Change Management

FIDIC Red Book compared to Finnish General Conditions for Building Contracts (YSE 1998)

The Finnish General Conditions for Building Contracts (YSE 1998) govern the majority of construction contracts concluded in Finland. With respect to modifications, the YSE terms contain provisions similar to the FIDIC Conditions of Contracts for Construction (1999 Red Book). However, the existing differences in technical terms may nevertheless have a major impact on the supplier’s entitlement to payment.

Obligation to implement a modification

The YSE terms distinguish between modification works and additional works.

Modification works result from a plan change. A modification may be either a change, increase or reduction of works.

Additional works, on the other hand, are works carried out by the contractor which did not originally form part of the obligations agreed under the contract.

For example, if the parties have agreed on the installation of piping within a building, piping works in the yard area would likely qualify as additional works. On the other hand, the addition of further piping interfaces to the systems inside the building would probably be considered as modification works.

The contractor is obliged to carry out the modification works requested by the client. For requested additional works there is no respective obligation: The contractor can refuse to carry out such additional works in case no agreement on the price and schedule impact is reached.

If the parties are in dispute whether the demanded changes qualify as modification or as additional work, under the YSE terms the employer may demand provision of work as requested. Naturally, an agreement on additional compensation and prolongation of the time schedule cannot be reached, when the scope covered by the agreed contract price is disputed.

The Red Book uses the term ‘variation’ instead of ‘modification’ and states that an employer-appointed engineer may instruct such variation. It contains a non-exhaustive list setting out the types of variation that such an engineer may require. These include changes to levels or positions. The variations relate to the permanent works, i.e. works to be executed by the contractor under the contract. Various sub-clauses in the Red Book terms also specify that certain instructions either must or may be considered as variations. The Red Book provides that the contractor may object to carrying out variation works if material required for such work cannot readily be obtained.

As far as additional works are concerned, an employer-appointed engineer may instruct the continuation of the work in case it is necessary for the ongoing construction works.

Price adjustment

Under the YSE terms, the contractor is entitled to an additional compensation provided that there is an increase in the contractor’s obligations due to modifications. The contractor has to submit a tender and in general the modification work should not be commenced before an agreement about the price and schedule impact has been reached in writing. If the parties cannot reach such agreement the contractor must nevertheless, at the client’s request, carry through the modification. Ultimately, the competent dispute resolution authority has to rule on compensation claims.

Under the Red Book, an employer-appointed engineer shall agree or determine the price to be paid for the variations. Either party has a right to apply to a Dispute Adjudication Board (DAB) or ultimately to an arbitral tribunal in the event that they are not satisfied with the engineer’s decision.

Written form requirements

In practice it has often proven difficult to follow the formal procedural rules and the written requirements of YSE terms at the construction site. For example, the project schedule may be so tight as to make it impossible for the parties to follow the formal agreement procedure, the client may have failed to indicate a modification to the contractor, or the parties have decided to agree on the price and schedule impact for a long period of time.

It is then advisable to agree in advance on a reasonable and practicable alternative procedure.

Similarly, also under the Red Book any alterations to or modifications of the permanent works should be implemented only upon respective instruction or approval by the engineer. Failing to comply may cause the loss of respective compensation claims.

The Red Book provides that whenever practicable, the instruction to carry out a variation shall be given in writing. However, if an engineer gives such an instruction verbally and this is (1) confirmed by the contractor in writing within two working days, and (2) not thereafter rejected by the engineer within a further period of two working days, this confirmation is deemed to constitute the engineer’s written instruction.

Due to its more detailed provisions regarding variations and the form of instructions, in some situations the Red Book seems to work better than YSE for the purpose of avoiding legal conflicts. Both schemes, however, have their downsides. It is advisable to agree in advance on more practical procedures, whenever it is foreseeable due to a tight schedule, that time is of the essence for agreeing about prices before implementing changes.