Construction Law/Variation

Advertisement


Question
QUESTION: Hello Peter,
I work for a consulting Engineer in a sewerage project in Dubai.The project is governed by Dubai Municipality Conditions of Contract for works of civil engineering constn First Edition March 1991 which is a modified version of FIDIC 1987.
During the early stages of the contract the employer asked the Engineer and the Contractor to install valves which were available in the employer's store.E&C did not object to the employer's request and installed these valves.Ancillary items such as nuts,bolts, gaskets,extension spindle+supports were provided by C.
The break down of rate for the supply and installation of the valve is L&P=0.3%, M=89.65%, OH&P=10%(There is no provision to price for subcontract in the Sch. of rate break down).The tendered rate is 300,000. The employer could not provide prices of his valves. C who was in the process of ordering the valves from the vendor provided the PO price amounting to 160,000. The ancillary items would amount to 25000.The employer wants C to include only the actual cost of ancillary items against Material.C claims payment of material element of the rate less PO price of valve which the Engineer is inclined to accept.
There is no formal instruction for a variation order although there were several exchanges of correspondence between E&C. Now E realizes that this should not have been variation in the first place since E can not omit any work if it is to be carried out by the employer.
I would request your ruling on this dispute.

Cheers,
Philip

ANSWER: Hi Philip,

The road to hell is paved with good intentions.  The Employer did not want to waste some perfectly good valves. The Contractor was happy to accommodate him.  The Engineer did not get the paperwork sorted out before the work started.  Now everyone is getting all upset.  Time for a little patience and realism to ensure that everyone gets a little.  

I suggest that a middle path would be to pay the Contractor the billed rate 3000,000 less (the cost of the valves plus 10% OHP - 176,000).  Remember, any excess profit here must be balance by a loss somewhere else.  If you squeeze the Contractor too much, it will cost more in the long term.  

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

QUESTION: Hi Peter,

Thank you for giving a very balanced response to my query which was exactly what I too thought is the right way to go about it.

In the above case should the contractor suffer loss of profit on the valves he was contracted to supply.
Can it be valued as a variation in the absence of a formal variation instruction.
As an alternative in future projects should the Engineer advise the Employer to provide a list of materials which he intends to supply from his store with his prices against each and give the contractor a choice to either accept employer's materials and the said prices to be deducted under miscellaneous head from his payments or to reject employer's materials and procure the materials by himself.

Cheers,

Philip

Answer
Hi Philip,

It depends on the final price.  If there are additions to match the omissions, then the thought is that the Contractor will have recovered any lost profit and will have made his expected profit.  If the final price is lower than the accepted contract price, then a discussion starts as to the reasonable level of profit to be recompensed.  Generally, the variation has to be greater than 15% before the Engineer will discuss loss of profit and overhead recovery.  

The work can be valued in any way that is legal and acceptable to the parties.  

In future project5s, the Employer should check his stores before writing the Contract and make the necessary provision in the tender documents.

Construction Law

All Answers


Answers by Expert:


Ask Experts

Volunteer


Peter M. Elliott

Expertise

First response to queries regarding extensions of time, variations orders, site instructions and payment using FIDIC and other forms of Conditions of Contract, based on English Law, and derivatives only. Anyone who needs advice about EoT should download and study the SCL Delay & Disruption Protocol www.eotprotocol.com before submitting a question.

Experience

Value . . .
It's unwise to pay too much, but it's unwise to pay too little. When you pay too much you lose a little money, that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing you bought it to do.
The common law of business balance prohibits paying a little and getting a lot. It can't be done. If you deal with the lowest bidder, it's well to add something for the risk you run.
And if you do that, you will have enough to pay for something better.
. . . John Ruskin (1819 - 1900)
"We are too poor to buy something cheap"
.Romanian Proverb 2002
A lean compromise is better than a fat lawsuit. George Herbert (English poet 1593-1633)
I said it in Hebrew, I said it in Dutch,
I said it in German and Greek:
But I wholly forgot (and it vexes me much)
That English is what you speak!" Hunting of the Snark - Lewis Caroll
Match your presentation to the reader!
The joy of food lasts but an hour, of sleep but a day, of a woman, but a month, but the joy of a building lasts a lifetime. Syrian proverb.
Comments and observations leading to improvements in the translation of FIDIC Red & Yellow books into Romanian prior to approval by FIDIC (reference 'Preface to the Romanian edition')

Organizations
Institution of Civil Engineers, Association of Chartered and Certified Accountants, Society of Construction Law, Dispute Resolution Board Foundation

Education/Credentials
B Sc(Hons) in Civil Engineering

©2016 About.com. All rights reserved.