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Valuation of Variations - Strict Operation of the Contract

In the May 1999 edition of our newsletter,we reported the decision of the English Technology arid Construction Court in the case of Henry Boot Construction v Alstom Combined Cycles. Boot, the contractor, received a "windfall gain" because of the way in which the Court found that a variation should be valued. The message was that the Courts would uphold 'loaded' rates, and so, by carefully structuring his tender, a contractor could make a healthy profit from variations. However, in order to load some rates, other rates must be 'unloaded' to keep the overall price competitive. In the case of Galliford (UK) v Aldi Stores, the Court applied the same strict rules to the valuation of a variation and adopted a nil rate, giving a harsh illustration of the risk associated with ‘unloaded' rates.

Boot v. Alstom went before the Court of Appeal in April this year. The issue on appeal was how the valuation rules contained in the ICE 6th Edition Conditions of Contract should be operated. The ICE 6th contains in summary the following rules for the valuation of variations:

  1. work of a similar character and executed under similar conditions to work priced in the Bill of Quantities is to be valued at the applicable rates and prices;
  2. work not of a similar character or not executed under similar conditions is to be valued using the rates and prices in the Bill of Quantities as the basis for valuation so far as may be reasonable;
  3. otherwise, a fair valuation shall be made.

Boot tendered a lump sum price for a tender addendum to increase the depth of excavation to two areas of the works. The price included the shoring that was necessary because of the increased depth. Although the price was calculated using the quantities for two areas of the works, it was expressed to be for only one of these areas. Alstom were no doubt unhappy at having to pay extra for the additional excavation to the second area of the works, but of even more concern was that substantial further similar work was instructed as a variation. Boot contended that the variation should be valued by applying a rate derived by dividing the lump sum by the quantity for the one area of the site to which . the lump sum was expressed to apply. Thus, Boot would be paid at a rate substantially higher than perhaps even they had contemplated at the time of tender.

The issue for the Court of Appeal to consider was, when should bill rates be applied to a variation? This hinged upon the correct interpretation of the words "so far as may be reasonable".

The Court of Appeal held that "it is the reasonableness of using the rates alld prices, alld not the reasonableness of the prices or rates, which has to be considered". So the reasonableness of a rate should be gauged strictly by comparing the work covered by the variation order against the work priced in the bill of quantities. It is inappropriate to take into account extraneous consideration such as how a rate or price was arrived at and whether it was too high or too low.

In Galliford, the dispute also arose over adjustments made to the bill of quantities following negotiations after the tender was submitted. The original tender included a rate of £44.60 for off-site disposal of contaminated material and £8.50 for clean material. In order to reduce costs, Aldi agreed that contaminated material could be buried on the site. As a result, Galliford amended the bills and inser!ed rates of £0.00 against the items for disposal of contaminated and clean material. Unfortunately, the whole site turned out to be contaminated necessitating the removal of all excavated material to a licensed tip. The arbitrator found that this constituted a variation, and made a "fair valuation" adopting a rate of £36.10.

The contract (the JCT Intermediate Form) provided that, where work was of a similar character to that described in the bill of quantities, it was to be valued in accordance with the bill rates, making due allowance for any change in conditions and/or quantity. The arbitrator could only make a "fair valuation" if there was no work of a similar character in the bills. Aldi appealed the arbitrator's award, arguing that the bill rate of £0.00 should be used to value the variation.

Although the contract was worded differently from the ICE 6th considered in Boot v A/stom, the issue before the Court was substantially the same. Was the reasonableness of the bill rate a factor that could legitimately be considered when deciding whether to use the bill rate as the basis for valuing a variation. The Court held that the arbitrator should only have departed from the bill rates if he had made a finding that the work was carried out under different conditions and/or there had been a significant change in quantities. The arbitrator did not make such a finding and should therefore have valued the variation using the £0.00 rate.

The Boot and Galliford decisions will probably surprise many in the construction industry. The clear message is that if you agree a set of rules by which variations will be valued, those rules will be applied strictly, even if the result is harsh for one of the parties. Where valuation rules depend on rates contained in the bill of quantities, it is vital that the consequences of an increase or decrease in the quantity of work to which the rates apply are appreciated.

Lovells, Asia Focus
September 2000

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