By Dr. Chandana Jayalath
Whenever variations are ordered that omit work, and particularly if such omissions are substantial in nature, contractors often argue that they should be entitled to claim the loss of profit that they would have earned on such works.
If, however the instruction omitting works is a valid variation order, then whether a contractor can claim loss of profit on such omitted works depends upon the wording of the conditions of contract. Many standard forms provide: “The prices in the Contract Bills shall determine the valuation of items omitted; save that if omissions substantially vary the conditions under which any remaining items of works are carried out.” This provision is not helpful to a claim for loss of profit, because it provides that the omitted works must be valued at the rate in the Contract Bill, i.e. omitting the full value, including profit, of the item in the Contract Bills. Nor is the proviso of any assistance in such a claim because the variation must substantially vary the conditions under which the remaining items are carried out before the remaining items can be re-valued.
Loss of profit on an omitted item will not in itself vary the conditions in which the remaining items are carried out. So the proviso does not appear applicable in this situation. However, contracts typically provide the Contractor with an entitlement to claim ‘direct loss and/or expense’ incurred by reason of a variation. In the case of Wraight Ltd v. P H and T Holdings (1968), a contract was wrongly determined with the work part completed. The determinations clause provided for the contractor to be paid “Any direct loss and/or damage caused to the contractor by the determination.” It was held by the court that this wording included loss of gross profit on the uncompleted work. Therefore, following the Wraight case it would appear arguable that a claim for loss of profit on works omitted by way of a variation can be claimed as direct loss and or expense.
Generally, for contractors seeking to prove a claim of lost profit due to omitted scope, it is critical to demonstrate that his loss of profit by the omission of work is genuinely incurred because his inability to recover that loss elsewhere. It is not sufficient to simply argue that the lost profit is speculative on the basis of a profit allowance in tender, ie loss of profit = value of omitted work x 15% profit margin for instance. However, this is a cumbersome exercise to be dealt with far remote facts, both for justification and evaluation. On the other hand, importing case law from different jurisdictions will definitely have legal ramifications. It could also be argued that the parties have entered into contract clauses together with their repercussions taken to have already agreed unless the contract expressly forbids or provides for.