Valuation of Variations — Rates, Star Rates, and Reasonable Cost

When a variation is agreed in principle, the next question — often equally contentious — is how much it is worth. Variation valuation is not simply about measuring quantities and applying contract rates. It requires a structured analysis of the applicable pricing mechanism, the character of the varied work, and the conditions under which it is carried out.

The Problem

The most common disputes in variation valuation arise at the boundary between contract rates and ‘star rates’ or fair valuation. The contractor argues that the varied work is sufficiently different from the work described in the bills — in character, timing, sequence, or physical conditions — to justify new rates. The employer argues that the contract rates were set knowing that variations would occur and should apply across a range of similar circumstances.

A related problem arises in lump sum contracts without detailed bills of quantities: where the contract is priced as a lump sum against an employer’s requirement, there are no item rates against which to value individual variations. The valuation must proceed on a different basis — typically reasonable cost plus a percentage for overheads and profit — and the parties frequently disagree about what is reasonable.

The Legal Principle

The hierarchy of variation valuation is set out in most standard forms. Under JCT Standard Building Contract 2016, Schedule 2 (Variation Quotation) and Clause 5 establish the following approach:

1. Where the work is of a similar character to the priced contract work and is executed under similar conditions: apply the contract BQ rates and prices
2. Where the work is of similar character but executed under different conditions, or is not of similar character: use the contract rates as a basis and make a fair allowance for the differences
3. Where neither of the above applies: fair rates and prices

Under FIDIC Red Book 2017, Clause 12.3 establishes a similar hierarchy based on applicable rates, derived rates, and fair rates, with particular attention to whether the varied work was of a character or under conditions that could not reasonably have been contemplated by an experienced contractor.

Practical Application

For contractors seeking to depart from contract rates: build the argument on three pillars — different character (the work requires different plant, labour, or method), different conditions (the physical or programme conditions differ materially from those prevailing when the rates were set), and the commercial impact (the contract rate is demonstrably inadequate for the circumstances). Support the argument with contemporaneous cost records and independent quantity surveying analysis.

For employers and their quantity surveyors: assess variation valuation requests against the contract hierarchy. Challenge departures from contract rates by reference to the contract conditions, the nature of the work, and whether the conditions could reasonably have been anticipated. Do not accept star rate claims simply because the contractor has incurred higher costs — higher costs alone do not entitle departure from contract rates if the character and conditions remain similar.

Risks

For contractors who accept variation instructions without agreeing the valuation basis first, the risk is that valuation at the end of the project is significantly less than the actual cost incurred. For employers who dispute variation valuations without clear contractual basis, the risk is that the contract administrator certifies rates the employer later disputes in adjudication or arbitration.

Mitigation

Where a significant variation is to be instructed, agree the valuation basis before the instruction is implemented — through a variation quotation procedure, a dayworks arrangement, or a prior rate agreement. Maintain detailed cost records for all varied work as a matter of course. Resolve variation valuations in real time rather than accumulating them for end-of-project settlement.

Conclusion

Variation valuation is a technical exercise with real financial consequences. The hierarchy of applicable rates, derived rates, and fair valuation is the framework — but its application requires commercial judgement, contemporaneous evidence, and a clear understanding of the contract’s pricing mechanism.