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Valuation Of Variation, Clause 52.1 (fidic-iv)

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Valuation Of Variation, Clause 52.1 (fidic-iv)

Postby melville » Fri Dec 02, 2016 3:36 pm

Dear Ali,

I am working as a Contract Engineer in a consultancy firm in Islamabad, Pakistan and I m currently facing a problem regarding the valuation of variations under clause 52.1 of FIDIC-IV. The understanding i have developed so far from the mentioned clause is that while applying rates to the items of variation, the items for which rates are available in the original BOQ should be taken from BOQ and for non-BOQ items new agreed rates should be established. But the problem is that most of the contractor's and some of our engineers contest that if the rates quoted by the contractor in original BOQ are 2-3 years old rates when the project started, how is it fair to use the same rates today when the rates have been increased over the period of time?

My question is that keeping in view the above mentioned scenario, if the rates quoted by the contractor in the original BOQ are very old, does the contract allow for negotiating new rates for the items for which rates are available in the contract?

Thanks & regards,

Haroon
melville
 
Posts: 50
Joined: Fri Apr 01, 2011 1:31 am

Valuation Of Variation, Clause 52.1 (fidic-iv)

Postby Tuomas » Fri Dec 02, 2016 10:14 pm

Dear Haroon,

I am sorry for late reply because I was in remote location. Regarding your question, the Contract allow new rates in accordance with Sub clause 52.2, which stipulates :" Provided that if the nature or amount of any varied work relative to the nature or amount of the whole of the Works or to any part thereof, is such that, in the  opinion of the Engineer, the rate or price contained in the Contract for any item of the Works is, by reason of such varied work, rendered inappropriate or inapplicable, then, after due consultation by the Engineer with the Employer and the Contractor, a suitable rate or price shall be agreed upon between the Engineer and the Contractor. "

Most contract forms used in the construction industry allow for variations or changes to the works and the design of the works, because there must be a basis from which a variation instruction can arise. Such allowance needs to be crystallised by an instruction or order of the Employer, to which the Contract gives the power to do so. As Variations may affect not only the works or their design but also the Contractor’s costs and profit, both the consequences of a variation to the Contractor and those to the Employer have to be fixed by the variation order. Thus standard contract forms usually provide rules which specify the effects of a variation order on the parties.

Under contracts based on the common law the Engineer typically has the authority to initiate variations by giving instructions to the Contractor. The contractor will then have to consider whether he is entitled to claims for additional payment.

Variations to the works are almost inevitable. Therefore, all standard forms of contract contain provisions to deal with them. Some variations can be made without affecting the progress of the work and with no change in the method, sequence and cost of the work to be done in the variation. In such circumstances, the rates applicable to the contract can be applied to the measured quantity of work in order to arrive at the value of the variation. However, even when these simple rules are applied, there may be some indirect costs which need to be addressed. For example, if the costs of insurance premiums have been included

in the 'Preliminaries' sections of the bills of quantities, there may have to be an adjustment made to the 'value related' element of the insurance premiums in the bills to reflect any change caused by variations. Similarly, re-programming and planning, increased logistics for pre-planned quantities may cause increase on overheads. Affects of variations are unique for each case and has to be examined individually. In practice, most variations have some effect on the progress of the works and the method of executing the work. Where it is possible, each variation should be valued taking into account all of the delaying and disruptive elements which are directly related to the variation.

The adjustment of any rates are subject to the requirements to give notice, keep records and to provide particulars and accounts in accordance with clause 53.

Sub-clause 52.2 contains what appears to be very onerous provisions regarding the notice to be served by the contractor if he should require a change in any rate:

Sub-clause 52.2 stipulates that "Provided also that no varied work instructed to be done by the Engineer pursuant to Clause 51 shall be valued under Sub-clause 52.1 or under this Sub-clause unless, within 14 days of the date of such instruction and, other than in the case of omitted work, before the commencement of the varied work, notice shall have been given either:

(a) by the Contractor to the Engineer of his intention to claim extra payment or a varied rate or price, or

(b) by the Engineer to the Contractor of his intention to vary a rate or a price "

The provision to give notice within 14 days and before commencement of the varied work is a condition precedent to the Contractor's(and the Engineer's) rights under the Sub-clause.

Sub-clause 52.1 covers valuation of variations at contract rates as well as varied rates, therefore, it appears that every single variation(including variations where no instruction is

required - such as increases in quantities), whether the rate is to be changed or not, must be notified within fourteen days of the instruction and before commencement of the varied work. It is hardly likely that the contracting parties agreed to this interpretation. It is probably

impossible to comply with such provisions in every case, particularly in the case of an increase in quantities which may only come to light after the work was substantially completed and had been measured on site or from drawings by the Engineer(or Contractor).

Sub clause 53.1 of FIDIC stipulates:" Notwithstanding any other provisions of the Contract, if the Contractor intends to claim any additional payment pursuant to any Clause of these Conditions or otherwise, he shall give notice of his intention to the Engineer, with a copy to the Employer, within 28 days after the event giving rise to the claim has first arisen."

Sub clause 53.4 provides for claims to be considered by the Engineer if the Contractor fails to comply with the twenty-eight day notice provision. However, no such relaxation exists to enable the Engineer to lower any rates unless he gave the Contractor notice in accordance with sub clause 52.2.

In the event of a dispute over payment for variations if the Contractor or Engineer fails to comply with the requirements to notify the other under sub-clause 52.2, it is highly likely that an arbitrator will consider clauses 52 and 53 together in order to make sense of the Contract.

A variation will normally have cost consequences and the Employer should be kept fully informed by the Engineer. Even if the variation can be carried out within a budget agreed by the Employer, he may require the opportunity to approve the instruction before it is given to the Contractor, see Sub-Clause 2.1. The Contract should establish in Part II a procedure for such approval. The steps in such a procedure could be:

1. The Engineer prepares an authorisation request with proposed variations to the Specification and Contract quantities as well as an estimate of cost together with the basis and justification for the variation.

2. After the authorisation request has been approved by the Employer, the Engineer negotiates with the Contractor to determine the price of the variation. If the price is equal  to or less than the amount sanctioned by the Employer, the Engineer is authorised to issue the necessary instructions for the variation to the Contractor. If the price is more

than the sanctioned amount the Engineer should seek further authorisation from the Employer.

3. Irrespective of the procedure described above occasions will arise when it will be necessary for the Engineer to issue an instruction for a variation prior to reaching an agreement with the Contractor as to price, in order to avoid delaying work. Under such circumstances a two-part instruction for the variation will be issued, the first part instructing the Contractor to proceed with the work without stating the rates and

prices, and the second part to be issued after further negotiations stating the rates and prices applicable.

Work included in variations is valued in accordance with this Clause using, wherever reasonable, the rates and prices in the Bill of Quantities. If there are no applicable rates or prices, new rates or prices are to be based upon the Contract rates and prices so far as

it may be reasonable to do so. Otherwise, suitable rates and prices are to be agreed. The exercise of his authority by the Engineer, under this Clause, may be subject to the specific approval of the Employer.

If the nature or amount of the work involved differs so much from that included in the original Contract that the rates and prices are rendered inapplicable, it is the Engineer's task to agree appropriate rates and prices with the Contractor, or, if agreement cannot be reached, to fix the rates and prices. Existing rates and prices shall be used as a guide for the valuation as far as reasonable. The importance of consultation with both the parties is highlighted in the Clause. Failure to reach agreement should not prevent the Contractor from receiving a payment on account for the work in question.

I have brought various angles to your subject, hoping useful for you.

Best Regards

IRVALI
Tuomas
 
Posts: 52
Joined: Sun Jan 05, 2014 11:51 am

Valuation Of Variation, Clause 52.1 (fidic-iv)

Postby Jefford » Sat Dec 10, 2016 11:22 pm

Dear Ali,

I am working as a Contract Engineer in a consultancy firm in Islamabad, Pakistan and I m currently facing a problem regarding the valuation of variations under clause 52.1 of FIDIC-IV. The understanding i have developed so far from the mentioned clause is that while applying rates to the items of variation, the items for which rates are available in the original BOQ should be taken from BOQ and for non-BOQ items new agreed rates should be established. But the problem is that most of the contractor's and some of our engineers contest that if the rates quoted by the contractor in original BOQ are 2-3 years old rates when the project started, how is it fair to use the same rates today when the rates have been increased over the period of time?

My question is that keeping in view the above mentioned scenario, if the rates quoted by the contractor in the original BOQ are very old, does the contract allow for negotiating new rates for the items for which rates are available in the contract?

Thanks & regards,

Haroon
Jefford
 
Posts: 52
Joined: Tue Jan 07, 2014 10:04 am


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