Importance of Variation Clause in Subcontract Agreement

Variation clause is an important clause for any construction contract. Most of the construction projects end up with variations to the original contract scope. These variations has an impact for the project value in way of addition or omission. This is why Variation clause is important in any construction project contract.

If you are a Main contractor for construction projects, you don’t have to worry too much because almost all of the construction contracts include the clause for Variations. This variation clause usually covers the procedure for valuation of variations and payment.

However, if you are a Main contractor who wants to subcontract whole or part of any work, then you have to sign subcontract agreement which binds both parties to the contract. Do you pay more attention to your subcontract agreement as the Main contractor?

Recently one of my clients asked me to check and revise their subcontract agreement which they use for all of the subcontracting work. When checking the agreement, I found that their general subcontractor agreement is lack of clauses for Variations and Valuation of Variations which are important clauses for any subcontracting work.

Importance of Variation Clause

Is it necessary to include Variation Clause in Subcontract agreement? (If you are a Main Contractor)

The issue:

Let’s consider the above actual work experience again. In their subcontract agreement, they mention about variations to the contract and the need of subcontractor to undertake such variation work.

But, with my experiences with working on variation orders and closing final Accounts in different projects, I know that just mentioning of variations to the contract is not enough to close Final Accounts at the end of the project. There will be lots of negotiations, arguments and even disputes regarding Variations and Valuation of Variations between Main contractor and subcontractor. When you don’t have mentioned the relevant clauses in detail, it will not be easier to settle such variations with the subcontractor as there is no provision from the agreement.

What are the important terms of Variations to the contract?

In most construction contracts, there are clauses that describes how variations to the contract are to be agreed. One of the important terms is that the parties to the contract should agree to any variations in writing. Any variation issued verbally or agreed orally is not valid unless it is issued as a signed instruction.

Most of the main contractors include this term in their contract with the subcontractors. However, beyond agreeing to carry out the variation work, the grounds for disputes are at the time of evaluating variation claims.

Therefore below are the important terms and clauses which you need to include in your subcontract agreements if you are a main contractor. In construction contracts, below are the important terms to consider mentioning under variations.

  • Variations shall be in writing   (Read more on instructions in construction contracts)
  • Subcontractor shall agree to carry out variations to the contract in way of addition, modification or omission which is issued by the main contractor in writing.
  • Variation to the sub contractor’s scope of work can be ordered as bellow.
  • Variations ordered by Employer/Engineer/Architect or relevant parties under the main contract scope and then confirmed to the subcontractor in writing by Main contractor
  • Any variations to the sub contract scope ordered in writing by the main contractor
  • Valuation of variations

Valuation of variations is important to specify in the subcontractor agreement as such valuation procedure can make ground for disputes.

In most construction projects, main contractor struggles to get his variation order claim approved by the Employer/employer’s consultants. However, in same project main contractor has to pay the sub-contractor to his work done under the variation work. In some projects, subcontractor’s actual work done cost is much higher than the approved variation order amount from the Employer. (In Additional work). This is where main contractor is at risk.

To avoid such risks in any project, most of the main contractors include clauses that describes the Valuation of Variations. Some of the terms to include in subcontract agreement are as below.

  • Variations to be valued using the rates specified in the same subcontract
  • In the event that there are no such similar rates available, fair and reasonable rates are used to evaluate the variation claim.
  • Subcontractor needs to submit his claim to the Main contractor for reviewing.
  • Joint measurements are used to evaluate the variation claims.
  • In case if the rates cannot be agreed by both parties, then it may be important to mention about use of consultant’s evaluation to certify the subcontractor’s claim.

Conclusion

Variations to construction contracts play an important role in project cost management. Therefore it is necessary to include important clauses on how valuation of variations is done in any subcontract agreement if you are a main contractor for construction projects.

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By | 2018-11-14T08:26:43+00:00 July 21st, 2018|Contract Administration|0 Comments

About the Author:

Amila Gamage
Amila Gamage is a Contracts Engineer with more than 14 years experience in construction sector. She is the founder of Sihela Consultants She offers Quantity Surveying and Contract Administration services for her clients.

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