Incorrect classification can be costly for contractors
Contract Variations and Hindrances: Incorrect Classification Could Be Costly for Contractors
Attorneys Martin Wiklundh and Erika Wallin from Fylgia's Construction Group explain important differences that contractors should keep in mind when it comes to claims for compensation based on contract variations (ÄTA) and hindrances directly related to the contract work.
Contract Variations (ÄTA) and various forms of hindrances are common in construction contracts. In addition to discussions about the impact on project timelines, contract variations and hindrances are often a subject of negotiation between the client and contractor regarding the contractor’s right to additional compensation.
This article provides an overview of the differences between contract variations and hindrances based on the Swedish General Conditions (AB 04 and ABT 06), outlining key aspects contractors should keep in mind regarding their entitlement to compensation. The contractor’s entitlement to compensation differs significantly depending on whether it concerns contract variations or hindrances.
The article assumes no deviations from the provisions in AB 04 or ABT 06 have been agreed upon. When referring to specific clauses in AB 04 and ABT 06, "Chapter 6 § 1" applies, and where the provisions differ, this will be clarified.
Contract Variations (ÄTA)
During the course of the project, the contractor is both entitled and required to perform contract variations (ÄTA) as prescribed by the client, according to Chapter 2 § 3. Variations also include work that arises due to insufficient initial assumptions, as outlined in Chapter 2 § 4 (cf. AB 04 Chapter 1 §§ 6-8 and ABT 06 Chapter 1 §§ 6-7 and 9).
Contract variations are compensated in accordance with the parties’ agreement and Chapter 6 of AB 04 and ABT 06. According to Chapter 6 § 6, the value of the contract variation is calculated according to the agreed unit price list, priced bill of quantities, or another agreed billing method. If the parties have not agreed in advance on how contract variations should be handled, and no special agreement exists, compensation for additional work is calculated based on the cost price principle, cf. Chapter 6 § 7, point 1.
Since contract variations typically involve work performed (except for removal work), a contractor is generally entitled to compensation, including profit.
In addition to the contractor’s entitlement to compensation for contract variations, they may also affect the contract duration, depending on how they impact the contractor’s ability to meet the original project deadlines, as outlined in Chapter 4 § 2.
Hindrances
According to Chapter 4 § 3, the contractor is entitled to an extension of the contract period if they are prevented from completing the work within the original time frame. The circumstances that may constitute a hindrance are listed in points 1-5 of the section. The contractor is required to notify the client "without delay" if any of the circumstances are invoked as a hindrance, as outlined in Chapter 4 § 4.
Chapter 4 § 3, point 1 specifies that "circumstances that are due to the client or something related to their side" constitute a hindrance that entitles the contractor to an extension of the contract period.
If the hindrance is due to the client or something related to their side, the contractor is also entitled to compensation for the costs incurred, according to Chapter 5 § 4. However, if the client can prove that they could not reasonably have anticipated the hindrance or prevented its consequences, the cost will be shared equally between the client and contractor. If the hindrance is due to something outside the client’s control (e.g., a pandemic), the contractor will bear the full cost of the hindrance.
In cases where the hindrance is not attributable to the client or their circumstances, the contractor is still entitled to an extension of the contract period but must bear the financial cost of the hindrance themselves.
In cases where the contractor is entitled to compensation for a hindrance, no profit is included in the compensation. Instead, only the actual costs incurred are compensated. It is the contractor’s responsibility to prove both the damage and the extent of the damage when claiming compensation for a hindrance.
Summary
The consequence of incorrectly using the hindrance provisions in Chapter 4 § 3 when the contractor could have otherwise invoked a contract variation under Chapter 2 §§ 3-4 is that the contractor forfeits the right to compensation for profit associated with contract variations.
The compensation provided under Chapter 5 § 4 covers only the contractor's costs (excluding profit/contractor's margin) incurred due to the hindrance.
It is not uncommon for a contractor to misclassify a contract variation as a hindrance. In practice, this means the contractor forfeits their right to claim compensation for profit, even if they are entitled to compensation at all.
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