Variation Orders (VOs) in Construction Contracts

As Egypt is recently witnessing a development in the real estate market at all levels, this has led to the assignment of many construction companies to implement major projects. Given this acceleration in the construction and building projects, errors may result in implementation on the part of the contractor, on one hand, or at the desire of the employer to make amendments during the implementation of the project, including amendments to drawings, designs or construction work on the other hand. Also, the employer may tend to expand the construction operations during the process.

Since the construction activities shall be exercised under a legal umbrella to determine the rights and duties of the parties to the contract, it is established to execute an appendix to the main contract, namely, Variation Order (VO). The VO is issued by the employer or engineer, as the case may be, to the contractor to make some changes or amendments to the implementation, to make the works in line with the new requirements of his project.

To this end, we will discuss some elements related to VOs as one of the main elements during the implementation of contracts, which are as follows: -

1. Definition of VOs in Construction Contracts:

Projects regulated by construction contracts often require amendments under the work circumstances, as deemed fit by the project engineer, as desired by the employer, or as amendments required to plans as agreed upon by both parties to the contract, i.e., the contractor and the employer. The engineer, sometimes, issues VOs to keep pace with the new circumstances that have arisen on the project as a whole or part thereof, and, thus, VOs are issued as the engineer deems fit for the project. This is, of course, after executing the contract and during the implementation. However, controversy arises regarding the controls and rules to be followed regarding the effects of these VOs on the obligations of the contracting parties, whether concerning the employer or the contractor.

Building and construction works sometimes require a series of contracts to regulate the then-complex relationships among the employer, contractor and engineer, and to address the changes that may occur during the implementation of the works. As the contract constitutes the legal basis for building and construction relationships, this entails accuracy of organization and good drafting for such contracts, while setting fair conditions to reduce any issues that may hinder the process of performing the contract in general.

It is noticeable that, the greater the development in the construction sector, the more and branching out the issues and disputes that may arise between the contracting parties, due to any changes or amendments that may be due to a mistake by either party to the contract and damage to the other party or an emergency beyond the control of all parties. In light of the accelerating competition in the establishment of construction companies, with the absence of the required capabilities and qualifications, led to the emergence of contractors claiming experience in building and construction, which, of course, caused the emergence of buildings that do not comply with specifications, threatening their safety and durability. As a result, disputes are arising between the parties. This has often led to resorting to legal proceedings that are too slow that parties prefer to resolve such disputes away from local laws that are, in most cases, unable to address the situation. Most of these laws no longer keep pace with the construction developments in construction contracts and given the complexities of such contracts. Also, provisions of such laws often fail to accelerate the construction works, or at least not to disrupt the works due to excessively complicated administrative procedures.

 It is worth noting that the local laws have not set a specific definition of VOs. However, the new contracts of the International Federation of Consulting Engineers (“FIDIC”) addressed the same, as they were defined as:

“Any modification or change to works as instructed and approved shall be treated as a variation.”

On the other hand, legal doctrine defines VOs as:

“An authority exercised by the engineer in construction contracts, by which the contractor is required to make the required amendments or additions to the work. As such variations are not stipulated in the main contract, they are executed in an agreement attached to the main contract, aiming at achieving the interest of the project.”

 Hence, it is evident that the VO is made in writing by the engineer to the contractor, as deemed fit by the engineer on his vision or at the request of the employer. It is, sometimes, based on a proposal from the contractor, to add, delete or amend the contract works, during the implementation, and before the issuance of the hand-over certificate.

2. Purpose of VOs: -

 The purpose of VOs is to avoid executing a new contract(s), as well as to avoid canceling the main contract whenever variations appear during implementation. No theoretical issues arise if the plan standards are clear, or if the contract allows the employer or the engineer to make variation(s) during implementation. However, issues arise in trying to determine the responsible party for bearing the costs and time extension resulting from such variation(s). Such issues may be exacerbated by the timing and schedule of variation(s) during the implementation of the project, which can bring substantial financial repercussions and grave consequences to the main contractor.

 It should be noted that the engineer does not have the authority to amend the construction contract. This is an evident matter from a legal perspective because the authority to apply this procedure is for the contractors only. As the engineer is not a party to the contract, then he cannot make such amendments under the principle of the relativity of the effects of the contract, which provides that the terms and effects of the contract are invested in its parties, and not third parties. Although the engineer plays an important and major role in the implementation of the contract, he, however, cannot increase or reduce any of the responsibilities stipulated in the contract, with which the importance of "VO” is reflected. Despite that VOs are not considered an amendment to the contract, they are close to this concept.

Third: Authority of VO Issuance:

The importance of determining the person authorized to issue VOs arises during the implementation of the contract, because it may result in responsibility for any errors that may result from such VOs, in addition to the contractor’s entitlement to the value of such completed works. Under that concept, the authority to issue VOs is limited to the employer and the consultant engineer, as the case may be.

The legal nature of the construction contracts entitles the employer, as the project owner, to make amendments to the project during the implementation, whether the implementation is defective, or for the contracting activity to fit his financial solvency, on the one hand, and the economic feasibility of the project, on the other hand. The contractor shall adhere to all VOs issued by the employer as long as they comply with the technical and professional standards.

The architect also has the power to issue VOs, as he may find during the implementation process that there are plan defects that constitute a violation of the principles of architecture, including errors in the design of foundations, measurements of different dimensions, or public utilities in the building. The authority of the engineer is rooted in issuing VOs up to the general terms in FIDIC contracts.

Therefore, it is clear that the engineer has the right to issue VOs for the form, quality, or quantity of works as he deems necessary. In return, the contractor shall abide by all instructions issued by the engineer for increasing or decreasing the volume of works as set out in the contract, or modifying levels, lines, locations, and dimensions of any part of such works.

However, in conclusion, the contractor shall have the authority to issue VOs in only one event; i.e., where the works are the subject of a subcontract. In this case, the main contractor shall act as the employer of the subcontractor, and he has the right to issue the VOs under the relevant subcontract.

4. Types of VOs:

 Sometimes, the construction process requires making certain amendments to avoid potential risks that may affect the safety of the building, target the expansion thereof, or set up fire protection systems therein, etc. Often, this requires the approval of the authorities or the competent authorities to ensure that such amendments comply with local laws.

As VOs are typically related to making amendments to drawings, designs, quality, or materials used in the project, whether by addition or deletion, their quantity, specifications, etc, they may entail changes in the employer’s obligations or restrictions set by him to access the site or parts thereof or regarding the method of work, to avoid events, contract breach or default.

The differences between the two types of VOs are as follows:

a) Beneficial VOs:

 Beneficial VOs mean orders issued by the engineer to speed up the work and perform the greatest amount of works in shorter periods. They also aim at reducing costs and eliminating unnecessary costs, improving the quality of work, and/or reducing performance difficulties. They also include adjusting and changing quantities of used materials, qualities and characteristics in addition to the levels, measurements and places for any part of the construction, as well as changing the timing or sequence of works, etc.

 In addition, VOs may amend, correct, or add developments to, drawings and designs. They also aim at correcting building errors that arise after the start of implementation, canceling some completed works, or making amendments to cope with accidents or weather factors, etc.

b) Negative/Detrimental VOs:

 These Vos cause negative impacts on the project, an increase in the costs, delay in delivery and completion, or a decrease in quality, for example, if the employer insists to use sub-standard and cheap materials due to financial problems suffered by the employer. All of this, of course, negatively affects the quality of the work or the project as a whole and the purpose thereof.

5. Grounds for VO Issuance:

These grounds are many and vary with the many factors that alter the facts of the project in comparison to the planned outcomes. Of these reasons, the most important are as follows:

1. Requirements for Addressing “Force Majeure" Effects and Unforeseen Material Difficulties:

 Building and construction projects are inherently volatile, and, therefore, exposed to many risks. Thus, the issuance of VOs may be a result of such risks that are unforeseeable during the execution of the contract or after the commencement of implementation thereof.

2. Reasons related to Engineering Drawing/Design Errors:

 The project plans and designs may contain errors in terms of accuracy. Sometimes some details are left to the contractor for design, although this responsibility falls with the project engineer. The errors cannot only be clarified or identified during the implementation process, which calls for redressing such errors by issuing VOs regarding modification and correction.

3. Reasons related to Employer:

VOs may be issued to avoid errors that may be made by the employer due to reasons in relation to the employer, including insufficient experience with some details, issuance of instructions that are practically incorrect or sometimes contradictory, his desire to make certain amendments to meet the final purpose of the project, or due to any change in his financial or social position or market conditions as well.

4. Reasons related to Civil Engineering Works:

These reasons may arise due to such variation(s) that occur to the soil, cause risks to the project and require the issuance of VOs to avoid any current or potential risks. They are also issued as required to integrate the advanced technologies for the project, thus reducing risks and costs to the extent reasonably practicable.

5. Lengthy Execution/ Prolongation of Works:

 Building and construction contracts are featured by the length of implementation in most cases, which exposes the project to many variables and changes due to changing circumstances. In such cases, VOs aim to keep pace with market changes or price changes. They may be beneficial VOs for the contractor, such as reducing labor or materials and may be detrimental, as if prices increased due to market changes or a war.

Sixth: Legal Effects of VOs:

VOs bring a direct impact on construction contracts, as they are considered an appendix to the main contract and, therefore, subject to the provisions of the contract. Also, the VOs, as they require amendments to the works in the subject matter of the contracts, may cause an increase in the volume of works over the that agreed upon in the main contract between the employer and the contractor. Furthermore, the principles of justice require that the value of the excess costs be estimated and added to the contract, while the employer shall pay them to the contractor.

 The effect of the foregoing is that the works subject to the VO issued by either the employer or the engineer are an integral part of the obligations of the contractor who shall perform them. The contractor may also demand an increase of the agreed fees if there is an amendment or addition to the design with the permission of the employer, provided, however, that the employer should have agreed with the contractor to increase the fees for such amendment or addition.

 The permission issued by the engineer may not be considered unless the engineer is authorized by the employer, and such authorization grants him the right to make amendments or additions to the agreed design. If permission is not issued by the employer, and the contractor voluntarily makes such amendments or additions, he is not entitled to any consideration for such works.

As “writing” is a prerequisite for proving VOs, when amending the plans or works, it is also a prerequisite to proving the agreement between the employer and the contractor on the fees resulting from such VOs. In this regard, we point out that the Egyptian legislator required a written agreement on fees between the employer and the contractor when issuing VOs because if the employer authorized the contractor to conclude an amendment or addition to the works, but he did not agree with him on the fees, the latter has no right to demand a fee for the excess of the agreed works, even if the work subject of the VO is carried out in the presence and knowledge of the employer.

Based on the foregoing, it is evident that the legislator committed to the side of the employer regarding the requirement of “writing” to prove the value of the works subject of the VOs, to obligate the contractor to agree with the employer on the fees for the works that were carried out over the works agreed upon in the main contract. This is despite that we believe that it would be better if the legislator was to make the contractor’s fees, if VO was devoid of stipulating the fees, under the general conditions of FIDIC contracts, by accepting the opinion of the appointed engineer from the employer, to determine the value and costs of such works given their nature in the construction and architectural field.