VALUATION OF VARIATIONS

Everybody has been in a position to negotiate with the contractor a new rate or price when an instruction has been issued and you know that if you are an engineer you must have a strong stomach and patience to deal the price. 

One of the reason to raise this question is my opinion that in most forms of standard contracts there are four ways of doing this and this options can raise disputes between the parties.

Variations under the contract can be valued by a number of methods. The price can be agreed by the employer and contractor directly, more usually by means of a quotation mechanism subject to analysis by the engineer. The contract may contain a schedule of rates to be used to value variations or standard published rates may be used as dayworks.
 If the contract contains a bill of quantities then the rates in the bill of quantities may be used as the basis of valuation. Most standard forms of contract (including ICE and JCT Standard Forms in the U.K.) which adopt bills of quantities have a four tiered approach to the valuation of variations. The options are:

1. Valuation using bill of quantity rates or schedule rates
2. Valuation on the basis of rates analogous to 1 above
3. Valuation on the basis of fair valuation or fair rates or reasonable prices
4. Valuation on the basis of dayworks

Which of the above options will apply as the basis of the valuation will depend largely upon the timing of the variation order, the location of the work, the quantity of the work involved and the circumstances in which the work is executed. If it can be established that these factors preclude the valuation on the basis of bill rates then the valuation will usually be based on fair or reasonable prices:


Option 1: The principle is that if the varied work is of a similar character and executed under similar conditions to work priced in the bill of quantities then such bill rates and prices shall be used to value the varied work.

Option 2: It requires the engineer to break down the quoted rates into the elements of plant, materials, labour and overheads, in order to make the appropriate adjustment. The engineer is required to do so even if he does not have from the contractor any build up of the rate upon which the new rate is based. In that case he will have to arrive at a notional build up. He may be assisted in doing so by information obtained from the contractor's contemporary records. The elements of the rate are to be adjusted to make appropriate allowances for the effects of the variation, but those elements unaffected by the extra effort are not changed.

Option 3: It applies if the other two rules do not apply. It requires a fair valuation to be made. A fair valuation generally means a valuation which does not give a contractor more than his actual costs reasonably and necessarily incurred plus similar allowances for overheads and profit.


Option 4: I will not comment it because it is very clear how this option must be applied.

What's difficult when using this four tiered approach? It's clear-a lot of disputes  arise from it.

Last edition of NEC (new engineering contract) is trying to avoid this problem by reimbursing the contractor his actual additional costs. How does NEC do it? If the bill of quantities originally included a piece of work (a) which is now to be replaced by a piece of work (b) the compensation is assessed as the difference between the forecast actual cost of (b) and the forecast actual cost of (a). The fee is then added to this difference and the resulting total amount is issued to change the prices. The original price for (a) does not enter the assessment. 

So NEC doesn't use the first two options anymore which are the sources of disputes and apply only the third option which I think is a modern trend in dealing with the valuation of variations.