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Profit /Overhead charges on deleted items

14 replies [Last post]
Tue, 2006-10-03 07:40
Mohamed Sahir
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Hi Friends,

A Brief Description of the Project:
Ours is a lumpsum project, using modified fidic 4th edition
In our BoQ we have a seperate Section for preliminaries which covers most of our overhead expenses. Also we have a rate break down for each item in the BoQ, which breaks down the rate to labour,material,overhead, and lastly profit.

My question is since ours being a lumpsum project are we eligible for the overhead and profit portion of the deleted (Variation )item from the BoQ arrived using the rate breakdown, apart form the preliminaries. Or we loose the complete amount of the deleted items.

Hope to hear from all of u soon.
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Replies

Thu, 2007-07-19 02:57
#1
Bolisetti Jogiraju
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Hi
Mohamed !
As you mentioned,your contract is a Lump Sum with the provision of PC,PS & Variations.
The quantities mentioned in the BoQ are approximately estimated not accurate and at the risk of Contractor.
So,Its the contractor’s duty to examine all the documents before submitting his tender,say he did it.
If your contract is based on FIDIC,in my openion,you can not deduct OHP from any "omited" work or "-" ve variation until your case satisfy the Cl 52.3.
On this forum,friends like me,posting their (General)openions but
you have to digest your contract docs properly.

cheers
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Mon, 2007-07-16 09:42
#2
Ernest J. HANNA
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Dear Friends,

As Contractor, i am facing such issues at all time.
In my opinion, the Contractor is allowed to cover all amounts related to OHP from contract with lumpsum price (%). Any change in Qty + or - should be without impact on OHP. Except Variation! Variation can be "omission and addition" or "simply addition". In the first case OHP are compensated and in the other case OHP are to be added. At all times the Contractor should reserve his rights for EOT and Compensation even if addition/variation includes OHP AND if time goes beyond Completion date.
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Sun, 2006-10-08 01:57
#3
Mohamed Sahir
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Hi Friends,


So We can Summarize it as follows.

Even Though the contract is lumpsum and the quantities are non remeasurable and the contract does allows for variations and change in contract price and there is no specific clauses on negetive variations then " Variations are variations" , except the difference in actual quantities and BoQ quantities (incorrect Quantities) which since the contract expressely states that it can not be remeasured. And the variations ( positive or negative ) are to be valued as per the contract in the same manner.

So for -ve variations profit and overheads will be deducted and for +ve variarion profit and overhead will be added.

Once again thanks to all.
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Sat, 2006-10-07 11:51
#4
Shahzad Munawar
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Yes, there is no doubt that variation is a variation and it should be treated as Contract expressly specifies either on part of Employer or Contractor in respect of deletion or addition unless or otherwise not provided in the Contract.

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Sat, 2006-10-07 07:45
#5
Andrew Flowerdew
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Mohamed,

That is to say, just because a variation has a negative value, it’s still a variation to be valued in accordance with the contact, just like any other variation. Unless something in your contract expressly says that an Employer deduction should be treated any different from an Employer addition then you value it in exactly the same way. A variation is a variation!

Which I suspect answers your question about overheads and profit.

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Sat, 2006-10-07 07:28
#6
Andrew Flowerdew
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Mohamed,

So if it is a variation and the employer can have some money back, what does your contract say about how to value variations?

That’s what he gets back.
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Sat, 2006-10-07 03:41
#7
Mohamed Sahir
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Andrew,

First of all thank you for you time and effort.

The deduction of an item form the BoQ is considered a variation. And when I said change in quantities, I was meaning the difference in quantity in the BoQ and the actual quantities. Moreover Change in quantity by the employer is also considered a variation.

Thx
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Wed, 2006-10-04 07:51
#8
Andrew Flowerdew
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Mohamed,

Where I’m coming from is that the starting point when considering the differences between a lump sum non remeasuarble contract and a remeasurable contract is:

1. Lump sum - the contractor is paid the lump sum whether the project turns out to involve more or less work than was originally envisaged. The risk of the work content is with the contractor, so if it goes up and turns out to be more expensive, tough, he’s paid the lump sum only. If it goes down, then the contractor gains.

2. Remeasurable - the contractor is paid for what he does. The risk of the work content is with the Employer and if the quantities go up, then the Employer loses, if it goes down, he gains.

And then there’s every variation between the two. You have a lump sum contract that allows variations to the contract to adjust the lump sum price. (not unusual)

Therefore does the deduction of the work amount to a variation or is it simply a change in quantity. A variation will change the lump sum but a change in quantity won’t.

You have to get away from the thinking that just because the Employer deletes work, he is entitled to some money back. Depending on the above he might well not be entitled to any deduction from the lump sum.
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Wed, 2006-10-04 07:40
#9
Mohamed Sahir
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Hi Andrew,

You Have got the facts correct.

The deleted work was in the original scope of the contract ( and also not a provisional item/sum) and the deletion is a variation.

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Wed, 2006-10-04 07:27
#10
Andrew Flowerdew
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Mohamed,

Rewind abit,

Lump sum contract, non remeasurable.

Provisional sums not fixed.

Variations are allowed but changes to BoQ quanities are not a deemed to be a variation.

Addition/deduction of work is a variation.

Was the work deducted in the original scope of the contract and therefore amounts only to a change of quantity which is not a variation. Was it a provisional sum or was it something else!
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Wed, 2006-10-04 06:29
#11
Mohamed Sahir
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Hi, The is no clause which expressly states there wont be deduction in Contract Price in case there is deletion of items. When the employer add or deducts its considered a variation under std. clauses of fidic .But my concern is since the contract is lumpsum, and quantities are not mesurable such being the case will i be eligible to claim overhead and profit on the deleted items. I hope i am clear.
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Wed, 2006-10-04 05:30
#12
Andrew Flowerdew
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Mohamed,

You wrote "changes in quantities from those stated in BoQ and actual quantities does not constitute a variation and there won’t be additional payment than the lump sum price"

Does this include changes down as well as up - the employer may add or deduct work but he may still have to pay the lump sum.

Is there anything in the clauses that expressly says if the employer deducts work then the price will be reduced, if not, you may still be entitled to the whole of the lump sum.

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Wed, 2006-10-04 00:13
#13
Mohamed Sahir
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Andrew,thank you for your reply.
The contract in brief says the quantities are non measurable and the lump sum price excluding provisional sums is fixed. But at the same time the variations are permissible as per standard Fidic clauses, In short changes in quantities from those stated in BoQ and actual quantities does not constitute a variation and there wont be additional payment than the lump sum price but at the same time the employer may add or delete items of work subject to standard clauses. Such being the case is the contractor eligible for overhead and profit on deleted items. The schedule of rate break down gives the profit and overhead break up of the item.

Please enlighten.
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Tue, 2006-10-03 11:44
#14
Andrew Flowerdew
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Mohamed,

First things first!

Check the contract expressly allows for a reduction in price, it usually does but you say yours has been modified (I doubt in the contractors favour) - but it maybe the case that in a lump sum contract, even though work is deleted, the lump sum doesn’t change unless the contract expressly says it does.

People assume that a deletion of work will automatically give the right to a financial saving but that is not the case.
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