Omission of Contract Work — Limits on Employer’s Right to Omit

The right to vary includes the right to omit. This is clear in every standard construction contract. What is less clear — and frequently disputed — is whether the employer’s right to omit is subject to any limitation. The answer, established by case law and confirmed in multiple jurisdictions, is yes: the omission of work for the purpose of giving it to another contractor is not a legitimate exercise of the variation clause, and may constitute a breach of contract.

The Problem

The problem arises when an employer, for reasons of commercial preference, programme, or cost, decides to remove a significant package of work from the main contractor’s scope and award it to a different contractor. From the employer’s perspective, this is simply a variation — an omission, which is expressly permitted by the contract. From the contractor’s perspective, it is a deprivation of a bargained-for opportunity to earn profit on a specific package of work, without any legitimate basis in the variation clause.

The issue is most acute in large contracts where specific packages — mechanical and electrical services, fit-out, landscaping — are individually significant. The profit on these packages may represent a substantial portion of the contractor’s expected project margin.

The Legal Principle

The principle that an employer may not omit work for the purpose of awarding it to another contractor is most clearly established in the Australian case of Carr v J A Berriman Pty Ltd [1953] 89 CLR 327, in which the High Court of Australia held that an omission of work done for this purpose was a breach of contract, entitling the contractor to recover the profit that would have been earned.

This principle has been followed and applied in English law. In Commissioner for Main Roads v Reed & Stuart Pty Ltd [1974], and in numerous English arbitration and court decisions, the same analysis has been applied: the variation clause authorises genuine omissions (those made for reasons of programme, design change, economy in the employer’s genuine interest) but not pretextual omissions designed to deprive the contractor of work.

Practical Application

For contractors: when work is omitted from your scope, ascertain whether it is being given to another party. If so, this may be outside the legitimate scope of the variation clause. Preserve evidence of how the omitted work was subsequently procured and by whom. Quantify the loss of profit on the omitted work by reference to the profit margin built into your contract rates.

For employers: if you wish to transfer a package of work to another contractor, recognise that this may expose you to a claim for the original contractor’s loss of profit. The safest approach is to agree a separate commercial settlement for the package transfer rather than relying on the omission variation power.

Risks

For employers: the risk of omitting work for transfer to another contractor, without recognising the contractor’s entitlement to lost profit, is a claim in damages for breach of contract that may exceed the expected saving from the transfer. For contractors: the risk of failing to assert the claim promptly, or of failing to document the profit element in their rates, is a weakened negotiating position.

Mitigation

For employers: do not omit work from the contractor’s scope for commercial preference reasons without first agreeing the financial settlement. For contractors: include a clear profit margin in all contract rates and maintain documentation showing the build-up of those rates, as this will be the evidential basis for a loss of profit claim.

Conclusion

The right to omit is real, but it has limits. Work cannot be omitted from a contractor’s scope simply to give it to a cheaper or preferred alternative. Where it is, the contractor has a well-established entitlement to recover the profit that would have been earned — and employers who ignore this principle risk a more expensive outcome than the one they were trying to avoid.