Last week, Director Bill Bordill joined Payapps for a webinar looking at the challenges of managing variations on construction projects. This article covers some of the key takeaways from that event, and the advice from Bill and the other panellists Iain Mcllwee and Kevin P’ng.
What is a variation?
A variation is any alteration to the original work as set out in the contract. This could take the form of an addition, omission or substitution. Whether your variation is a change or a compensation event, depends on one very important thing: the construction contract used.
The JCT originally called changes to the scope of works, ‘variations’. They define a variation as “the alteration or modification of the design, quality or quantity of the Works”. The contract takes a retrospective approach to assessment of entitlement, so the JCT examines time and cost separately at the end of the project.
The NEC form of contract however uses the term, ‘compensation event’. This form of contract requires looking at the effect on time and cost together, and contemporaneously, at the time when the changes take place.
For more on how the various construction contracts deal with variations, head over to the Decipher podcast where we discussed this in-depth.
What should you be looking for when assessing variations?
One of the biggest challenges when dealing with and claiming for variations is inaccurate information, or even a complete lack of information to begin with. Information relating to variations should be recorded at the time the changes take place.
Recording this information should allow you to assess the state of the project as it progresses. Accurate information allows you to spot early warnings that the project might be in trouble, so that you can assess the impact of cost and time and react accordingly.
It is important for everyone in the construction process to have a clear understanding of where the project is at, in terms of budget. Communication up and down the line is key to avoid exposure to unexpected budget increases. Ultimately, if the client doesn’t know about the impact of changes, they may not have the funds available to pay for them, meaning that those further down the line might not receive payment. Transparency should always be encouraged no matter where you sit in the contractual chain.
Why do changes cause problems in construction?
Any change to the planned and agreed scope and schedule of works comes with significant risk. This is why variations are one of the trickiest parts of the construction process. They are both a symptom and a cause of the wider issues that cause difficulties in the industry.
Ian sees from his members at FIS that failure to manage change introduces conflict into the construction process. Everyone in the construction industry preaches that they work collaboratively – except when they don’t. He believes the problem lies in the typically adversarial nature of the construction industry, and it appears old habits die hard.
The only way to avoid this is to communicate. Set clear expectations, be pragmatic and importantly honourable. Keep everyone in the chain up to date so there are no surprises, and collaboration will likely improve.
Are we getting better?
There does seem to be an appetite for increased collaboration across the industry. Anecdotally, Decipher has seen this in the projects we manage. Clients have been dealing with Covid related delays and cost overruns in a cooperative and collaborative way. This ‘new normal’ has seen many companies re-evaluate the old way of doing things and look for more innovative solutions.
However, it does appear that a shift in risk allocation could make things difficult. Construction contracts seem to be increasingly looking to shift risk to the contractors and sub-contractors. This may not necessarily be a bad thing as contractors are often set up to manage these risks better. However, employers do need to understand that shifting the risk away from themselves will come with added costs, and they need to be prepared to accept that.
How best to value change?
The most important thing when it comes to preparing your claims for variations is to price in accordance with the contract. Make sure you are applying the rules that apply to your project and you follow the correct processes. The RICS has a useful guidance note which is a great starting point if you are unsure.
The second thing is to make sure your records are in order. Variations need to be substantiated and you need to show that costs increased as a result of instructed change. Contractors shouldn’t lose out as a result of variations, but when they do, it tends to be because they cannot evidence costs rather than a lack of entitlement.
There can sometimes be a temptation to overstate claims for variations. The thinking behind this is that your claim will be knocked down a bit by the employer. But provided you can evidence all costs, this shouldn’t be the case.
What about if something is omitted from the original tender?
This is a complex area and one that many contractors struggle with. Ultimately, you are entitled to a ‘fair valuation’ of the cost of the works. It is important to establish whether the change amounts to a variation or a breach of contract. So for example, if a large part of the works is given to another contractor, this may be a breach. But if say, you were swapping plastic skirting for timber this would be a variation and the difference in cost needs calculating accordingly.
Our friends at Claims Class have a popular piece on the problem you can find here.
Why does the construction industry still struggle with change?
Ultimately, a large problem in the construction industry is a rush to get projects to site before final designs. This means that the scope of works constantly needs amending as the project progresses. If we could extend the pre-construction phase, we could bring contractors on earlier to help with the design process and there will be less changes as the projects develop. This approach is even more valuable when you are talking about specialist sub-contractors.
Another consideration which could impact positively, would be a move away from a tender process that values lowest price above everything else. Tenders will never accurately price a project this way, and it is well known that often the only way for a project to be profitable is through claims for variations. By pricing projects realistically and accurately we could reduce the need for change.
Variation provisions are important, and without them you would have no flexibility as a project progresses. Whilst clients should be able to change their minds, and project adapt, we should avoid abusing variation provisions to allow design completion.
Thanks to PayApps for organising and to all the participants and other speakers for engaging with the event. Do get in touch if you need any more information on the subject.