“Variation” is a prevalent issue, as at the time of signing, it is challenging for the parties to foresee potential changes or adjustments that are necessary for the works, especially for high-valued and complicated works.

Currently, the Vietnamese laws on construction, in particular, Law on Construction 2014, amended, supplemented in 2020 (hereafter referred to as “Law on Construction 2014”), Decree No. 37/2015/ND-CP (hereafter referred to as “Decree 37”) recognize provisions regarding Variation.

In this article, our senior associate Tran Pham Hoang Tung and legal assistant Nguyen Thi Phuong Thao analyze differences in provisions regarding “Variation” in FIDIC Red Book 2017 and in the law of Vietnam to provide the audience better understanding, thereby drafting and managing construction contracts, minimizing the likelihood of disputes.

What is Variation?

According to Sub-Clause 1.1.86 FIDIC Red Book 2017, Variation is defined as “any change to the Works, which is instructed as a variation under Clause 13 [Variations and Adjustments]”. In other words, according to the definition in FIDIC Red Book 2017, an issue is considered a Variation if it meets two criteria (i) it results in a change to the Works as originally agreed by the parties; and (ii) it originates from the instructions of the Engineer in accordance with the procedures specified Clause 13 [Variations and Adjustments].

While the FIDIC Red Book 2017 distinguishes between “Variation” and “Adjustment”[1], the construction law of Vietnam does not make such explicit distinctions but uses the term “adjustment” generically to refer to issues modified from the originally signed contract. Specifically, Article 143.1 of Law on Construction 2014 stipulates: “Adjustments of construction contract includes adjustments in volume, progress, contract unit price and other contents agreed upon by parties in the contract.” Decree 37 on detailed guidance on construction contracts also regulates similarly to Article 35.1.

In other words, the law of Vietnam has neither specific definition nor terminology to refer to Variation as approached in the FIDIC Red Book 2017, but broadly referred to as “adjustment of work volume in construction contracts” in Article 37 of Decree 37– the author hereafter assumes such term as “Variation” in the law of Vietnam.

The article hereby provides a better understanding of differences in Variation provisions between the FIDIC Red Book 2017 and the laws of Vietnam regarding (1) changes considered a Variation; (2) the timing and authority to issue Variation; (3) process and procedures for Variation approval; and (4) valuation of Variation.

Changes considered as a Variation

According to the FIDIC Red Book 2017, a Variation can fall into the following 06 cases:[2]

• Changes to the quantities of any item of work included in the Contract (however, such changes do not necessarily constitute a Variation);
• Changes to the quality and other characteristics of any item of work;
• Changes to the levels, positions and/or dimensions of any part of the Works;
• The omission of any work, unless it is to be carried out by others without the agreement of the Parties;
• Any additional work, Plant, Materials, or services necessary for the Permanent Works, including any associated Tests on Completion, boreholes, and other testing and exploratory work; or
• Changes to the sequence or timing of the execution of the Works.

Meanwhile, the approach adopted by the law of Vietnam in Article 37 of Decree 37 does not specifically list the cases in which a change will be considered as a Variation could be initiated, but rather generically refers to “adjustment of work volume” and allows the parties to negotiate on specific cases themselves. Although not explicitly listed, the provisions in Article 37.2 of Decree 37 can be interpreted that “adjustment of work volume” will be applied to cases where the volume of the works arises out of the signed contract, including cases where the works is priced in the contract (i.e not new item of work) or where the works is not priced in the contract ((i.e new item of work) thus bearing resemblance to cases listed in item (i), (ii), (iii) and (v) of fifth paragraph of Sub-Clause 13.1 [Right to Vary] in the FIDIC Red Book 2017.

However, the law of Vietnam does not have clear regulations on whether “omission” could be considered as a Variation since Article 37 of Decree 37 seems to only address cases of increased work volume while the decrease in work volume is neither mentioned nor guided. Additionally, the law of Vietnam also does not specify whether instructions to change the sequence or timing of the execution of the the Works (for example, the Employer requests the Contractor to shorten the time for completion of the Works) constitutes a Variation or not, since Article 39 of Decree 37 only guides the case where progress adjustment is the outcome of other delay events. Hence, regarding the above-mentioned cases, the parties must negotiate specific terms in the contract to provide the basis for the application.

The timing and authority to issue Variation

In accordance with Sub-Clause 13.1 [Right to Vary] FIDIC Red Book 2017, Variation may initiated by the Engineer at any time before the issue of Taking-Over Certificate ( “TOC”). Moreover, Variations could also be instructed after the issue of TOC per Sub-Clause 11.2 [Cost of Remedying Defects] of the FIDIC Red Book 2017, when the Contractor remedies defects of the Works attributable to causes out of the Contractor’s responsibility.

One main rationale why Sub-Clause 13.1 of the FIDIC Red Book 2017 is built toward “prioritizing” the issuance of Variations before the issuance of the TOC is that, once the TOC is issued – indicating completion of the Works, the Contractor will demobilize their resources from the Site (including equipment, personnel, etc). Thus, instructing the Contractor to execute a Variation after the TOC seems impractical and discouraged, except when essential for rectifying defects as previously mentioned.

On the other hand, Article 143 of Law on Construction 2014 and Article 36.1 of Decree 37 stipulate that the application of adjustment of construction contracts is only feasible during the time for contract implementation, including any extensions of time granted. This provision in the law of Vietnam is not entirely clear as the term “the time for contract implementation” currently has not been uniformly interpreted and applied, whether it refers solely to the time for completion (of the Works) or includes the warranty period as well.

Regarding the authority to issue a Variation, the FIDIC Red Book 2017 grants such authority to the Engineer. Meanwhile, according to the law of Vietnam, the Employer (in cases a Variation does not lead to exceeding the approved construction package price) or investment decision-maker (in cases a Variation leads to exceeding the approved construction package price) shall hold the authority to decide a Variation[3].

Process and Procedures for Variation Approval

In general, the most significant difference between the FIDIC Red Book and the law of Vietnam regarding the procedures for Variation Approval is the process and form of issue

First of all, regarding the process of issue of Variation Order:

The FIDIC Red Book 2017 stipulates 02 cases where Variations could be initiated in Sub-Clause 13.3 [Variation Procedure]: (i) Variation by Instruction; or (2) Variation by Request for Proposal, accordingly:

(I) Variation by instruction could be initiated by the Engineer by giving a notice to the Contractor, describing the required change, and stating any requirements for the recording of costs. In this case, the Contractor shall proceed with the execution in accordance with the Notice and submit the detailed particulars including a description of the varied work, a program for its execution, and the Contractor’s proposal for necessary adjustments pertaining to time and costs for Variation.[4]

(ii) Variation by Request for Proposals is also initiated by the Engineer, however, in this case, the Engineer may, by giving a notice, present its intention on Variation and request the Contractor to submit a detailed proposal, which shall include matters similar to that of the submission made in the case of Variation by instruction.[5] After the receipt of the proposal from the Contractor, the Engineer shall consider and determine whether to instruct the Variation or not.

In both cases, upon the receipt of the instruction from the Engineer, the Contractor shall not be entitled to refuse to execute the Variation, unless the Contractor promptly gives a notice to the Engineer stating with detailed supporting particulars that:[6]

• the varied work was Unforeseeable having regard to the scope and nature of the Works described in the Specification;
• the Contractor cannot readily obtain the goods required for Variation; or
• the Variation will adversely affect the Contractor’s ability to comply with Sub-Clause [Health and Safety Obligations] and/or Sub-Clause 4.18 [Protection of the Environment].

Different from the above-mentioned provisions of the FIDIC Red Book 2017, the law of Vietnam regulates that a Variation shall be issued based on the agreement and consensus of the contractual parties.[7] In other words, if no consensus on matters regarding Variation is reached by the contractual parties, the Contractor shall be entitled to refuse to execute the Variation without submitting any detailed particulars as required by the FIDIC Red Book 2017. Provided a Variation does not exceed the approved construction package price, the Variation shall be evaluated and agreed upon by the Employer and the Contractor. However, in the event that Variations result in exceeding the approved construction package price, such Variations shall be evaluated and determined by the investment decision-maker.[8]

In case no consensus is reached by the parties, the arisen work volume shall constitute a new construction package and the tender procedure shall be carried out in accordance with the law.

Secondly, regarding the form of issue of Variation

According to Sub-Clause 13.3 [Variation Procedure] FIDIC Red Book 2017, Variations issued by the Engineer are under the form of a Notice, and an Addendum to the contract is not required.

Meanwhile, according to the law of Vietnam, when the parties reach an agreement on Variation, the parties must conclude an Addendum to the contract prior to its implementation.[9] Therefore, to ensure that Variation is approved or allowed to be enforced by the authorities/relevant parties, the parties to construction contracts based on FIDIC are well-advised to take note of this provision and comply with the procedure and regulations under the law of Vietnam by signing Addendums, instead of solely relying on Variation Notices (Variation Orders) issued by the Engineer as per the approach in the FIDIC Red Book 2017.

Valuation of Variation

Regarding the valuation of a Variation, in Sub-Clause 13.3 [Variation Procedure] of the FIDIC Red Book 2017, the valuation of Variation may not be agreed upon at the time of issue, however, the parties may proceed this procedure later. Specifically, the Contractor shall submit all necessary documents, and materials requested by the Engineer so that the Engineer gives its determination per Sub-Clause 3.7 [Agreement or Determination], whether Variation by Instruction or Variation by Request for Proposals.

The law of Vietnam takes a different approach to this matter. To be specific, Article 37.3 of Decree 37 specifies that at the time of issuing a Variation, for works not priced in the Contract, the parties must have already agreed and reached a consensus on unit price or principles, measures to evaluate price prior to the execution.[10] The significance of this provision is to control the event in which a Variation is implemented without determining its specific value beforehand, evaluating whether its value exceeds the approved construction package price or not, both of which could lead to potential disputes unless the parties could reach an agreement on the value in later stages. This difference should be noted by the parties to appropriately modify provisions of construction contracts based on FIDIC contracts.

Conclusion

During the implementation of construction projects, Variation is a frequently encountered issue that affects, whether directly or indirectly, costs, time, or even the completion of Works. For construction projects executed in Vietnam with contracts based on the FIDIC Red Book 2017, it is necessary to have a firm grasp of the differences between provisions in the FIDIC Red Book 2017 and the law of Vietnam regarding Variation, thereby the parties may ensure the conformance to the law of Vietnam to avoid potential risks and disputes.

Download PDF of this article here: [pdf] CNC- Variations in Fidic Red Book 2017 and the law of Vietnam

Written by

Senior Associate Tran Pham Hoang Tung Phone: (84) 28 6276 9900 Email: tung.tran@cnccounsel.com

Legal Assistant Nguyen Thi Phuong Thao Phone: (84) 28 6276 9900 Email: thao.nguyen@cnccounsel.com

[1] According to the FIDIC Red Book 2017, “adjustments” are issues modified in the contract that are not a “variation”, adjustments do not result in changes to the Works, such as changes in the contract price.

[2] 5^th Paragraph, Sub-Clause 13.1 [Right to Vary], FIDIC Red Book 2017.

[3] Article 37.2 of Decree 37.

[4] Paragraph 2 Sub-Clause 13.3.1 [Variation by Instruction] FIDIC Red Book 2017

[5] Paragraph 4 Sub-Clause 13.3.2 [Variation by Request for Proposals] FIDIC Red Book 2017

[6] Paragraph 3 Sub-Clause 13.1 [Right to Vary] FIDIC Red Book 2017

[7] Point a Clause 2 Article 37, Decree 37

[8] Article 37.2 of Decree 37.

[9] Article 37.2 of Decree 37.

[10] Article 37.3 of Decree 37.

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