One of the most common contracts used for residential building work in New South Wales is the Master Builders Association of New South Wales BC4 residential building contract.
The BC4 contract is a head contract between the builder and the owner of the land for the performance of residential building work on a fixed price basis.
However, it is important for owners to be aware that the price specified in the BC4 contract, like the other standard form fixed price contracts (such as the Office of Fair Trading contract), is not entirely fixed and be increased or increase or decreased throughout the course of the work.
The matters which may change the price of the work (referred to as the “contract price”) are clearly listed underneath the price on the first page of the BC4 contract. There are two matters in this list in particular which often result in disputes arising: variations and provisional sums.
What is a variation?
What constitutes a variation is defined in clause 14 of the BC4 contract.
In general terms, a variation is a change to the work which results in:
- additional work;
- less work;
- a change in the methodology or performance of performing the work; or
- a deviation from a previously specified plan, position, dimension, etc.
The starting point to assessing whether there is a variation is to review the scope of work as defined in the contract. Without a clearly defined scope of work, disputes often arise in relation to whether a particular aspect of the work is included within the contract price or whether that aspect of the work was not included in the contract and is additional work resulting in a variation which increases the contract price.
Accordingly, firstly, review the contractual scope of work (this is often referred to as the “scope of work under contract”) and consider whether the new work is additional work, less work or a change in the work.
Next, clause 14 sets out how a variation may be established. In general terms for a variation to be established there needs to be a communication to the builder which results in a change to the scope of work or something needs to arise which was previously unknown which necessitates a change to the work (this is referred to as a latent condition).
For example, if the owner requests the builder to install a window in an area where there was previously not a window, this would clearly establish a variation resulting in the execution of additional work, and would likely increase the contract price.
The BC4 contract prescribes, and it is a legal requirement, that variations be recorded in writing. This may be in the form of an email, a quotation, or a revised drawing. This is important, both the builder and the owner should ensure that all variations are clearly recorded in writing.
It is best if the written record includes all aspects of the variation as agreed, including a detailed description of the change in the work, the additional cost or the amount of the reduction in cost, and the additional time the variation will add or subtract from the date for practical completion.
It may not always be the case that a variations will result in a change in the contract price however should a change be required, clause 14 sets out how the contract price is to be adjusted. In the case of less work, the actual cost of the work is deducted from the contract price. In the case of additional work, the contract price is increased in accordance with the cost of the additional work and the rates specified in the contract for labour and overheads. As mentioned above, it is usually best if the reduction/increase in the contract price is recorded in writing at the same time as the variation is established as often disputes arise on account of variations costing more than is originally anticipated.
What is a provisional sum?
The operation of provisional sums is defined in clause 15 of the BC4 contract.
A provisional sum is not the same as a variation. Where a variation arises from, or results in, an increase, decrease, or change in the scope of work, a provisional sum does not necessary relate to a change in the work.
A provisional sum is an estimate (i.e. an allowance) for some part of the scope of work which the builder not able to provide a fixed price. The contract price includes the work specified as a provisional sum up to the amount specified in Schedule 2 of the contract.
The starting point, when considering whether a provisional sum increases or decreases the contract price, is to review the tables in Schedule 2 of the contract and compare the actual cost of the work against the amount allowed for as a provisional sum.
Clause 20 of the contract provides that the builder’s claims should show the value and descriptions of variations and other adjustments made pursuant to the contract. This information is important to keep track of actual cost of the work versus the provisional allowance.
Clause 15 of the contract provides that, if the actual cost for the work (the work specified in Schedule 2) is less than the amount specified in Schedule 2 then the difference is deducted from the contract price (in accordance with the provisions set out in clause 15).
Alternatively, if the actual cost exceeds the amount specified in Schedule 2, then this results in an increase in the contract price (in accordance with the provisions set out in clause 15).
I will use excavation as an example to illustrate the difference between a variation and a provisional sum.
It is quite common for excavation to be included as a provisional sum in the BC4 contract due to the builder being unable anticipate sub-surface conditions and being unable to confidently assess the equipment and time which will be required to remove unforeseen material such as rocks and debris.
Say for example, the builder is constructing a new house with a basement. The location and dimensions of the basement will be shown on the drawings. The builder knows how much excavation is required (in terms of cubic metres) however the cost of the excavation is specified as a provisional sum due to the uncertainties referred to above. Schedule 2 of the contract states that there is a provisional sum for “Basement Excavation” and specifies an amount.
The builder commences excavation and hits hard stone, additional equipment needs to be brought in to cut through the stone, the builder advises the owner that there will be an additional cost as additional equipment is required and it will take longer than anticipated to complete the excavation. The builder gives the owner an estimate of the additional cost and the owner instructs the builder to proceed.
The scenario described above would constitute a variation under clause 14 of the contract because the hard stone was a latent condition. The scope of work is the same however the methodology of executing the work needed to change. The change in the work relates to the excavation of the basement. As there was already a provisional amount included in the contract price for the excavation of the basement, the contract price will increase by the amount the actual cost of the excavation exceeded the amount specified in Schedule 2.
However, as a different example, let’s say that the owner decides after signing the contract that the basement is not necessary, however the owner would like to have an inground pool constructed at the rear of the property.
The owner knows that it will be easier and cheaper to excavate the pool before the house is built. The owner obtains development consent from the council and provides the builder with drawings for the excavation of the pool.
The removal of the basement would constitute a reduction in the scope of work. As the provisional sum is specified in Schedule 2 of the contract as “basement excavation”, the actual cost of the work would be less than the provisional amount and the difference will reduce the contract price.
The excavation of the pool would also constitute a variation as it is additional work however the provisional sum would not apply to the additional work because the provisional sum specified in schedule 2 refers to “basement excavation”.
In this situation the builder may be best to prepare a variation for the pool excavation which specifies an estimate for the work and emphasises that the cost of the variation is not fixed. Often, in these situations the builder will specify that the work is being undertaken on a cost-plus basis. This usually means that the cost of the variation work is charged at the cost paid by the builder plus a percentage for overheads and profit.
In the second example, although in reality the owners funds are being diverted from the basement excavation to the pool excavation, this is not the way the BC4 contract works as the provisional sum applied for the basement excavation. Under the terms of the BC4 contract the variation needs to clearly specify the decrease and increase in the works and new provisional sum needs to be established for the pool excavation (which could be the same amount as the basement excavation).
Variations and provisional sums are some of the most common causes of disputes arising under the BC4 contract. In many cases these disputes can be avoided by the builder and owner communicating with each other regularly in relation to anticipated costs increases and budget constraints. Clause 2A of the BC4 contract is designed to try and achieve open communication and cooperation between the builder and the owner.
However, disputes do arise. It is important for both parties to obtain advice from a legal practitioner specialising in construction law as early as possible when there are signs that a dispute is brewing. Often the earlier the issues are addressed the better are the prospects that the dispute may be resolved without the contract needing to be terminated and costly legal proceedings may be avoided.
The information provided in this article is general information only and should not be relied upon as legal advice or be used as a substitute for obtaining legal advice. The examples provided have been simplified to explain a particular issue and there are other factors which need to be taken into consideration. The specific circumstances relating to you impact upon your legal rights and obligations and personal legal advice based upon your circumstances should be obtained. This area of law changes frequently and the law may have changed after the time this article was prepared, up-to-date legal advice should be obtained. Please do not hesitate to contact Williamson Lawyers if we may be of assistance.