Contract management pitfalls – part 4

Contract variations can be a risky business!

In the fourth part of our series on contract management pitfalls, we look at the risks arising from varying the terms of construction contracts.

You might think that having negotiated a contract, it would not be necessary to vary the terms during delivery of the works or services. However, there are occasions when it is appropriate to vary contractual mechanisms. For example, adjusting key performance indicators (KPIs) and incentives, or adjusting the final account mechanism if works are due to continue beyond the expiry of a term service contract.

We often see disputes arise out of a misunderstanding of the consequences of a variation, or where one party wishes to revert to the original contract terms.

The case of Mears Limited v Shoreline Housing [2015] 1396 (TCC) highlights some of the difficulties that can arise. In this case, the parties agreed to change the schedule of rates contained within the contract (with the new rates referred to as the “Composite Rates”), but they didn’t agree a formal contractual variation. A dispute arose as to the correct value due to Mears, with Mears calculating payment based on the Composite Rates and Shoreline applying the rates tendered by Mears in the schedule of rates. The Technology and Construction Court agreed with Mears that the Composite Rates applied, requiring Shoreline to pay the higher rates.

How to manage the risk

There are two ways to mitigate the risks of contract variations:

• Firstly, ensure that the contract is managed in accordance with the written terms of the contract; and
  
  
• Secondly, ensure that any contract variations are captured clearly in writing and signed by all parties. It is particularly important to document the full extent of the variation, including identifying any additional payments, when those payments are due and the value of those payments.

It is also important to consider whether the variation has any implications under the Public Contracts Regulations 2015. Seeking support from legal advisers to review (or draft) the variations and comment on the procurement implications of any variation, can also assist in managing the risks.

For more information

If you have any questions regarding the issues raised in this briefing or would like to find out more about our bespoke client training programme, please contact Andrew Lancaster.

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