Star rates vol. iv issue no. 2

vol. iv issue no. 2

1. Volume IV Issue No. 2






David Merritt David Brodie-Stedman
Senior Vice President & MEA Managing Director Senior Vice President & AMEA Managing Director
Dubai Office Abu Dhabi Office
Sultan Business Centre Butti Al Otaiba Building, Suite 1601 & 1602
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Floor, Suite 501 Sheikh Khalifa Street
P.O. Box: 71467, Dubai - U.A.E. P.O. Box: 5201, Abu Dhabi – U.A.E.
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E-mail: [email protected] E-mail: [email protected]


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STAR RATES
Disclaimer: This article does not constitute advice, legal or
otherwise, and is provided only as general
commentary. Appropriate professional advice should always
be obtained before taking or refraining from taking any
action in relation to such information and/or the application
of applicable law. This article and the materials contained in
it are provided on the basis that all liability for any loss or
damage, whether direct or indirect, arising out of or in
connection with any use or reliance upon this article is
excluded to the fullest extent permitted by law.

In recent years modern Contract forms have
brought about significant improvements to
the construction landscape. However, some
traditional industry traits remain as robust
as ever. Variations remain the lifeblood of a
project. Contractors crave them, Employers
and Consultants loathe them. They cause
havoc with the programme, disrupt the
works, and invariably cause disputes as to
their need and value.
Most JCT and FIDIC based Contracts set out
‘rules’ for valuing Variations. FIDIC Fourth
Edition (1987) Clause 51.1 provides six
scenarios where the Contractor is entitled
to recover additional cost arising from
instructed Variations, provided that the
Variation has not resulted from Contractor
default. FIDIC Clause 52.1 states that the
Engineer should value Variations in the
following order of precedence:
a) at the rates set out in the Contract if, in
the opinion of the Engineer, the same
shall be applicable;

b) if the Contract does not contain any
rates or prices applicable to the varied
work, the rates and prices in the
Contract shall be used as the basis for
valuation so far as may be reasonable;

c) Failing which, after due consultation by
the Engineer with the Employer and the
Contractor, suitable rates or prices shall
be agreed upon between the Engineer
and the Contractor;

d) In the event of disagreement the
Engineer shall fix such rates or prices as
are, in his opinion, appropriate and
shall notify the Contractor accordingly,
with a copy to the Employer.
How do you value Variations? Many people
have conjured up different, and often
‘creative’ ways. One approach is the use of
new rates, or ‘Star Rates’. Star Rates tend to
be used where the rates in the Contract
cannot be applied. An example is where an
Employer requires a Technical Room. Prior
to the Works the Contractor is instructed to
provide additional electrical outlets thus
complicating the MEP design. The actual
Works performed are more complex than
envisaged at tender resulting in increased
costs. In such a case, Contract rates similar
to the work undertaken may be used as the
basis to determine a Star Rate to value such
work. Alternatively, in the absence of similar
rates, suitable rates may be agreed upon by
the Engineer and Contractor.
The difficulty to determine what is often
referenced in the Contract as a ‘fair rate’
often involves analysis of quotations,
market prices and trends. What is meant by
‘similar conditions’? How do you calculate
Star Rates? Should they include overhead
and profit? Star Rates can be more
expensive for the Employer if they are
based on cost plus profit rather than
competitively tendered Contract rates. Not
surprisingly, Engineers tend to be dismissive
of Star Rates as these move away from the
original rates stated in the Contract. Whilst
there is no guaranteed way around this, if
the Engineer can be convinced that Contract
rates are not applicable (in whole or in part)
then Star Rates will be applicable i.e. rates
which are not Contract rates but may be
derived in part from some element of the
same. In order to successfully negotiate the
use of Star Rates a party must demonstrate
to the Engineer the inapplicability of
Contract rates. This might be justified where
the Works are a different size, quantity,
nature and/or scope to that stated in the
Contract.
In the case of Weldon Plant v Commission
for New Towns [2000] TCC BLR496 the
Courts addressed the above points. The
issue was the meaning of “fair valuation” of
variations under ICE 6
th
Edition Clause 52(1).
In particular, whether a contractor was
required to prove loss of opportunity as a
result of the Variation before being entitled
to be paid overhead and profit.
The Arbitrator decided that the instruction
was to be valued on the basis of a ‘fair
valuation’ stating that Weldon was to be
paid an amount which would leave him in
the same financial situation he would have
been in if the instruction had not been
issued. The Arbitrator considered that the
Contractor was entitled to its costs but not
overheads and profit.
However, on appeal the Court held that fair
valuation would “ordinarily” be based on
the reasonable cost of carrying out the work
and that this would include labour, plant,
materials, the cost of overheads and profit,
otherwise it would not be a fair valuation
under the Contract. Although this case falls
under English legal jurisdiction and is not
legally binding in the Middle East, the
principles that arise from the case are
persuasive in addressing the evaluation of
Star Rates in this region.


- Edward Ryan
Senior Consultant of Hill Claims
Group






Hill International, with 3,000
employees in 100 offices worldwide,
provides program management,
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