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Hi everyone, Jacob Austin here and welcome to episode 145 of the Subcontractors Blueprint. The show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode covers the topic of omission variations and how they can be used to effectively terminate a subcontract, whether that instruction is actually lawful and what your commercial options are when that happens to you. So let's dig in.
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Here's a scenario that happens in UK subcontracts more often than it should, and it almost never gets handled correctly. You run a project, you've priced the work, you've resourced it, you've planned it into your program, and then three months in you get a variation instruction. Not the kind you want. The main contractor is emitting a significant chunk of your scope. Ventilation fit out across two floors. The external works package that you've built your summer program around, or the electrical work to the biggest block on the site.
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The reason behind it, the clients made the decision, the scope been redesigned, or they want to bring in somebody else for that part because they've worked out and they'll be cheaper. You've now lost work that you've priced for and you've planned for. Work that you've had margin built into. Work that was contributing to your overhead. And the instruction arrives as if that's completely normal. The contractor simply allows them to do that. And the reality is, sometimes it does, sometimes it doesn't.
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And the difference between those two positions is worth serious money. Not just the value of that omitted work, but the profit that you've budgeted, the overheads that you've allocated against it. And in some cases, you're right to treat the contract as if it's been fundamentally breached. So let's break this down properly. What's happening legally when a main contractor admits your scope when they're within their right and when they've crossed the line and exactly what to do about it? To do that, we're going to start with your subcontract.
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And on the most standard forms of subcontract, JCT, NEC, and most bespoke subcontracts, they include the right for the contractor to issue instructions that vary the work. Given how often scope of work's change on a building site, it's quite understandable that these clauses would exist and that they allow the emission and the addition of any work. So at first glance, that looks straightforward. The main contractor has the power, they use that power and you lose the work.
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But is that the end of the story? There are two questions that should spill out of this situation. Question one, does the subcontract give the main contractor the right to emit the scope, which is almost certainly going to be yes. Question number two though, is does that contractual right have limits? And again, that is almost always yes. The limits are where this becomes a commercial conversation. The variation clause gives the main contractor the power to adjust the scope.
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What it doesn't give them, and this is the critical distinction, is the power to emit work specifically so it can be given to another contractor. That's not really a variation. It's not the client saying they don't want that anymore, it's not the design developing in a particular way. It's a partial termination for convenience carried out through the back door of the variation mechanism. Courts in the UK, in Australia, Canada, Hong Kong have come to similar conclusions on this.
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The variation clause is there for adjusting the scope. It's not a mechanism for the main contractor to reassign your work to a competitor while keeping you on site for everything else. This happened because of an implied term, and this is the part that isn't written down in your subcontract. It's actually worth understanding this properly, because this is where your commercial leverage comes from. English contract law recognises implied terms, which are obligations that aren't written down, but they're treated as part of your agreement, because they're either obviously necessary, or they're required to make your contract effective, or they're implied by a law.
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And in construction subcontracts, the well -established implied term is that the main contractor won't use their variation rights to purely emit the work from a subcontract to give it to somebody else. And as well as that, once the subcontractors been awarded the work, they've got the rights to complete it. In English law, the case that settles that is Abbey development versus P .P. Brickwork limited. This went to the Technology and Construction Court in 2003. Abbey had engaged P .P. Brickwork as a
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labour -only brick and blockwork contractor for a development. Their subcontract gave Abbey the power to increase or reduce quantities, standard variation clause language. And the question that was answered before the court was whether Abbey had the rights to strip the full remaining scope from P .P. Brickwork and hand it to somebody else. To this, the court said no. The reasoning behind that is worth no. It's more powerful than most subcontracts will realise. The judge decided that a contract given to a subcontractor for the execution of a piece of work contains not just the duty to carry out that work, but the right to complete it and that those two things go together.
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You take on the obligation, you get the right to finish what you started. So if the contractor strips away that work and gives it to a third party, you're not exercising a variation right, you're infringing the right that belongs to the subcontractor. And on top of that, the case is established for the contractor to have that power to admit work and transfer it to another contractor. You need clear words in your subcontract that allow you to do it. Not just a general variation clause with the possibility for a mission, but clear, express language that establishes the rights to take work from one contractor and give it to another. That's
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pretty rare in a subcontract form, and Abbey subcontract didn't have it. The likelihood is you also aren't either. And that there is going to cut off the main contractor's usual source of defence. Their reason for omitting is legally irrelevant here, whether it's commercial pressure, client instruction, cost saving, program change. None of these arguments address the legal question, whether the contract gives them the right to transfer that work to somebody else. If it
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doesn't, then whatever cock and bull story they're coming up with this time really doesn't matter. That a mission has become a breach of contract. And what that now means is that you can claim for the profit that you would have made on that work as if you'd been able to see the job through. So how do you know as a subcontractor whether you're falling foul of this situation? There's a pattern that tells you whether you're dealing with an unlawful a mission rather than a legitimate scope adjustment. And it's got consistent features.
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Often the omitted work is a defined and priced element of a package, not just a marginal adjustment to either decrease the spec or trim back quantities because of a bit of a nominal change. It's a chunk of your contract sum that you've got planned resources a margin built into. Another telltale sign is that the work still happens on the project. You can see another outfit moving into that area and completing work that should have been yours. Meaning there's been no client submission. The work
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hasn't disappeared from the site, it's just disappeared from your order. The timing is telling. The instruction arrives after you've mobilized, after you've bought materials. Maybe it's in the middle of an existing commercial dispute on the site. The scale is significant. Reassigning one room for example because of a genuine access issue would be different from omitting two -hole floors of a large fit out package. Maybe the contractor has told you that there's a client decision or there's a redesign and so this section of work is emitted. But as you're
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walking the finished job, the same design has been completed. Meaning all of those reasons were pork pies that would rival some of Melta Moorie's finest for quality. They've simply moved the scope somewhere else and saved themselves a few could. If you've got two or more of these indicators together you're probably not dealing with a legitimate variation. You're dealing with partial removal of your contract dressed up so it looks legitimate. The biggest mistake at this point would be assuming that the main contractor has got the right to do that. Because the
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instruction arrives on the contractor's standard official looking variation form it doesn't make it valid. The second most damaging mistake would be knowing that you've got an argument and valid points to make but either not making them or not doing it with a valid notice. Both of those issues would cost you money and we'll see next what that might look like in practice. So let's spin up a worked example. Let's say you're a mechanical subcontractor and you've been awarded the full M &E fit out across a six -story commercial office block. You're
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subletting the electrical work to a company that you've worked with time and time again. You know them well, you trust them to do a good job. They're not always the cheapest but their quality. All in all you're looking at a £1 .2 million total package. You've mobilized, you've got plant coming to site and you've placed your order with your partner electrical contractor. Over the next 8 to 12 weeks you complete the design work you've started on site and everything seems to be going to plant.
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The contractor seems to be happy with what you're doing but can week 12 you receive a variation instruction. Floors 5 and 6 have had their electrical work emitted. The main contractor tells you it's a design change. The clients repurposing those floors. They've currently been laid out as an IT suite with significant amounts of power, data and security systems in them and they're the most significant portion of the electrical work on site. So you receive it, you pass the instruction onto your electrical counterpart and at the back of your mind you're expecting to receive a different instruction in a couple of weeks time for a reduced scope. But weeks later
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as you're continuing your mechanical works on those remaining floors you notice another electrical contractor working on levels 5 and 6. It's a different team altogether and as you get a little bit friendly with them you start to talk about the scope you realise it was almost identical to what was emitted from your package. So your work has basically been chopped off and given to someone else. Now you go back to your subcontract and it doesn't contain that Abbey style clear wording that gives the contractor the ability to transfer your work to another subcontractor.
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So you've got a valid argument but moving on you look at the loss and expense clause and there's a requirement to notify loss and expense within 14 days of becoming aware of the event. You're now at day 35 so your notice window is gone. You also don't have a contemporaneous record disputing the instruction. You just got on with emitting it from your sub subcontractor's package. So where you land because you said nothing at the time whilst you almost certainly had a valid argument your silence has given the main contractor the strongest event available.
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That emitted portion of scope was worth 240 g and the margin that you would have earned on that is now gone. Not because you didn't have the legal entitlement but because you didn't protect it whilst you had the chance. So how do you protect yourself? Let's use that example scenario. That instruction should have smelled fishy to you. Perhaps the contractor had a point in issuing an emission like that. Maybe there was some expensive plant on that floor. Maybe for good reason they wanted to stop you from ordering that before it started incurring expensive restocking charges and all the good stuff that would come within a mission like that. But they could
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have had a sensible conversation with you about it and you'd expect that if it was a genuine change, you'd expect a phone call saying like the clients considering changing this floor and that floor to something else. I'm going to instruct you to pause procurement of those bits of work until we know what's happening. You'd probably respond to that with a delay notice which the contractor had understand and because this is coming from the client and they'd have a home for the cost they probably wouldn't get too excited about it. But in reality they just issued you a straight instruction omitting the work. When you get
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that you're probably going to ring them see what the crack is but you also need to respond in writing to it. If you're getting the sense from your verbal conversations with them that they're not being entirely genuine with you that's going to prompt that written response sooner rather than later. Most subcontracts will give you a short window in which to challenge a variation instruction. And if you believe that the emission is being used to strip your scalp and give it somebody else then right back the same day. Formerly state you dispute the instructions of valid emission under the variation clause and that you reserve your rights to claim any loss of profit and overhead arising from it.
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What you don't do is stay silent and just comply with that instruction. Compliance without any protest at all will be read as acceptance by your contractor. Whilst you're doing that you serve notice of your loss and expense claim. Under any C4 you're raising a compensation event. The mechanism differs but the requirement to act on the event that's happened immediately doesn't. Here you're formally recording that the instruction is causing you financial loss and you intend to quantify and recover that loss when you can work out how much it is.
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You serve that notice even if you don't yet know the full value of it. The notice is there to preserve your entitlement even if the numbers have to come later. Next you gather your evidence as a result on the fold. If the work does go to another so contractor as you suspect it might then document it. Take photographs, take written site records with dates and if you can establish that the scalp you're instructed to emit is carried out by a third party that's the real meat on the bones that you're looking for that makes your case a slam dunk. Next you quantify
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the loss properly. The claim is going to be around the loss of overhead and profit that you would have expected to make on that omitted portion of work. Don't forget as well though if you've genuinely ordered materials, sub subcontracts and there's costs that comes out of that as well that you claim for those costs too. If the contractor isn't responding to this adjudication is your available route to settling the dispute. That of course under the Construction Act you can refer your dispute to at any time.
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An omission that breaches an implied term is clearly going to be a referable dispute if the contractor doesn't respond positively to your claim and you would expect the adjudicator's decision to be fairly simple. Be honest with yourself though about the strength of your position first and consider getting some legal advice before you refer. If the omissions are so substantial they effectively hollow out your subcontract to a shallow what it was, maybe 60, 70, 80 % of your scope handed to other contractors. There's a
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further argument of what we call repudiation. If the main contractor is stripping out the commercial substance of what you've agreed taking all the meat off the bones you might be entitled to treat yourself as discharge from the contract entirely and that means you could claim damages including your expected profit on the job. The threshold for that is high and this is a real special situation but in the right circumstances it's a real and proper claim but it needs specific legal advice and carefully putting together.
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An example of that might be the contractor awarding you a 100 house development as a ground worker including some sections 278 works and roads and sewers and then emitting all of that highway work and having it done by somebody else because they think they can get it done cheaper. If they've entered into that contract with you and they emit what's effectively the biggest portion of work and leave you with the lower value of the plot work that's completed slowly over a long program of trekking along pace. That kind of scenario would be open to that kind of claim.
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It's going to be rare but there's a very real entitlement if it does happen to you. So your key takeaways from today's episode if you get an instruction that doesn't feel right emitting a large portion of your work then respond in writing to it. You need to do that before the deadline in your own subcontract. Don't comply with it and stay silent but instead reserve your rights formally the same day if possible to set out your stall for a claim. Silence in this scenario would be treated as acceptance and if you're silent long enough for your time bar to elapse you've missed your boat altogether.
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If the work that's been emitted goes on to another contractor then document it, photograph it, take site records with dates, establish the principles of your claim with evidence. Evidence is what wins the argument. The loss that flows from that isn't just the cost of associated with emitting that work but the loss of profit, the loss of overhead associated with it as well. The variation clause is broad but it's not unlimited. An instruction that looks like a variation isn't necessarily of valid use of the variation clause and because of the Abbey developments case you may have the implied right to complete the work that you've started.
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Finally with any claim the notice deadline in your subcontract are absolute. Even a valid claim that misses the deadline is one that you've lost so more than anything be sure to submit on time. I hope that helps. My mission with the podcast here is to help the million SME contractors working out their own industry. If you've taken some value away from today's episode then I really need your help to share the show and to pass that value on to somebody else who'd benefit from hearing it so I can help as many people as possible.
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And of course thanks for tuning in. If you like what you've heard and you want to learn more then do find us at www .subcontractorsblueprint .uk. You'll find more information there and across our socials again at subcontractorsblueprint and remember miss the contract detail and the commercial risk falls on you. Thanks all. I've been Jacob Austin and you've been awesome.
