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A change is gonna’ come

When a project runs in to unforeseen problems, contractors and clients must know who will pay the extra costs

One of the biggest challenges in the construction industry is managing change.

Change creates uncertainty for the employer and contractor and is one of the main reasons for cost and time overruns.

Despite lengthy and complex provisions in standard form and bespoke contracts dealing with the valuation of change, arguments over this issue are a common cause of disputes.

One of the most common changes leading to such problems is in the scope of work, whether at the design or construction stage. It is important to ensure that the risk of change is managed to reduce the risks of exceeding the budget or of completing the works late.

Change to the scope of work is usually in the context of a formal instruction from the architect or project manager. These changes are easy to identify and the contract conditions usually contain detailed provisions as to how the effects of the change are to be managed.

But change can arise in other ways, which can cause particular problems, as it is not always immediately obvious that there has been any such change. When this happens the specification for the work creeps surreptitiously upwards in scope – a phenomenon sometimes referred to as ‘spec creep’.

There are many examples of how spec creep may arise. In the context of design and build contracts, this can happen when the employer’s requirements or contractor’s proposals are jointly worked-up between the contractor and the employer, perhaps during formal design workshops or by way of informal design discussions.

This blurs the line between the employer’s and the contractor’s responsibility for any design decisions and may mean that the party that bears responsibility for the design (usually the contractor) is unable to price for that risk.

Comments from the employer or its design team on the contractor’s working drawings during the design approval process can also produce spec creep. Such comments are not properly identified as instructed changes and often arise from disputed understandings as to whether the contractor was obliged under the contract to provide a particular ‘changed’ item in any event.

Spec creep can also arise on projects where the employer is responsible for the design, but the contractor volunteers a design solution when the job hits a problem on site and the design team is unable to find a way around it. And it can arise when the contractor produces samples that set a standard that goes beyond the contractual obligation.

Many contracts contain express provisions requiring, for example, a contractor to notify the architect if it considers it has been instructed to carry out a change in work scope. Furthermore, it is becoming increasingly common for contracts to provide that such notifications are ‘conditions precedent’ to the right to any extra time or money for such changes.

This creates a serious legal risk for contractors and subcontractors. The surreptitious nature of a spec creep means that those responsible for raising and serving such notices may well be unaware of the need to do so before they are legally time-barred.

For employers, unless such tough enforcement notice provisions are properly drafted, or if the contractor is more alive to the risk and complies with these provisions, then these changes may cause cost and time overruns for which they have not budgeted and which they cannot finance or recover from third parties such as tenants or design team members.

This risk can be managed at the pre-contract stage by devising a project programme that allows the design team adequate time in which to complete, check and co-ordinate the design before the works commence on site. In practice, this cuts down much of the need for change to work scope.

The construction contract should contain procedures for the contractor to pre-price change – say, in the form of JCT05 Schedule 2 or NEC clause 62 quotations. If carried out properly, this should reduce uncertainty by fixing the price and time consequences before the work is instructed.

As regards unexpected changes, the construction contract should contain notification obligations and the design team’s terms of appointment should include express design change approval procedures.

It is also important to ensure that the provisions of any design approval process in the construction contract are workable in practice and allow the contractor adequate time to identify change and raise this with the employer, without the process having a detrimental effect on progress.

The contract should also make clear that the contractor will not be subject to a ‘fitness for purpose’ requirement, either when carrying out the design or in making proactive design suggestions or value engineering proposals.

During the operation of the contract, the risk will be reduced if the knowledge accumulated by those negotiating the contract is passed on to those who are going to build the project. The operational team would then be made familiar with the form of contract and understand, communicate and follow all notification and procedural obligations.

The risk can also be managed more easily if a project plan is put in place to ensure all parties comply with any time limits provided in the contract. Obligations down the supply chain need to be ‘back-to-back’ with the main contract obligations, via bespoke subcontract amendments.

Another key to managing change successfully is to ensure that the right records are kept by all parties. In my experience the best records to deal with change include a regularly updated programme, realistic progress reports and meeting minutes and contemporaneous records of the individual effect – in terms of time and money – of each change.

The management of change can often make the difference between the commercial success and failure.

Best practice mechanisms and procedures should be included in the contracts for dealing with change and thereafter management systems put into project plans to ensure that they are followed to maintain the balance of the original contract bargain for all parties.

Neal Morris is a partner in the UK Construction & Engineering Group with law firm Pinsent Masons