Just a little off the top: when does descoping go too far?

Variations to descope contract works are permitted under many construction contracts. However, if done incorrectly, it could amount to ‘repudiation’ and contractors may claim for their lost profits.

What is descoping?

Descoping (sometimes called a negative variation) is the reduction or removal of work from the scope which the parties had previously agreed under a contract. The extent may vary from small reductions in work to the deletion of large sections of a project.

From a principal’s perspective, the ability to descope provides flexibility to manage unforeseen circumstances or changes in project requirements. It also enables a principal to adjust the scope to align with budget constraints, changes in design, or evolving project needs.

Is descoping allowed?

A contract sets out the scope of work, and that scope can only later be increased or decreased if: (a) the parties agree; or (b) there are clauses that enable such variations. Given the changeable nature of construction work, most standard form construction contracts contain such variation clauses. However, there are limits.

Can descoped works be performed by someone else?

A principal may not descope work and then reallocate it to a different contractor (or perform the work itself) unless the contract clearly and unequivocally grants such a right.

This rule has been applied consistently across several jurisdictions, e.g. by the Scottish Courts in Van Oord UK Limited v Dragados UK Limited, by the High Court of Australia in Carr v JA Berriman Pty Ltd, and in the English case of Abbey Developments Limited v. PP Brickwork Ltd.

Is it a variation, or is it effectively termination?

Sometimes descoping can be so significant that, in effect, the remaining work is partially or wholly terminated. In such circumstances, there is a risk that the contractor will argue that the principal has essentially repudiated the contract, or has effectively terminated it without following the termination processes in the contract.

For example, in Chadmax Plastics Pty Ltd v Hansen and Yuncken (SA) Pty Ltd:

• Hansen & Yuncken’s head contract required Wallflex finishes for the office tower. Chadmax was subcontracted to apply the Wallflex.
• The head contract and subcontract each expressly provided a right to reduce the scope of the work. When the principal decided against Wallflex, Hansen & Yuncken passed that instruction through and deleted 98% of Chadmax’s subcontracted work.

Notwithstanding the express rights to descope, the court ruled that Hansen & Yuncken could not omit such a fundamental proportion of the works from its subcontract.

What are the risks of inappropriate descoping?

Contractors may have mobilised significant resources, and made associated commitments to suppliers and subcontractors, in preparation for the works that are being descoped. If there is inappropriate descoping, a contractor or subcontractor may seek to claim for unrecovered costs and loss of profits.

Key takeaways

• For head contracts, consider whether:
  • there should be a right to descope; and
  • the right should extend to allowing the principal, or others, to later perform that work.
• For subcontracts, consider a right to terminate if the work is descoped under the head contract.
• When considering descoping mid-project, carefully review the entitlement to do so and assess whether the work being omitted is of an extent that could be considered essentially termination.

Want to know more?

If you have any questions about descoping rights, please contact our specialist Construction Team.

View the pdf version here.