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Construction Law/FIDIC 1987.. Provisional Sum and Variation

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Question
QUESTION: Dear Sir, Could you please answer my query?
I have two questions regarding FIDIC 1987 clauses
1. Can you please advise me regarding clause 52.3 "Value of variation exceeding 15% " of FIDIC 1987,i mean what does it mean?.If at the end of contract we find out that total amount of work done is exceeding 15% of the contract price then in that scenario what should one do.What i infer from the wording of clause is that one should deduct the amount exceeding from that 15% limit from the contract,but then what should be done with that amount.I mean how to pay that exceeded amount to the contractor.Should we enter into another contract other than the orignal one (only of that amount).If thats the case then on what prices. Is it on the same unit price of previous contract or totally new price.(We have unit price contract)
2. My second question is about Provisional Sum in the contract.What rates apply to works included in provisonal sum of the contract.Is it the same item rates in the BOQ or new rates.For Example if we have a unit rate of concrete 1:2:4 in the BOQ of contract and we perform any activity in Provisional Sum items involving the same concrete ratio,should we apply same rate or a new one.
Reagrds

ANSWER: Dear Mohammad,
Thank you for your question.
The fidic guidelines provide very clearly that under cl.52.3 ,the first 15% up or down the original contract sum is disregarded,but any increase or decrease beyond this percentage may require an adjustment to the amount due to the contractor on substantial completion.The reason is that contractor may gain on his fixed on-cost if the overall value is increased or lose if the total is less than that in the original bill.The fixed on-cost are such as mobilization,camp and workshop, consumable stores etc.Regarding fixation of rates, let me say under cl.52.3 it is not individual boq item but overall contract values that are considered only.Clause 52.2 deals with individual boq items if certain conditions are fulfilled.
To your second question ,I would only say that the billed rates act as the predominant guide when developing varied rates,because they are the basis of contract.
Regards-Liaqat Hayat

---------- FOLLOW-UP ----------

QUESTION: Sir,Thank you very much for your prompt and abled reply. I want to have a more clearer view of what clause 52.3 of FIDIC 1987.Let me put it like this. Suppose we have a contract of contract price Rs 100.00 Million.At the end of the contract time, meaning at substantial completion stage contractor submits his final bill which on checking/vetting reveals that now it is closing at Rs 125.00 Million (due to variation in original boq quantities and due to addition of some non boq items which were priced as per clause 52.1),then in that situation what should the Engineer do. I mean to say first 15% variation (15.00 million) will be paid to the contractor as it is because it comes in 15% limit.But how to deal with remaining 10% variation (10 Million).How to adjust that in the contract?.I mean if same boq rates apply to that remaining 10 % amount or what.Should we enter into a new contract with the remaining amount as the previous one already has its 15% limit.
I am working in a organization since 2 years in which a contract was awarded to a contractor some 4 years ago. We normally give priced BOQs to contractor who in return quote premium(above/below %) to that amount.Nespak was the consultant on that project.They(contractor) quoted 20 % above the estimate. At the end of the project,it was found out that final amount is exceeding the 15 % limit,so Nespak made a amendment in the contract of the amount exceeding that 15% and made a seperate BOQ of that amount to which the contractor quoted 38% above the estimate(premium). Now last year we had audit of our projects executed during last 6,7 years.Audit pointed out that there cannot be two premium in one contract and this a anamoly at our end so we should recover the excess amount from the contractor.I want to know whether they(audit) are right as Nespak Officials say that they have done this right as per Clause 52.3 of the contract (FIDIC 1987)
Regards

Answer
Dear Mohammad,
Thank you for coming back with 2 points to elaborate. My response is as follows.
Point 1:
In the given example, up to contract amount of 115 million no change in the process.For last 10 million, there is a duplication of overheads scenario if this work has been done at the same time with no change of normal sequence etc. For this portion of work, the saved overheads ( on-site as well as head office ) can be on account of  the contractor. If overheads are say 15 %, it means 2.25 million can be debited to the contractor due to increase in work quantum and to account for duplication of overheads scenario. This is however dependent on actual scenario as verified through contractual provisions and amount of final amount. Any adjustment already made under any other sub-clause to be discounted.
Point 2:
I feel the consultant has correctly dealt with the matter as there can be two premiums as per definition of variation in the contract amount i-e the contract amount with 15 % increase and the other above it. FIDIC through its questions and answers on its website agrees with this approach. The audit people need to be explained that this is how FIDIC works and i am enclosing on such question answer for your information.

I have an additional question/answer from FIDIC and directly answers your question and is reproduced as follows.

"New rates

Question no 1.

In a civil marine work contract of FIDIC conditions, disputes quite often occurs on fixing of revision of rates. though clauses 51 and 52 of Fourth Edition - Red Book - clearly provide causes for variation and valuation of rates, ambiguity still persists with respect to adoption of revised rates for varied quantities only or for full quantity executed as long as there are no major changes in deployment of workmen, equipment and materials. Leaving the decision to engineer may not give an appropriate solution as persons holding the post of engineer may have different views and their decisions may not exactly match with the views of FIDIC authors. Please clarify the situations when revised rates are applicable for the entire quantity or for increased quantities only.

Answer

The decision whether a new rate applies to the total quantity of an item, or just to the Variation quantity, will depend on the reason why a new rate is necessary. This may depend on the reason and details of the change to the Contractor's cost. Sometimes the original quantity will already have been executed and paid at the BQ rate, before the Variation is ordered. However, sometimes the fact of the quantity being changed by the Variation will change the circumstances and costs and makes it reasonable to pay the total quantity at the new rate. The new rate may differ if it is being applied to the total quantity or just to the Variation quantity. The Engineer will, of course, take all these factors into account when calculating a new rate. You should also refer to the commentary on Clauses 51 and 52 in the FIDIC Guide to the Fourth Edition. The commentary emphasises the importance of consultation with both the parties.

Refixing of rate
Question no 2

I am interested in application of Clause 52.2 (Power of the Engineer to fix Rate). If circumstances allow a refixing of rate, would it apply to the varied quantity(increased/decreased) or to the entire quantity, i.e., quantities in the bid plus increase/decrease?
Answer
You are referring to the 4th Edition 1987 of the Contract for Works of Civil Engineering, Sub-Clause 51.1 (a) allows the Engineer to issue an instruction to increase or decrease the quantity of any work included in the Contract. The rate which the Engineer agrees or fixes under Sub-Clause 52.2 would only apply to the varied quantity (increased or decreased). The original quantity is not part of the Variation and would be paid at the original rate."

Regards,
Liaqat Hayat  

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Liaqat Hayat

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I can answer questions based on FIDIC 4 and FIDIC 1999 [design-build] with particular reference to time extension , price adjustment and disputes. I am in particular more inclined for response to points pertaining to how claims should be framed and put up in case of technical or other contractual shortcomings. Regarding procurement matters I have spent over 5 years as procurement specialist for highway authority and dealt with numerous claims and disputes in the capacity of "The Engineer" .

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