Let’s discuss Contract rates. Whilst tendering a contract using a bill of quantities or a schedule of rates, very often mistakes are made. These mistakes are more relevant for the contractor, when he includes an unrealistically low unit rate in his tender, which is also included within the contract. The problem arises when variations or change orders are issued and the quantity of the work increases, resulting in the contractor undertaking the additional work at a loss.
How unfair, I hear you say.
But the question is, is the contractor stuck with this rate for the varied or additional work, as his losses on the project will increase? Put simply, is he obliged to do all the additional work at the low loss-making contract rate?
Contractors often argue that they are only held to the rate up to the original contract quantity and after this, a new (more advantageous) rate can be applied. However, I’m sorry to be the bearer of bad news, but the relevant case law on the matter states that even where a rate is included in error or is unrealistically low, that that rate will apply to the varied work.
The courts generally take the view that you apply the rules of contract and apply the agreed contract rates irrespective of any error or over or under-pricing. The parties have agreed to the rate, you are stuck with it, and irrespective of any substantial change in quantity, this will not affect rates to be applied.
All is lost then? Well not quite.
Some contract forms allow for the rates to be modified or a pro-rata rate (that is a new rate derived from the existing rate) to be determined if certain limited circumstances occur. Remember, it is arguable that the contract rates only apply to additional work when the work in question is exactly the same as the original contract work. This includes the conditions in which the work is carried out and the character of the work itself. If either of these are different to what was envisaged at tender / contract stage, then it may be possible to modify the original rate to take account of these changes.
A change in conditions would include work now being carried out in the winter as opposed to the summer, or work carried out at night rather than in the day. A change in character of the work relates to the work itself when the new work is more complex or more detailed.
In these circumstances, it may be possible to modify the rate to reflect the effect of these changes only. Let’s be clear, it is not a case of ignoring the contract rate and producing a totally new rate, it’s a case of modifying the rate to allow for the additional cost that would be incurred for the change in character or conditions. So its not a wholesale re-rate, but a way to increase the rate in question to better reflect the manner in which the varied work is being carried out or its more complex nature.
Of course, if the above-mentioned conditions and character are so drastically different, then it may be possible to demonstrate that the original rates are no longer applicable and that a fair valuation should be made. If a fair valuation is to be made, then this can be derived from cost and a totally new rate calculated; that should negate any losses the contractor is making on the original contract rate.
Finally, a word of caution, the same applies to instances where the rates may be high, and the contractor is making good money. Certain clients may well take the above view to reduce the rate!
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