Variations in Construction Contracts: Why “We'll Sort It at Final Account” Can Be a Costly Mistake
By Brian Moriarty MCIArb | Founder, BAM Consult
There is a phrase that I suspect almost every construction subcontractor has heard at some point during a project:
"Just get on with the work. We'll sort the money out at final account."
It is usually said with the best of intentions. The project is progressing, the programme is under pressure and somebody needs to make a decision to keep the works moving. The main contractor wants the work completed, while the subcontractor is understandably reluctant to delay progress over a commercial disagreement.
In many cases, everyone genuinely expects the additional work to be agreed and paid for later.
Unfortunately, that is not always what happens.
By the time the final account arrives, the people who originally instructed the work may have moved on, the circumstances surrounding the instruction may be difficult to establish and the main contractor's commercial team may take an entirely different view of the subcontractor's entitlement.
What appeared to be a relatively straightforward variation can suddenly become a substantial disagreement over whether the work was instructed, whether it was included within the original scope and whether the subcontractor followed the contractual procedure necessary to recover its costs.
The difficulty is that carrying out additional work and establishing a contractual entitlement to payment for that work are not necessarily the same thing.
This distinction is especially important under NEC contracts, where failing to comply with certain notification requirements can result in a subcontractor losing its entitlement to additional time or money altogether.
What Actually Constitutes a Variation?
In simple terms, a variation generally involves a change to the works or obligations originally agreed between the contracting parties.
It might involve additional quantities, changes to specifications, alterations to the design, omitted works or instructions to undertake activities that were not included within the original subcontract.
However, whether a particular instruction constitutes a variation depends upon the actual contract.
A subcontractor might consider certain work to be additional because it was not anticipated when preparing its tender. The main contractor may nevertheless argue that the work was already included within the subcontractor's original obligations.
For example, a specialist subcontractor might be required to deliver a completed installation that complies with a specified performance standard. As the works progress, the precise activities necessary to achieve that outcome may differ from those originally anticipated.
That does not automatically mean every additional activity constitutes a variation.
The contract may place responsibility for achieving that specified outcome upon the subcontractor, regardless of the precise work involved.
This is why reviewing the original scope, specifications, pricing documents and variation provisions is so important.
Before arguing about the value of additional work, it is necessary to establish whether the work represents a genuine change to the contractual obligations.
The Danger of Informal Instructions
Construction projects rarely operate in a perfectly controlled environment.
Instructions are discussed during site meetings, issued through emails, recorded on drawings or sometimes communicated verbally between site managers and supervisors.
While these arrangements may be sufficient to keep the physical works progressing, they can create considerable commercial difficulties if the subcontract requires a particular procedure for issuing and accepting variations.
A site manager might ask a subcontractor to carry out additional work and confirm that it will be paid for. However, if that individual does not have the contractual authority to instruct changes, or the appropriate notice is never issued, the subcontractor may subsequently face a challenge to its entitlement.
Similarly, an email asking a subcontractor to investigate a problem does not necessarily amount to an instruction to carry out additional works at the main contractor's expense.
The distinction can become particularly important when the parties are no longer working collaboratively.
Rather than relying upon informal assurances, subcontractors should establish who has authority to issue instructions, what form those instructions must take and how changes are to be notified and valued.
Where the contractual position is unclear, it should be clarified as early as possible.
NEC Contracts: When a Variation Becomes a Compensation Event
Under NEC contracts, changes that may affect the contractual Prices, Completion Date or Key Dates are generally addressed through the compensation event mechanism.
Rather than simply leaving the parties to negotiate additional costs at the end of the project, NEC establishes a structured process for identifying, notifying, assessing and implementing compensation events while the works are ongoing.
Clause 60.1 of the NEC4 Engineering and Construction Contract and Engineering and Construction Subcontract identifies events that can qualify for compensation.
These include certain instructions changing the Scope, together with other specified events that may affect the contractor's or subcontractor's entitlement to time or money.
The intention is that the financial and programme consequences of such events are addressed promptly, while the relevant information is still available and the parties have an opportunity to manage their effects.
In principle, this is a sensible approach.
It encourages the parties to understand the commercial consequences of changes as they arise, rather than accumulating unresolved claims to be argued over at final account.
However, it also places important procedural obligations upon subcontractors.
And failing to comply with those obligations can be extremely expensive.
The NEC Time Bar: Missing a Notice Could Mean Losing Payment
One of the most significant provisions within the NEC compensation-event procedure is clause 61.3.
The standard NEC4 contracts contain notification requirements, but the applicable deadline and any exceptions must be established from the actual signed subcontract. Amendments introduced through Z clauses or other bespoke conditions can alter those requirements, sometimes significantly.
A subcontractor should not assume that the notification deadline under the main contract also applies to its subcontract, or that an unamended standard-form deadline has been retained.
Where the time bar applies, failure to notify within the required period can result in the Prices, Completion Date or Key Dates not being changed to reflect the event.
In practical terms, a subcontractor could undertake substantial additional work, incur genuine costs and still lose its contractual entitlement to compensation because the required notification was issued too late.
When Does the Clock Start?
Under the standard NEC4 provisions, the notification period is generally linked to when the subcontractor becomes aware that the relevant event has happened. The actual subcontract and any amendments must nevertheless be checked.
It does not necessarily begin when the subcontractor finishes calculating the cost, receives its supplier invoices or decides that the event has become commercially significant.
Consider a subcontractor who encounters an unexpected condition that it believes constitutes a compensation event.
The site team identifies the issue but concentrates on overcoming the problem and maintaining progress. The commercial team only becomes involved several weeks later, once the additional labour and materials have been recorded.
By the time the subcontractor prepares its quotation, the notification deadline may already have expired.
The problem is not that the additional expenditure was imaginary or unreasonable. It is that the subcontractor may have failed to preserve its entitlement under the contract.
This is why identifying and notifying an event should not be delayed until the full financial consequences are known.
The NEC procedure distinguishes between notifying the event and subsequently assessing its effect on time and money.
Does the Time Bar Apply to Every Compensation Event?
No, and this is an important qualification.
Under the standard NEC arrangements, certain compensation events are required to be notified by the Project Manager under the main contract or by the Contractor under the subcontract.
These include specified events arising from their own instructions or decisions.
Where the relevant party should have notified such an event but failed to do so, the clause 61.3 time bar does not necessarily apply in the same way.
The precise exception must be considered against the contract and the type of compensation event involved.
Equally, many NEC contracts contain additional or amended conditions, commonly referred to as Z clauses, which can alter the standard notification requirements.
A subcontractor should never assume that the standard NEC provisions apply without first reviewing the actual subcontract.
My advice would nevertheless be straightforward: if an event may give rise to a compensation entitlement, notify it promptly and correctly rather than relying upon an exception to the time bar.
An Early Warning Is Not the Same as a Compensation Event Notice
Another area that causes confusion is the distinction between an early warning and a compensation event notification.
Under NEC4, the early warning procedure is intended to bring potential risks to the parties' attention so that their impact can be reduced or avoided.
For example, a subcontractor may identify that late design information could affect its programme or increase its costs.
Issuing an early warning allows the parties to consider the problem before its full consequences materialise.
However, issuing an early warning does not automatically satisfy the separate requirement to notify a compensation event.
The two procedures serve different purposes.
An early warning identifies a matter that could affect the project, whereas a compensation event notification formally identifies an event that the notifying party believes gives rise to a contractual entitlement.
A subcontractor that has issued an early warning should therefore not assume its entitlement to additional payment has been protected.
Indeed, under NEC, failure to issue an early warning when one should have been given can also affect the subsequent assessment of a compensation event, even where the event itself has been notified correctly.
Both procedures need to be understood and administered properly.
What About JCT Subcontracts?
Although NEC contracts contain particularly prescriptive compensation-event procedures, subcontractors operating under JCT contracts should not assume that variations can safely be left until final account either.
JCT contracts generally contain provisions governing the instruction, confirmation and valuation of changes to the works, although the precise requirements depend upon the form and edition used and any amendments incorporated into the subcontract.
In some circumstances, the entitlement to payment may depend upon whether a valid instruction was issued by an authorised person.
Where a subcontractor acts upon a verbal instruction, it may be necessary to obtain written confirmation in accordance with the contractual procedures.
Similarly, certain claims involving delay, disruption, loss and expense or other financial consequences may be subject to separate notification and record-keeping requirements.
Unlike the NEC compensation-event time bar, there is no single universal notification period that applies to every variation under every JCT subcontract.
That does not make the procedures any less important.
The key is to understand what the particular subcontract requires and to ensure that those requirements are followed throughout the works.
Why Leaving Everything Until Final Account Is So Dangerous
The problem with postponing variations until final account is that disagreements rarely become easier to resolve with the passage of time.
During the works, the relevant instruction may be fresh in everyone's mind, labour and material records may be readily available and the people involved may be willing to discuss the commercial consequences openly.
Several months later, that position can change considerably.
The main contractor may dispute whether the work was additional, question the resources claimed or argue that the relevant costs should have been included within the original subcontract price.
There may also be disagreements concerning programme effects, particularly where the subcontractor believes that instructed changes caused delays or disrupted its planned sequence of works.
These disputes become considerably more difficult where records are incomplete, correspondence is ambiguous or contractual notice deadlines have been missed.
In my experience, one of the most common commercial mistakes is assuming that because the main contractor knows additional work has been undertaken, the entitlement to payment must automatically follow.
Unfortunately, that assumption can prove expensive.
Knowledge of additional work is not necessarily the same as a valid contractual instruction, and agreement that work was undertaken is not necessarily agreement that additional payment is due.
What Should Subcontractors Look Out For?
There are several practical measures I would recommend to any subcontractor seeking to protect its entitlement to variations and additional payment.
Understand the variation procedure before signing the subcontract.
Identify who can instruct changes, how instructions must be issued, what notices are required and how variations will be valued. Pay particular attention to amended conditions and any provisions that restrict or qualify entitlement.
Do not rely solely upon verbal instructions.
Where instructions are given informally, seek the appropriate written instruction or confirmation in accordance with the contract. Make sure the scope of the change and the person issuing it are clearly identifiable.
Notify potential compensation events promptly.
Under NEC, do not wait until the work has been completed or its full cost established before considering whether a compensation event notification is required. Check the notice requirements and applicable deadline in the signed subcontract, including any Z clauses and other amendments.
Keep early warnings and compensation event notices separate.
An early warning does not automatically preserve an entitlement to additional time or money. Ensure that each notification is issued for its intended purpose and through the contractual communication procedure.
Maintain contemporaneous records.
Keep instructions, correspondence, photographs, labour allocations, material records, delivery tickets and other evidence that may help establish the nature, extent and consequences of the additional work.
Monitor outstanding variations throughout the project.
A variation register should identify instructed changes, submitted notifications, quotations, responses, agreed values and outstanding matters. Under NEC, the relevant deadlines should also be monitored carefully.
Do not allow unresolved variations to accumulate unnecessarily.
Where a main contractor disputes an entitlement, establish the contractual basis of that disagreement and address it while the circumstances remain clear. Leaving numerous unresolved items until final account can create avoidable commercial exposure.
Final Thoughts
Variations are a normal and often unavoidable feature of construction projects. Specifications change, unforeseen conditions arise and instructions are issued as projects develop.
The existence of additional work does not, by itself, mean that a dispute should arise.
What matters is whether the contract provides a clear procedure for dealing with those changes and whether both parties follow it.
NEC contracts illustrate particularly well why this matters. A subcontractor can have a genuine compensation event but lose its contractual entitlement through failure to comply with the notification requirements.
Under JCT and other forms of subcontract, different contractual provisions can create equally significant difficulties where instructions, notices or supporting records are not properly managed.
In either case, postponing commercial administration until the final account is rarely a sensible strategy.
The time to establish your entitlement to additional payment is when the circumstances giving rise to that entitlement occur, not several months later when the main contractor begins challenging your final account.
At BAM Consult, we believe that properly negotiated contractual terms, clear commercial procedures and timely advice can prevent many of these disputes from arising in the first place.
Because while carrying out the work is essential, ensuring that the contractual entitlement to payment is properly protected is what ultimately safeguards the subcontractor's financial position.
Brian Moriarty MCIArb is the founder of BAM Consult, providing specialist commercial management, contract reviews and construction dispute-resolution services exclusively to construction subcontractors.
This article is provided for general information and does not constitute legal advice. Contractual entitlements and notification requirements depend upon the particular form, edition and amendments of the contract.