Variation Valuation Under FIDIC: The Four Gates of Sub-Clause 12.3

A quantity has moved a long way from the bill. The contractor says the rate no longer works and asks for a new one. The engineer says the rate is the rate. Both are sure the contract is on their side.

Under the 1999 Red Book the answer sits in sub-clause 12.3, and it is narrower than most contractors assume. A new rate is appropriate only where four conditions hold at the same time.

The four gates

• Quantity. The measured quantity differs from the Bill of Quantities quantity by more than 10 per cent — below 90 per cent or above 110 per cent of it.
• Materiality. That change in quantity, multiplied by the rate in the bill, exceeds 0.01 per cent of the Accepted Contract Amount.
• Cost effect. The change in quantity directly changes the Cost per unit quantity of that item by more than 1 per cent.
• Not fixed. The item is not identified in the contract as a fixed rate item.

All four. Not the best three.

Where the argument usually goes wrong

The contractor stops at the first gate. The quantity went up 40 per cent, therefore a new rate is due.

The third gate is what defeats that. The change in quantity must itself have changed your cost per unit. If you are doing more of the same thing, in the same conditions, with the same gang and the same plant, your unit cost may be unchanged — or better, because the preliminaries are spread wider. The rate stands, and it should.

The third gate also runs in the opposite direction, which contractors consistently forget. A quantity that comes in below 90 per cent can wreck a unit rate, because the fixed element inside it — mobilisation, a plant item hired for the duration, a supervisor — now spreads across less work. That is a route to a new rate on exactly the same wording, and it is almost never claimed.

A worked example

Rock excavation, billed at 12,000 m³ at 18.00 per m³. Accepted Contract Amount 24,000,000. The measured quantity comes in at 15,600 m³.

• Gate one. 15,600 against 12,000 is 130 per cent. Above 110. Passed.
• Gate two. The change is 3,600 m³ × 18.00 = 64,800. One hundredth of one per cent of 24,000,000 is 2,400. 64,800 clears it comfortably. Passed.
• Gate three. This needs evidence, not arithmetic. If the extra 3,600 m³ came out of a deeper and harder horizon, needing different plant and delivering lower outputs, unit cost has moved far more than 1 per cent and the gate is passed. If it is simply more of the same material in the same place, it probably is not.
• Gate four. Read the bill.

Three of the four gates can be settled in a minute with a calculator. The third is an evidence problem — and it is the one that decides the money.

Varied work with no comparable rate

The clause has a second limb. Where work is instructed as a variation, or arises from provisional sums or daywork, and there is no rate in the bill for work of similar character executed under similar conditions, the valuation is built from relevant bill rates where they assist and otherwise from reasonable Cost. The result is often called a star rate.

Those two phrases carry real weight. The same activity in a different location, at a different level, in a different season, or in a sequence that prevents you using the same method, is not the same conditions. Which is why it matters that whoever is on site writes down the conditions that actually applied, while they apply. Reconstructing them a year later against a bill rate is a losing position.

The profit trap inside the valuation

Note what it is you are recovering. FIDIC defines Cost as all expenditure reasonably incurred by the contractor in performing the contract, whether on or off site, including taxes, overheads and similar charges — but does not include profit. Cost Plus Profit is that figure plus the percentage stated in the Contract Data, and where none is stated, five per cent.

Build a valuation on Cost where the clause entitles you to Cost Plus Profit and you have left the profit behind. The measure differs clause by clause, so it is a question to answer from the contract in front of you rather than from habit. There is more on that distinction here.

Keep the record, because gate three lives there

Everything above reduces to one habit. The first, second and fourth gates can be answered at any time from documents that already exist. The third can only be answered from evidence captured while the work was happening: outputs, plant on site, the horizon being dug, the sequence being followed, what changed and when.

A contractor with that record argues gate three from facts. A contractor without it argues from assertion, and loses.

Which is the same discipline that produces an honest forecast to complete, and for the same reason: both depend on knowing your real achieved rate rather than the one you tendered.

The point

The common belief is that a big quantity swing earns a new rate. It does not. It opens the door to one, and three further tests decide whether you walk through — one of which is settled months earlier, by whether anybody wrote down what the conditions were.

References here are to the 1999 Red Book. The 2017 suite restructures this ground, so check the edition and any particular conditions in front of you. Practical guidance for commercial teams, not legal advice.