Deciding Whether to Accept a Variation Order Under a Fixed-Price Contract
A diploma-holder site engineer works for a small contractor on a fixed-price contract for a two-storey workshop building. The contract sum is BDT 1.20 crore, with a 10 percent retention and a 5 percent performance security. Three months into a nine-month programme, the client's consultant issues a drawing revision adding a mezzanine floor slab and staircase, with no change to the contract sum and no formal variation order. The engineer estimates the extra work at BDT 18 lakh and 6 weeks of additional time. The client verbally assures that "it will be settled at final accounts". The contractor's cash flow is already tight, and the next interim payment certificate is due in two weeks. The site engineer must advise the contractor's owner on how to proceed.
1. Assess the risks of proceeding with the extra work on a verbal assurance, and state the contractual position.
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Contractual position: a fixed-price contract is not automatically varied by a drawing revision. A valid variation normally requires a written instruction from the authorised party, and the price and time effects must be agreed or valued under the contract's variation mechanism. A verbal assurance is not a variation order and is very hard to enforce.
Risks of proceeding on the verbal assurance:
- No agreed price - the BDT 18 lakh estimate is the contractor's figure, not an agreed sum. At final accounts the client may value it lower or dispute it entirely.
- No time extension - the 6 extra weeks may later be treated as contractor delay, exposing the contractor to liquidated damages.
- Cash-flow exposure - the contractor funds BDT 18 lakh of extra work while already tight, and retention (10 percent) further reduces receipts.
- Performance security risk - if a dispute arises, the 5 percent security is at risk.
- Design liability - building to an unapproved revision may create defects liability for work not properly designed or checked.
Proceeding purely on a verbal promise transfers all risk to the contractor.
2. Recommend a practical course of action that protects the contractor while keeping the project moving.
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- Do not start the extra work until a written instruction is received. Put the request in writing: confirm receipt of the revision, state that it constitutes a variation, and submit a priced proposal (BDT 18 lakh) and a time-impact statement (6 weeks) for approval.
- Request a formal variation order signed by the authorised representative, referencing the contract's variation clause. If the client wants work to start earlier, ask for a written instruction to proceed pending valuation, which preserves the contractor's right to be paid.
- Protect the programme - issue a notice of delay as soon as the revision is known, so the 6 weeks are documented and liquidated damages cannot be applied for that period.
- Protect cash flow - include any approved variation value in the next interim payment application, and keep records (drawings, correspondence, site instructions, photographs) to support the claim.
- Escalate if refused - if the client insists on verbal-only instruction, refer the matter to the contract's dispute procedure before committing resources.
Bottom line: the engineer should advise the owner to proceed only against written authorisation with an agreed price and time, using a 'proceed pending valuation' letter as the minimum safeguard. Verbal assurances are not bankable.