Chapter 4 Valuation of Variations

Many contracts set out how variations are to be valued or priced. For example, clause 36.4 of AS4000-1997 Construct Only Contract states that the superintendent must price each variation using the following order of precedence:

  • prior agreement between the principal and the contractor;
  • applicable rates or prices in the contract;
  • rates or prices in a priced bill of quantities, schedule of rates or schedule of prices; and
  • reasonable rates or prices, which includes a reasonable amount for profit and overheads.

If there is no mechanism in the contract which sets out how a variation is to be valued or priced, the contractor would still be entitled to be paid a reasonable sum for the variation works. What is reasonable depends on the circumstances.

However, where a contractor is entitled to a contractually agreed rate, the question of whether or not that rate is reasonable does not arise.

CASE STUDY

Vadasz v Gadaleta Steel Fabrication Pty Ltd [2015] SASC 162

Facts
  • Vadasz engaged Gladaleta to carry out steel and welding services for the construction of a school hall.
  • Throughout the project, Gadaleta issued 9 invoices and claimed that the agreed rates included an hourly rate of $75 plus GST plus overtime for Gadaleta’s employees and $85 plus GST plus overtime for Gadaleta’s supervisor.
  • The invoices were signed by Vadasz’s foreman and Gadaleta claimed that the signing of the invoices was an acceptance by Vadasz that the invoices were accurate.
  • Vadasz challenged the amount subject of the invoices claimed by Gadaleta.
Result
  • The court held that the contract between Vadasz and Gadaleta’s supervisor provided an hourly rate of $75 and that including an hourly rate of $85 plus GST in an invoice (different to the agreed rate of $75 plus GST) was an offer or request to vary the contract terms relating to payment.
  • Given that Vadasz’s foreman did not have the authority to approve the request to vary the hourly rate, the rate of $75 plus GST applied.  In this case, the question of whether or not the hourly rate was reasonable did not arise given that the rate of $75 plus GST was the agreed hourly rate.

Some contracts include clauses which exclude the contractor from recovering costs resulting from delay or disruption. However, these clauses may not always be effective in precluding the recovery of all time-related costs of carrying out variations. For example, in Lucas Earthmovers Pty Limited v Anglogold Ashanti Australia Limited [2019] FCA 1049, the exclusion of delay costs in that contract only applied to costs, losses and expenses caused by a delay or disruption and did not extend to preventing delay claims caused by a variation.

CASE STUDY

Lucas Earthmovers Pty Limited v Anglogold Ashanti Australia Limited [2019] FCA 1049

Facts
  • Anglogold engaged Lucas Earthmovers to construct a 200km access road to a gold mine.
  • The works were delayed and Lucas Earthmovers incurred additional costs due to the additional works required to haul material from borrow pits.
  • The parties agreed that the additional works constituted a variation under the contract for which Lucas Earthmovers was to be paid a reasonable rate.
  • Anglogold paid Lucas Earthmovers the direct costs for the variation but refused to pay Lucas Earthmovers any time-related costs on the basis that the contract included a clause which excluded the recovery of costs resulting from delay or disruption
Result
  • The court found that the delay costs exclusion clause did not prevent the recovery of time-based costs of variations.
  • However, given that Lucas Earthmovers sought to recover delay costs it incurred due to the delay to the completion of the contract as a whole, the court held that the delay costs exclusion precluded Lucas Earthmover’s claim even though delay was partly caused by a variation
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