Variation Clauses in Construction Contracts: What’s Fair and What’s Not?
In Queensland’s construction industry, variations to building contracts are both common and necessary. Projects often evolve due to client-driven design amendments, unforeseen site conditions, or regulatory changes. To accommodate this, construction contracts include variation clauses and terms that govern how changes to the scope of work are instructed, costed, and executed.
Given the unfair terms regime contained in the Australian Consumer Law (ACL), businesses should ensure that their variation clauses are fair, transparent, and legally compliant or face serious financial penalties. This article explores what makes a variation clause fair or unfair, how courts assess these terms, and what parties should do to comply with their obligations.
Understanding Queensland’s Variation Clauses in Construction Contracts & Common Disputes
A variation typically refers to any change to the agreed scope of works under a construction contract. This can range from minor material substitutions to significant design changes or additional works. In Queensland:
- the Domestic Building Contracts Act 2000 (Qld) governs variations for domestic projects.
- the Queensland Building and Construction Commission Act 1991 (Qld) governs the building and construction industry in Queensland and relevantly to this article requires that all variations to the building contracts must be in writing, agreed by the parties and approved before any variation work commences (unless in relation to urgent work).
- the Building Industry Fairness (Security of Payment) Act 2017 (Qld) regulates entitlements to payment for variations in broader construction contexts, particularly in commercial settings.
Disputes often arise when:
- principals issue variation directions without following the agreed process or without obtaining approval;
- contractors begin variation work without a written agreement, risking non-payment;
- variation clauses are drafted to grant one party broad, unilateral discretion to vary the contract as can often be the case with costs escalation clauses;
- unreasonably short timeframes (e.g., 48-hour notice periods) are imposed on contractors for making variation claims.
Such clauses can lead to significant commercial imbalance, delays in payment, and disputes over scope and entitlement, especially for subcontractors and small businesses.
What Makes Variation Clauses in Construction Contracts Fair or Unfair?
Under the ACL, a contract term may be unfair if it:
- causes a significant imbalance in the parties’ rights and obligations;
- is not reasonably necessary to protect the legitimate interests of the advantaged party; and
- would cause detriment (financial or otherwise) to the disadvantaged party if relied on.
When these criteria are applied to variation clauses in construction contracts, Courts are increasingly alert to clauses that:
- permit a party to issue unilateral variation instructions without requiring agreement or fair compensation;
- require contractors to absorb costs of changes without payment;
- impose impractical notice periods, often as short as 48 hours, to claim variations or additional time;
- prohibit or restrict the contractor from disputing variation directions;
- allow one party to terminate for convenience with no compensation;
- permit the recourse to security without notice or proper justification.
By contrast, fair variation clauses in construction contracts provide:
- a mutual right for both parties to initiate changes;
- clearly defined procedures for adjusting timeframes and payments;
- reasonable timeframes to claim variations (e.g., 10–14 days);
- transparent mechanisms for dealing with disputes and security.
Quick Comparison
| Clause Type | Fair Practice | Unfair Practice |
| Variation Initiation | Both parties must agree to variations in writing before works proceed. | Principal can direct changes unilaterally without the contractor’s consent or input. |
| Payment for Variations | Contract entitles contractor to be paid for additional time or costs reasonably incurred as a result of variations. | Contractor must perform variation work at no additional cost unless explicitly approved by the principal – regardless of actual increased cost. |
| Notice Periods for Claims | Reasonable notice periods (e.g., 5–10 business days) for submitting variation claims or time extensions. | Extremely short time-bars (e.g., 24–48 hours) that are impractical and likely to result in loss of entitlement. |
| Dispute Rights on Variations | Contractor is allowed to dispute variation directions and seek independent valuation or adjudication. | Variation directions are final and binding, or contract prohibits dispute resolution for principal-directed changes. |
| Termination for Convenience | Principal may terminate at will but must pay for completed works and lost profits or demobilisation costs. | Principal may terminate at will without paying for partial work, sunk costs, or losses arising from early termination. |
| Security Recourse | Recourse to security (e.g. bank guarantee) only permitted upon written notice and specified contractual breach. | Principal may call on security at any time and for any reason, including in the absence of contractor default. |
| Transparency of Terms | Clause is drafted clearly, in plain English, and accessible to both parties. | Clause is buried in fine print, uses complex legal language, or contradicts other parts of the contract. |
| Right to Claim Delay/Cost | Contractors entitled to claim reasonable delay costs or extension of time if variation affects the critical path. | Contract prohibits EOT or delay claims where caused by principal-directed variations or denies compensation entirely. |
Penalties for Unfair Terms
The ACL:
- makes it illegal to propose or use unfair terms in standard form contracts; and
- imposes significant civil penalties for each unfair term proposed or relied upon with the penalty framework as follows:
- Corporations face the greater of:
- $50 million;
- three times the value of the benefit obtained; or
- 30% of adjusted annual turnover during the breach period.
- Individuals (including directors and managers) can be fined up to $2.5 million per unfair term.
- Corporations face the greater of:
The penalties apply to each instance of an unfair term so if a standard subcontract contains three unfair clauses and is used multiple times, each clause and its use may attract separate contraventions. Courts may also:
- grant injunctions restraining continued use of unfair terms;
- order compensation or redress;
- require businesses to rewrite their contracts to remove offending clauses.
This makes compliance not just a legal issue, but a critical risk management priority for construction businesses.
These laws apply to standard form contracts used where one of the parties is a small businesses. With a small business being a business with fewer than 100 employees or an annual turnover of less than $10 million.
How Courts Assess Variation Clauses in Construction Contracts Under the ACL
Under section 24 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) (Australian Consumer Law), courts consider:
- whether the term causes imbalance;
- whether it is reasonably necessary;
- whether it would cause detriment if enforced.
Case Study:
Although not a construction case, JJ Richards was the first Federal Court decision to declare standard form small business contract terms unfair and void. It provides useful guidance for variation clauses.
Key findings relevant to variation clauses in construction contracts:
- Unilateral Price Variation: The company could raise prices unilaterally without customer consent. Justice Moshinsky found this unfair. Analogous clauses in construction where a principal can vary scope or price without mutual agreement are likely to be found similarly unfair.
- Automatic Renewal and Lock-In: Terms that automatically renewed contracts unless cancelled were found to disadvantage customers. In construction, similar risks can arise where staged works are rolled over with no variation rights for contractors.
- Combined Effect of Terms: Even if some clauses were tolerable in isolation, the cumulative effect created imbalance. This is highly relevant to construction contracts, where a combination of strict time bars, unilateral variation powers, and delayed payment terms often compound the disadvantage to subcontractors.
Conclusion
Variation clauses in construction contracts are a necessary part of any project, but how they’re managed in contracts can significantly affect risk and legal compliance. Under the Australian Consumer Law, unfair variation clauses are not only void – they carry serious financial penalties.
Construction businesses should act immediately to review their standard form contracts, remove or amend any clauses that grant one-sided variation rights, and ensure that contractors, especially small businesses, are treated fairly in terms of scope, payment, and risk allocation.
How We Can Help
For advice on reviewing or updating your variation clauses in construction contracts to meet ACL and Queensland legal standards, contact the team at RCR Law.
The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.
