Variations on a theme

Clause 52 of the ice form of main contract has had more than its fair share of judicial comment recently. Three judges of the Court of Appeal gave their views on it in April in Henry Boot Construction Ltd vs Alstom Combined Cycles Ltd, and now Judge Humphrey Lloyd has taken matters further in the Technology and Construction Court with his judgment in Weldon Plant Ltd vs The Commission for the New Towns.

Clause 52 deals with how variations are to be valued. If the varied work is similar to work priced in the contract bills and carried out under similar conditions, the bill rates are applied. If it is not, the bill rates are used as the basis of a reasonable valuation. If such a valuation would produce an unfair result, because of the peculiar nature or amount of the variation then, subject to some administrative machinery, the engineer has to fix a fair rate.

Henry Boot had made a serious error in pricing some sheet piling, so when substantial further sheet piling was ordered as a variation there was a dispute about how to value it. The error was on the right side for Boot. It stood to make a chunky profit on the extra piling because of its initial mistake.

John Tackaberry as arbitrator had decided to use a fair rate that removed the windfall, but Judge Lloyd, his erstwhile chambers-mate, decided that he was wrong and applied the bill rate regardless. The Court of Appeal agreed.

Weldon Plant was also complaining about an arbitrator's decision. It had contracted to construct Duston Mill Reservoir, which required the excavation of gravel and clay. There was a rate in the bill for removal of clay to a tip, and there was also a rate for the removal of gravel. There was a difference in that Weldon was to be paid for removing clay, but Weldon would pay the employer when it removed the gravel, which of course it was going to sell.

The original contract required Weldon to excavate to a specified level, but also gave it an option to go further if it wanted so that it could excavate more gravel for sale. During the course of the work, the engineer gave Weldon an instruction to excavate all the gravel below the design level and back fill with clay. He valued this work at bill rates.

The arbitrator did not agree about the use of bill rates. This was no ordinary variation, because it was not so much an instruction to carry out extra work, but rather the removal of an option to not carry it out. He thought that it was necessary to establish a fair rate that would not leave the contractor out of pocket. He started from net cost figures, without any addition for overheads and profit.

He then enquired as to whether Weldon had suffered any extra overheads. Weldon's witness was unable to say there had been any specific extra overheads, but he said the company's resources had been tied up on the contract and had been unable to recover overheads on other jobs.

He had not been too convincing about that and the arbitrator decided not to include anything for overheads.

Weldon fared no better when it came to profit. If the arbitrator had added profit, Weldon would not have been in the same position as it would have been in without the instruction, and it had not demonstrated that it had been unable to earn profit elsewhere.

Off they went to court. Appeals from arbitrators are not easy. It is not sufficient to argue that the arbitrator got it wrong on the facts – you have to show that he made a mistake of law. If the argument were about the mechanical valuation of the work, and whether the figures were correct, there is nothing that the court could have done. However, the method of valuation can show an error in the legal interpretation of the contract. Fortunately for Weldon, Judge Lloyd decided that the arbitrator had made just such an error.

The judge started with profit. A valuation of a variation using bill rates or rates derived from bill rates would usually include profit, because profit was included in the bill rates. If those approaches included profit, so should a fair rate.

Turning to overheads, the contractor could only recover time-related overheads if they were actually incurred as a result of the variation. Other overheads, included within the bill rates, were different. A fair valuation should include them. It is not necessary to prove that they were actually incurred, and a percentage addition may be the right approach.

So now we have some common sense ground rules for the valuation of variations under ICE 6th Edition. If the item is covered by a bill rate, that rate should be used even if the rate was unrealistic because of a mistake in the tender calculation. If a fair rate is being built up because bill rates are not applicable, an allowance should be made for profit and overheads without demonstration of actual loss.

This of course is not to be confused with the evaluation of cost of delay and/or disruption, or loss and expense claims, under JCT-type contracts. Such claims must be based on costs actually incurred or losses suffered.