Dilemma 2:  Submitting a contract claim for a variation - Dilemma

 

You are the claims manager of a construction company which is carrying out works under a construction contract with the project owner.  The project owner issues a variation which results in your company needing to undertake additional work.  Under the contract: (1) your company is entitled to additional payment as a result of a variation; and (2) if the parties  are unable to agree the cost effect of the variation in advance, then the contractor will undertake the variation, and will be paid by the project owner the reasonable costs of undertaking the variation.  You are instructed by the commercial director of your company to price the variation, and submit the claim to the project owner.  You calculate the cost at US$20,000.  Part of the cost is calculated based on agreed contract unit rates.  However, some items do not have agreed rates.  You therefore calculate a reasonable price based on the actual costs paid to the sub-contractor, a reasonable hourly rate for the labourers, plus the company’s overhead and profit rate used on that contract.  You believe that the claim is reasonable and justifiable.  The contract requires that you evidence the claim.  You therefore assemble copies of the sub-contract invoices, and the timesheets of the labourers used on the variation.  The commercial director instructs you to increase the claim to US$30,000.  He tells you that:  “The project owner will reduce our claim.  We need some negotiating margin.  Increase the labour element of the claim.  Use some labour timesheets from other parts of the works to back it up.  The project owner will never know that those labourers were not working on the variation.  If we only claim US$20,000, he will knock us down to US$15,000.    However, if we claim US$30,000, we should end up with US$20,000, which is what we are entitled to, although we might make a bit more.  We bid low to win this contract - we need to make good money on the claims.”

 

What do you do? 

 

Consider your position, and then go to the answer on the next page.