Keeping the Paper Trail and Keeping the Faith – Variations in Commercial Building Projects

It is often said that commercial building contracts do not impose the same stringent requirements on builders, as are imposed on their counterparts carrying out domestic building works. This is because of course the Domestic Building Contracts Act 1995 (Vic) contains requirements that a Builder estimate in writing to the owner the extra time, cost and other changes associated with a variation and then receive a follow up notice signed on behalf of the Owner with permission to proceed, BEFORE the variation work is carried out.

If a domestic builder does not follow this ‘paper trail’ before the variation work is performed the DBCA stipulates that the Builder will not be able to obtain payment for the extra work unless certain special circumstances apply, ie that the Builder can prove the work was done, and that it would be an exceptional hardship on the Builder if he did not collect payment and not unfair on the Owner. This requirement in the Act is mirrored in standard domestic building contracts.

There is not such a stringent requirement in any Act that imposes any such obligation on builders in commercial building contracts, nevertheless the standard commercial contracts will set out requirements that a Builder must be authorised or directed in writing to perform a variation before it occurs, and will set out a formula to value these variations. This may involve the parties agreeing on the value based on a schedule of rates applied to the change in quantity, or by a superintendent or contract administrator valuing the variation if agreement cannot be reached.

We have come across instances recently where parties have agreed verbally on variations in commercial contracts, on extra works or changes in scope involving tens of thousands of dollars. Later when the relationship breaks down toward the end of the project, one finds the variations or the necessity for them is disputed. This can make payment recovery extremely difficult for the Builder.

Therefore one should not underestimate the importance of good, sound documentation of variations and their likely implications for cost and time, and documented authorisationsky scaper construction.jpg from the Owner or Principal that works may proceed. Although there is no compulsion in the form of legislation hanging over the Builder’s head in this regard, a wise Builder knows that such good practice is for the Builder’s own protection. The same would apply for timely service of extension of time requests, or written notices in response to the Principal’s or Superintendent’s directions (if there is any dispute or difference over such directions).

In reality, it is not always possible with variations on large commercial sites to have all the paperwork in before work commences, nevertheless an attempt should be made to have the variation approved in writing by the Owner or Principal as urgently as possible, even if such approval is given while works are actually underway on the variation. It will save much time, aggravation and money in the long term. Proving a later verbal agreement to proceed with the work can be very problematic, particularly where there are not even diary notes or site meeting minutes to support the Builder’s argument.

As stated, a similar rationale applies to extension of time claims, crucially important not only for avoiding liquidated damages deductions, but also allowing a potential prolongation or delay claim in favour of the Builder, where such claims are allowed based on justifiable extensions (eg as found in the AS 2124 contract conditions).

It may be the subject of another dedicated article, but too many builders and subcontractors in commercial works neglect to make claims under the Security of Payment laws. Where that legislation applies to a construction contract, all payment claims should be made by invoices that cite the relevant Act and are valid payment claims under the Act (ie the Building and Construction Industry Security of Payment Act 2002). The beauty of this is that if the respondent to your payment claim does not give you some form of payment schedule in reply to the claim within 10 business days, the full amount of your claim becomes due and payable at the time it falls due under the contract. If necessary you can then sue for it in court.

To an extent such claims can include variations, provided they fit within the formula contained in the Act and are not “excluded amounts” under the legislation. You should see a lawyer for more explanation as to how to send compliant payment claims under the Act and what claims can be included, particularly in regard to variations.

By Justin Cotton, Director, Lovegrove & Cotton.