Change on major underground infrastructure projects, like death and taxes in life, has an almost inevitable certainty. Change in its broadest sense can result from many and varied causes: a client altering its project requirements, a contractor encountering unexpected physical conditions, the development of innovative technical solutions, or by alterations in the political, regulatory or funding environment. Any of these occurrences may impact project definition, cost and programming.
Change is an aspect of project risk, and the risk of change will be allocated to either the client or the contractor under the contract. The consequences of the client instructing change to a project scope is a risk that the client retains and is examined in some detail in the sections here dealing with contractual issues. Other risks, most obviously ground conditions, will be contingent on the nature of the project and will result in the contractor having an entitlement to additional time and money depending on how they are allocated under the contract.
Part two of this article addressing programme and quantum issues will consider methods that may be employed in practice to determine the amount of time or money allocated to a change event.
The project perspective
Technically, change may result from a wide range of factors that alter the scope, implementation or risk profile of a project, with consequential impacts on cost and programme. This important issue can be actively addressed throughout the project cycle in project definition and scope, planning and design, procurement and construction.
Project initiation & planning
An old military maxim states that ‘Time spent in reconnaissance is never wasted’. Change is frequently associated with the construction phase, but the seeds of change events are often sown earlier in the project lifecycle.
Underground construction typically is associated with major infrastructure projects, where significant effort goes into the project definition and planning stages. Despite this, high level issues such as the reliability and accuracy of forecast data on traffic or passenger numbers, scope creep, stakeholder and political influence may still result in change.
It is now well established that industry best practice requires formal risk management procedures to be actively applied on projects involving underground infrastructure. As a particular project risk, change should be explicitly included in the Risk Management Plan; this should be established at project initiation and continuously reviewed and updated throughout the project cycle. It is a client responsibility to ensure this process is in place at the early stages of the project. In the author’s experience however there are still projects where this process is not followed, or is only applied later in the project cycle.
Some client organisations delegate risk management to the contractor, seeing their role as purely one of enforcing the contract. For the risk management process to function adequately, especially in relation to change, it is important that the full range of risks issues is considered and also that time and cost impacts are quantitatively evaluated.
An earlier article in this series on ground risk noted that this “remains one of the most significant issues for tunnelling and underground construction projects.” The corollary of this is that inadequate investigation and characterisation of the ground is also one of the principal causes of change, both for underground and surface civil engineering projects. Despite much comment over years in the professional press, failure to involve geotechnical engineers early enough and inadequate ground investigation continue to impact and result in change on projects.
It is also important that ground parameters that provide the contractor with sufficient information to determine key issues—such as construction method, rate of excavation, abrasiveness, in situ stress, rockmass structure, permeability and water conditions—are adequately investigated.
For major underground projects, particularly in urban areas, early consultation with key stakeholders is important in order to minimise the likelihood of changes in later stages of the project. As has been demonstrated on the Hindhead and Crossrail projects in the UK, consultation with government agencies, local authorities, statutory undertakers and local residents requires significant time and resource allocation in the early stages of a project. The importance of this issue was demonstrated on an urban motorway project involving a tunnelled section when a pressure group representing some future commercial users, together with press coverage, resulted in the client reassessing space-proofing requirements at a late stage of the project.
Design & programme development
At this stage of a project there are significant opportunities for unplanned change to be addressed and minimised.
Many projects go to tender with completed and checked detailed designs. Although this can be an effective way to minimise future change, construction efficiencies with cost savings may be proposed by tenderers requiring the design to be re-evaluated. Other projects go to tender on the basis of a partial design, typically 50 per cent, which is then completed either with the involvement of a ‘preferred bidder’ or post contract award.
Early contractor involvement (ECI) in the project development and design process has proved an effective way to minimise change. As well as providing valuable input and certainty concerning constructability and sequence issues, ECI can also provide benefits for public enquiries and managing external stakeholders. The Crossrail project will have a period of optimised contractor involvement after contract award in which the Engineer’s design is reviewed and contractor proposed options are considered before the design is finalised.
The use of geotechnical baseline reports (GBR) is a significant development that provides a fixed contractual baseline for ground conditions. A key aspect is that the client organisation is responsible for both the factual site investigation data and its interpretation; encountered ground conditions outside defined ranges given in the GBR are compensation events under the NEC form.
Concerns have been raised by contractors, however, that the use of overly broad ranges for ground parameters may not adequately reflect actual conditions. It is also worth noting that an overly conservative interpretation of ground conditions can also result in change. On a recent major Alpine tunnelling project the contractor’s construction method and equipment were based on the anticipation of very poor ground. When the actual ground conditions encountered were better than predicted this represented a major change, with financial and programme implications for the client.
It is important that the issue of change is actively addressed through the risk management process during this stage. This will involve the development and continuous review by all parties of design risk registers but, in relation to change, the process needs to be more widely applied. As required by the Joint Code of Practice2, the client organisation is responsible for addressing all potential areas of risk associated with the development of the project and it is in the wider context that change hazards frequently exist.
Third party interfaces, particularly in urban areas, are an increasingly important issue for tunnelling projects and a potential source of change impact. The necessary approvals from affected parties such as Network Rail, LUL, various utilities, and building owners, typically require significant input at this stage necessitating the allocation of adequate design resources and allowances in the programme.
Construction and project organization
The application of industry best practice in the pre-construction stages of a project will help minimise change. However, the significant complexity of modern underground infrastructure that frequently involves multiple parties, interfaces, disciplines, phases and contracts means that although change may be minimised it can rarely be avoided.
The use of partnering for major project delivery, with co-located task teams consisting of the client, designer and contractor, improves communication, design and construction efficiency, and is seen by many as having a positive impact on managing and mitigating project change.
Legal perspectives
As we have seen, ‘change’ can be defined very broadly in relation to engineering projects. In engineering contracts, however, change (or ‘variation’) is principally used to mean a change instructed by or on behalf of a client that alters the work the contractor is to carry out under the contract.
In basic terms, such change will result either in the delivery of an asset that is (to a greater or lesser extent) different in scope or nature to that otherwise required by the contract or in the contractor having to alter his method of working. The change itself may require additional work to be carried out or work to be omitted.
Change in this sense can be distinguished from ‘changes’ that arise out of “general” project risks, which may be owned by the client. For example, a contractor may, depending on the contractual risk allocation, have a claim for time and money against the client if particularly adverse ground conditions are encountered or for additional payment if prices rise due to inflation.
Change in the specific contractual sense can also be distinguished from two other situations that people commonly consider to be ‘change’:
• Where a contractor carries out more work than he anticipated of a kind that is to be implied as necessarily ancillary to the construction of the required asset; and
• where a design is refined through a process of client approval under the contract.
In the first of these situations, the contractor may find, at least under a lump sum contract, that he has no entitlement to additional payment or time. A court would view the ‘extra’ work as being included in the contract price. (This is really an instance of a project risk having been allocated to the contractor; other risks allocated to the contractor would also result in no entitlement to additional time or money.) In sophisticated contracts for complex projects, the contractor may, however, have an entitlement to additional payment, depending on how the work to be carried out is specified and the contract prices are built up. Where there is such an entitlement it will, in principle, be a change in the sense we mean.
In the second situation, the process of design approval will not give rise to changes, unless the client misuses the process so as effectively to instruct the contractor to carry out work different in nature to that which he is required to carry out under the contract.
Change, procurement and pricing
The likelihood of change being required by a client is a type of project risk. The choice of contract for a project—and, more particularly, the choice of pricing mechanism—will in large part be determined by how project risk is to be allocated between the client and the contractor. The degree of control required by a client over design during the project lifecycle will also be a factor in determining the detail of the procurement route (e.g., the degree of responsibility the contractor takes on for design).
If major changes in scope are likely during the construction phase, it is generally thought to be more efficient for the procurement route to reflect this. For example, if the scope of the project is likely to change it will be better value for the client clearly to retain the associated risk and manage it through the contract change mechanism, rather than seek to enter into, say, a lump sum contract that includes an inflated risk premium inserted against a relatively ill-defined scope.
In such cases it may be that a target contract or even a cost reimbursable contract is appropriate. Such contracts are, generally speaking, more likely to result in fair and transparent pricing of client instructed changes. They are consequently more tolerant of ongoing and relatively late changes in scope. In theory, all of this should promote a good client-contractor relationship, as the client will pay an appropriate price for work actually carried out. But much will depend on the details of the pricing mechanism, for example, how the contractor’s ultimate fee against scope is calculated under a cost reimbursable contract.
In any case, experience shows that contractor claims for general loss and expense are more likely under contracts that transfer a high degree of risk to the contractor with only limited entitlement for additional payment under the change mechanism.
Contracts—the right to instruct changes
Engineering contracts invariably include a clause expressly permitting the client (or his representative) to instruct a change and stating how the cost of the change is to be determined. Without this, the client would have no right to require the contractor to implement a change and any request for a change would be subject to veto by the contractor. Even so, some standard form contracts give the contractor limited rights to object to change instructions (for example, the International Federation of Consulting Engineers contract (FIDIC) allows the contractor to object to an instruction because it will impact adversely on safety).
The client’s right to instruct a change is not unconstrained. The general rule is that a change may only be instructed under a contract if the change is within the scope of the contract. This will be a matter of fact and degree. For example, a change instructing a contractor to construct a second tunnel under a contract to construct one would almost certainly be out of scope and the contractor would be entitled not to comply. But other cases may not be so clear-cut.
If a contractor does implement an out-of-scope change, he may be entitled to be paid a reasonable price for the additional work, without reference to the contract rates and prices.
An instruction to omit work may also be outside the scope of a change clause. This is only likely to be the case where the omission is very considerable and would effectively result in the financial basis of the contract being rewritten unilaterally by the client. In such a case, the contractor would have a claim against the client for breach of contract.
The Institution of Chemical Engineers (IChemE) contract forms (including the international versions) attempt to provide certainty by stating that the contractor may object to a change instruction if it would result in the original contract price or target cost being increased or decreased by more than 25 per cent.
Change—standard forms
Standard form contracts not only permit the employer or his representative to instruct a change, but, in varying degrees, allow for or require the contractor to submit quotations for the cost and programme consequences.
For example, FIDIC’s Silver Book for EPC (Engineering, Procurement, Construction)/Turnkey Projects and Gold Book for Design, Build and Operate Projects permit the employer or his representative to instruct a change, or request the contractor to submit a proposal prior to issue of an instruction. A contractor’s proposal is to include proposed modifications to the programme and contract price.
Surprisingly, the FIDIC contracts provide little guidance on how the cost of a change is to be calculated. They simply provide that the amount of the adjustment shall include ‘reasonable profit’ and shall be agreed between the parties, failing which the employer or his representative is to make a ‘fair determination in accordance with the contract’.
In itself, this may provide a contractor with relatively little assurance. As a matter of practice, it is likely that the parties will seek to incorporate additional detail into the contract setting out how the amount of a change – which may be very substantial – is to be calculated.
Similarly, IChemE allows the project manager to require quotations for potential variations. It also requires the project manager to give the contractor reasonable opportunity to comment on a proposed change prior to its instruction, unless delay in issuing the instruction would prejudice the works or the client.
Unlike FIDIC, IChemE requires the parties to include extensive detail in the contract schedules specifying how the cost of a change is to be calculated. Under the lump sum Red Book, the cost is to be an amount that is reasonable in all the circumstances. However, the detailed calculation of the amount will be based on the heads of cost, rates, charges and fee for overheads and profit set out in schedule 18. If the project manager and contractor cannot agree the amount, it shall be such amount as the project manager decides.
IChemE’s target cost Burgundy Book requires a change in the target to be ‘determined as soon as is practicable’ having regard to the schedules detailing cost elements, rates, charges and target cost mechanism.
A change will be grounds for an extension of time under both FIDIC and IChemE, requiring the contract programme to be updated.
The NEC3 ECC (Engineering & Construction Contract) does not contain a distinct set of clauses covering change. Instead, a project manager’s instruction to change the works is a compensation event and is consequently dealt with under the compensation event procedure that covers all matters that may have time and cost consequences under NEC3. As such, change is subject to NEC3’s early warning and risk register procedures.
In common with the NEC ethos, the compensation event procedure promotes a proactive ‘real time’ approach to dealing with such events. Time limits for response are set for each stage of the process, from notification of the event, through submission of the contractor’s quotation for it (setting out his proposed cost and time changes) to the project manager’s acceptance or rejection of the quotation.
NEC3 contains a number of default provisions that apply if the contractor or project manager does not adhere to the process. The programmatic nature of the compensation event mechanism distinguishes it from change procedures under FIDIC and IChemE.
Under NEC3, the amount of the adjustment to the price or target is, essentially, the change in the ‘defined cost’. Simply, this means that the contractor is entitled to be paid the additional cost of carrying out a change plus a fee, albeit that the amount payable (under most NEC3 pricing options) will be calculated by reference to a relatively detailed schedule of cost components. In the case of target cost or cost reimbursable NEC3 contracts, the cost of additional sub-contracted work will be payable in full and will not be assessed under the schedule of cost components.
FIDIC, IChemE and NEC3 each allow for value engineering changes to be proposed by a contractor. The target under IChemE Burgundy Book and NEC3 Option C does not reduce if a proposal is accepted that reduces the cost of the works. This incentivises the contractor to make proposals, as he will share in any saving. It is less clear how value engineering may be encouraged commercially under a lump sum contract: the FIDIC contracts do not engage with this point.
Importantly, FIDIC, IChemE and NEC3 each contain a clause that limits the time in which the contractor may make claims in respect of ‘change’ in the broad sense. The rationale behind this is to promote active contract management and prevent possible claims being stockpiled for resolution at a later date, perhaps as part of a ‘global’ claim, when the parties’ ability to analyse accurately the cost and programme implications will be reduced.
Conclusions
Change can be effectively managed and mitigated throughout the project cycle when industry best practices are applied. Of these, it is particularly important that change is adequately addressed in project risk management procedures and that the client organisation actively ensures this is applied.
Contractors and contract administrators should realise that not every event that impacts on the nature of and time for delivery of an asset will be a change that has contractual consequences.
The formal contractual change mechanism is relatively narrow and is focused on changes that reflect alterations in client requirements.
If a change event, in the broad sense, occurs that is not covered by the change mechanism, it will only lead to the contractor becoming entitled to additional time and money to the extent that it is covered by the general extension of time and loss and expense provisions in the contract. The scope for claims under these provisions may be limited, particularly under some forms of lump or EPC contract.
