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Construction contracts include a lengthy and detailed scope of work. Generally, following the signing of the agreement, there is no right to vary the scope of this work. However, the contract itself may give the principal the ability to order a variation of the scope of work. Sometimes, a variation removes part of the scope of work. As a result, this reduces how much work will be completed. This process is known as a negative variation. This article will first explain negative variations. Then it will discuss the limits a principal must abide by when ordering a negative variation on a construction contract. 

What Are Negative Variations?

If something is outside the contract’s scope of work, a contract variation will need to be ordered. Construction contracts generally include a clause allowing the principal to order such a variation to the scope of works. 

A negative variation occurs when the principal seeks to reduce the scope of the work. Naturally, this reduces the value of the contract. Negative variations generally occur in three circumstances:

  1. the works are no longer required, e.g. in the case of a design change; 
  2. you are engaging a different contractor for a portion of the work; or
  3. the project (or part of a project) is no longer continuing. 

Whether the scope of work can be negatively varied will depend on the contract itself. A variation that substantially changes the scope of work may be seen as a repudiation of the contract, unless there is a defined right within the contract. This means the principal has demonstrated they are unwilling to perform their obligations under the contract. In doing so, they are allowing the other party to terminate the contract and seek damages. 

Omitting a Portion of Works to Engage a Third Party Contractor

The High Court in Carr v JA Berriman Pty Ltd (1953) decided that reducing the scope of works in a contract to engage a third party to complete the works is not a valid variation unless the contract contains an explicit power to do so. 

Entering into a contract confers on a contractor the obligation to carry out the work. However, there is also a corresponding right to be able to complete the work they were contracted to do. Often, the contractor will divert resources from elsewhere. This is done with the expectation of earning back the resources invested and is based on the work they were contracted to complete. If the value of the contracted work changes significantly, the contractor may be left out of pocket for investments made.

Negative variations must be genuine in that there must be no intention to carry out the omitted work at all. 

Can You Omit All (Or Almost All) of the Works?

The contract may give the principal an express power to order a negative variation to the scope of the contract. Even so, there are implied limitations on how much work one can omit. The court in Chadmax Plastics Pty Ltd v Hansen and Yuncken (SA) Pty Ltd (1984) decided you can not cancel a contract using a variation clause.

In this case, the principal contractor engaged a subcontractor to apply a Wallflex finish on the walls of a building they were constructing. The principal contractor later changed their mind about this finish. As a result, they issued a negative variation. However, this removed approximately 98 percent of the works in the subcontract. 

The court said that a principal could not omit such a large portion of the work. Such an omission effectively terminates the contract, as there is no longer any work to be completed. You can include variation provisions to change project requirements, not cancel it altogether. 

Other Limitations

A variation must be within the general scope of the contract and cannot include changes beyond the original scope of work. How you can order a variation will be set out in the contract. The principal contractor must issue the variation in the manner set out in the contract. Usually, you should issue a variation via written notice and should note any necessary adjustments to the contract price and duration. 

Once practical completion of the contract has eventuated, the power to vary the scope of works may no longer be available, unless expressly stated in the contract. Practical completion occurs when the works are substantially complete. Any incomplete work is of a minor nature that does not affect the ability of the principal to occupy and use the structure. 

Practical Implications

A negative variation to the scope of work will usually result in a reduction of the contract sum. Ensure you discuss any changes to the contract sum before completing work on the variations to avoid a dispute later on. 

A negative variation may also result in a change in the timeline for completion. This is because the principal may require the reduced scope of work to be completed quicker than initially planned. If you issue variations in writing it makes it easier to track changed deadlines and agree on appropriate and achievable timeframes.  

Key Takeaways

A negative variation is where part of the scope of work under a contract is removed or deleted. Contracts need to contain clear and express wording to allow for negative variations. If you negatively vary a contract beyond the limits discussed above, it may result in a right for the other side to terminate the contract and seek damages for breach. 

If you need help to understand the variation provisions included in your construction contract, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions 

What is a negative variation?

A negative variation is a variation of the original contract that reduces the scope of the work, therefore reducing the value of the contract. These generally occur when work is no longer required (perhaps following a design change), a portion of the work is being delegated to a different contractor, or the project (or part of it) is no longer continuing. 

Can I engage a third party contractor? 

In a nutshell, no. Reducing the scope of works in a contract to engage a third party is not a valid variation unless the contract contains an explicit power to do so. This is because the contract conferred on a contractor the obligation to carry out the work. Negative variations must be genuine, in that there must be no intention to carry out the omitted work at all.

How much work can you omit? 

There are implied limitations on how much work you can omit. The variation clause in a contract cannot be used as a right to cancel the contract. You can only vary project requirements, not cancel them altogether.

Are there limitations on using negative variations?

Yes. The negative variation must be within the scope of the original contract, and cannot include changes beyond that work.

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