Construction Law/Price variation in LS Contract
Dear Mr John,
Let me share the following event –
Recently we are awarded nine hospitals at different locations in our state. State Govt. is the client & it’s a “Design & Build” contract on turnkey basis.Out of nine hospitals four are only 5 storied and will follow isolated footings instead of pile foundation . A payment schedule on percentage basis were agreed with client upon completion of certain milestones which specifies as stated below -
a)On completion of 50% foundation ( Pile only) @ 5.5% of Contract value
b)On completion of balance 50% foundation ( Pile only) @ 5.5% of Contract value
Now here is a dispute. .As per Payment schedule it seems payment will be made against pile foundation only. Now instead of pile foundation if we adopt isolated footings client may ask for savings by saying that they bought the building including pile foundation and raft etc which is now changed to isolated footings which are more cost effective. So , client may treat this event as a part of “value engineering” to issue a variation order in their favour.
As a contractor are we entitled to get full payment as agreed ?
Contractually how to protect ourselves ? If you kindly advise, thanks
Regards - Kallol Seal , L&T- Kolkata , India
Dear Kallol Seal,
Thank you for this question.
The answer to this problem will depend greatly upon the Request for Proposals, the Specification and the acceptance of the tender and the adopted form of Contract; accordingly I can give only general advice.
If the Specification is a performance specification only and the Contractor is entitled to design the foundation as it deems suitable then it can change between pile or footings to suit its developing designs.
If, however, the Contractor submitted an initial design as part of its tender submission and acceptance of the tender was based, in part, upon those designs, then it is possible that the Employer can demand compliance with the proposed design philosophy.
In either case and under contracts such as the FIDIC form, for example, the Contractor is free to propose a change in design as part of a value engineering proposal. Such a proposal does not have to result in a lower cost too the Employer, providing there is some other tangible benefit. The Employer is not obliged to accept such a proposal. The Contractor cannot unilaterally make the changes.
In the circumstances of the change being only for the Contractor's convenience I suggest that the Contractor should consider a benefit sharing option with the Employer. The Employer may be prepared to accept a time saving (early delivery) in exchange for the Contractor taking any financial benefit; or the Employer may accept only a partial financial benefit.
I hope that this assists you.
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