractual agreement.

  • The judge deemed the construction of the bird island entirely outside the original scope of work, validating its classification as a distinct contract.

Conclusion and Next Steps

  • Students are encouraged to prepare responses for upcoming tutorial activities as group engagement is planned.

  • Further reading is suggested to deepen understanding of the discussed concepts pertaining to variation valuation.