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Fixed-price contract: Financial consequences of variations

A construction contract often contains a variation clause allowing some flexibility in the scope of works. Variations are usually qualified as either additions or omissions to the initial scope of works.

In a fixed price contract, if a contractor is required to carry out extra works the employer will have to pay a higher price. However, omitting works does not automatically result in a price decrease, except if set out in the contract or agreed between the parties.

After ascertaining the principle of a price adjustment, the subsequent issue is as to the value of that adjustment.

In the recent case of MT Højgaard A/S v E.ON Climate and Renewables UK Robin Rigg East Ltd and another [2014] EWCA Civ 710, the Court of Appeal had to examine a TCC judgment deciding preliminary issues on the valuation of a variation of works under a fixed-price contract.

Background

Pursuant to an engineering Contract, a Contractor agreed with a wind farm company, ("the Employer") to design, manufacture and install the foundations for 60 wind turbine generators and 2 substations. One of the Contractor's obligations was to provide and use a jack-up barge.

However, the barge was not fit for purpose. Three variation orders were issued requiring the use of a different vessel to perform the remaining works. The Contractor did so, utilising a vessel supplied by the Employer on a free-to-issue basis.

The parties agreed that the price had to be varied to reflect the change of barge. The dispute was over how the engineer should adjust the price under the Contract.

The Contractor submitted that the price should be adjusted by firstly omitting the component of the original contract price which related to the barge.

The Employer submitted that the price adjustment should be based on a starting point of what would have been the costs for the Contractor to carry out the works under the contract with an unfit barge and therefore, over a longer period.

Judgment

In the first instance, the TCC held that in valuing the omission, the engineer is "required to ascertain and deduct the component of the original contract price that relates … to the provision of" the barge.

The Employer appealed.

Supporting the TCC's decision, the Court of Appeal added that:

"In carrying out the exercise of valuing an omission it is necessary to consider the Contract as a whole and, in particular, the incidence of the pricing risk. In this respect there is a fundamental difference between the valuation of an omission and the valuation of an addition. In the latter case what is added is not already part of the Contract embraced within the Contract Price. In the case of an omission what is omitted is part of the Contract."

The appeal was dismissed unanimously.

Comment

The above case illustrates the way that the Courts will value omissions of works.

The case sets out important considerations when dealing with variations in fixed price contracts:

  • The Court will endeavour to give a single consistent meaning to a variation clause, applicable in any circumstances.
  • There is a difference between the valuation of an omission and the valuation of an addition. The value of the omission should be ascertained as a component of the initial contract price. The addition is not part of the initial contract price and, therefore, should be assessed under the contract, taking into account the new obligations between the parties.