A contractor must comply with the contractual claims procedure before any assessment of valuation adjustments under the Public Works Contract (PWC). We examine the framework for testing entitlement before valuation.

Introduction

The PWC provides a structured mechanism for adjusting the contract sum in response to variations and compensation events. Clause 10.6 sets out a valuation hierarchy that governs how adjustments to the contract sum arising from compensation events are to be assessed. It is important for the employer and Employer’s Representatives (ERs) to recognise that before any question of valuation arises, a contractor must first navigate the significant procedural requirements set out in Clause 10.

This is Part 1 of a two-part series. Part 1 examines the conceptual framework for variations, the elements of a valid variation, the valuation starting position and the claims procedure that operates as the gateway to valuation. Part 2 will examine the Clause 10.6 valuation hierarchy itself, fair valuation, and practical takeaways.

The Conceptual Framework for Variations

Standard form construction contracts typically define the variation power in broad terms. Most permit the employer (or ERs) to instruct changes to the works, including additions, omissions, and alterations. It is important for an employer to ensure that an instruction remains within that contractual power. Standard form contracts say little about the boundaries of that power. Changes within the scope of the original contract are valid variations and changes outside the scope of the original contract constitute additional or extra-contractual work. Employers and ERs should test this distinction at the outset of any proposed change, as failure to do so can have significant consequences for both parties.

Case law identifies four principal constraints on variation power, which define the outer limits of what can be achieved through the variation mechanism, and, by extension, what can be valued under Clause 10.6.

1. The whole character, dimensions, and position of the works may not be fundamentally changed.

In 1978, the Supreme Court of Victoria held that the character and nature of the works cannot be so radically altered by a variation instruction as to amount to a different project entirely.

2. Variations may not be ordered after practical or substantial completion.
3. Some contract forms limit the power to variations required for good construction reasons.
4. Work may not be omitted from the contract for the purpose of having it carried out by another contractor.

This last constraint was authoritatively established in 1953 when the High Court of Australia held that omitting work in order to give it to a cheaper contractor was outside the scope of the variation power. In 1987 the English Court of Appeal clarified that work which falls entirely outside the original scope of the contract cannot be brought within it by means of a variation instruction.

Elements of a Valid Variation

Drawing on the general principles, four elements can be identified as necessary for a valid variation. Each should be verified by the employer before treating work as compensable.

1. The work must constitute additional or altered work falling outside the scope of the original contract sum.
2. There must be an express or implied contractual obligation to pay for the work. Without this, the contractor proceeds at its own risk.
3. Any agent who instructed or authorised the work must have had actual or ostensible authority to do so. The importance of this requirement was considered by the House of Lords in 1919 where it was held that an instruction will only constitute a valid variation where it is given by a person with actual or ostensible authority under the contract.
4. All applicable conditions precedent must have been satisfied, including requirements for written orders and compliance with specified time periods. The employer should ensure that these requirements are checked before the work is treated as giving rise to an adjustment. The treatment of conditions precedent is critical.

In 2007, the Technology and Construction Court  (England and Wales) held that failure to comply with contractual notice requirements operated as a condition precedent barring the claim. The consequences of non-compliance were absolute: a contractor’s failure to give timely notice deprived it of any entitlement, regardless of the merits of the underlying claim. An employer should therefore treat notice and other conditions precedent as issues to be checked promptly, without assuming that the underlying merits can cure non-compliance.

The Valuation Starting Position: Contract Rates

Once a variation is established as valid, employers should expect the valuation to begin with the contract rates, rather than with alternative or higher rates proposed later by the contractor. This principle was confirmed in 1992 by the Court of Appeal (England and Wales) which held that contract rates must be used where work is of similar character and executed under similar conditions to work priced in the contract.

A practical issue arises here for employers and ERs. Efficiency and productivity on varied work are typically lower than on work programmed from the outset. The question of what constitutes “similar conditions” was considered in 2000 by the Technology and Construction Court (England and Wales), where it was held that conditions must be assessed by reference to the actual circumstances of execution, not the assumptions made at tender stage. This is an important qualification: where a variation alters the sequencing, timing, or logistics of the works, the conditions may no longer be “similar” for the purposes of applying contract rates, even if the physical work is identical. Employers should therefore examine the actual effects of the change rather than assume that the original rates automatically apply or cease to apply.

The Claims Procedure: Gateway to Valuation

The PWC establishes a detailed claims procedure that the employer and ERs should follow before any adjustment to the contract sum can be considered under Clause 10.6. Three provisions are of particular importance:

1. Clause 10.3.1 requires the contractor to notify the ERs within 20 working days of becoming aware of a compensation event, followed by a detailed calculation of the proposed adjustment within a further 20 working days. For employers, this provides a clear timetable against which to check the timeliness and completeness of a contractor’s submission.
2. Clause 10.5 then imposes obligations on the ER. The employer should ensure that the ER’s response process is managed within the contractual timetable. Within 20 working days of receiving the contractor’s submission, the ER must: request additional information (one cycle only), agree the contractor’s proposal, decline the proposal, or make a determination.
3. Clause 10.1 links compensation events to the Clause 10.6 valuation mechanism.

For an employer, the practical effect of these three clauses, read together, is that a contractor’s claim must pass through the mandatory claims procedure before it can reach valuation.

Employers should recognise the distinction between instructing the ER and relying on the ER’s independent certification and valuation function. In 1988 in the High Court of Justice (England and Wales) the ER was recognised as having a dual role: acting on the employer’s instructions, and exercising independent professional judgment in certification and valuation. In the latter capacity, the ER must act fairly and impartially.

Conclusion

The claims procedure under the PWC is not a mere formality. For employers and their representatives, it is the framework for testing entitlement before valuation. Without procedural compliance comprising timely notification, a detailed calculation, and proper engagement with the ER’s determination process, a contractor will not reach the valuation stage. Employers should treat notice requirements and other conditions precedent as entitlement issues. If the contractor fails to comply, the claim may never reach valuation as demonstrated by the case which held that the contractor’s failure to give timely notice deprived it of any entitlement, regardless of the merits of the underlying claim.

In Part 2 of this series, we will examine the Clause 10.6 valuation hierarchy in detail, including the mandatory sequencing of valuation rules, fair valuation and quantum meruit, preliminary overheads, and practical takeaways.