If you’re a developer with a finite amount of funding then one main priority will be to minimise variations, or at the very least ensure you’re aware of the potential for variations before they occur and that you have made adequate allowance for them through contingency.
The Oxford dictionary defines a variation as:
“Something which deviates from a former or normal state, standard or type.”
Almost all construction projects, large or small, deviate away from the preliminary design, specifications or drawings for a variety of reasons. From a developer’s perspective, it’s important to understand the usual pitfalls and how to avoid them.
Most contracts contain express terms as to how you can administer variations, so it’s important to appraise the timings, ownership and obligations of both parties and the method of valuing variations. Often, when issuing variations, there is additional cost and disruption to the delivery of the works, which may already be in full flow. If mismanaged, this can lead to significant cost and time overruns.
As a client, thinking about what is likely to occur during the lifecycle of the development, who is best placed to manage this risk, and then considering whether to sell this risk to the supply chain is one way to increase price certainty and minimise your exposure to variations.
At a high level, the types of variations you should be looking to avoid are:
- Ambiguity or conflicts between the contract documents
- Making changes to the sequence or phasing of the works
- Making changes to the contract requirements including changes to quantities, quality, look or finish
- Reducing, amending or otherwise altering land access dates
- Introducing third party contractors to the worksite engaged directly by the client
- Removing packages of work and placing this with different contractors
- Look to avoid placing contracts with Prime Cost sums or Provisional Sums
What can you do to avoid variations occurring?
At the centre of process is the contract: what form to use, the drafting, understanding the obligations on each party, and when they must be completed by to avoid any failures in delivery. Ensure that you’re clear on key information in contracts e.g. start dates, completion dates, any sectional completion dates and if there are liquidated damages. You will not be able to amend the core clauses or requirements post contract award without a deed of variation and even if you do change it, you will be fundamentally changing the contractors risk profile which will likely come at a cost.
In terms of design development vs. genuine change, you will first need to be clear and concise with the scope of works, ensuring that you have previously consulted with stakeholders and have their buy-in to the specification.
Secondly, you will need to issue all information available to tenderers so they can appraise the project information but you may not wish to bind all information into the final document. What this means, for example, is that you can issue the outline design to tenderers that you may have used to get through planning approval, but for reference only. You will not want to necessarily include this as scope in the contract as any changes or deviation away from this design could be constituted as a variation. The important part is that you will have provided an output specification which is agreed with your stakeholders and reflects the client’s requirements and therefore your contractor will need to develop a design such that it meets these requirements. If this includes additional detailing to the design this would be the contractor’s risk and not a variation.
Other ways to reduce variations are through efforts made pre-contract i.e. ensuring that risks are properly identified by the Architect at an early stage and that they have eliminated or reduced. An example of this in action would be to carry out thorough site or ground investigation surveys or where brown field development, carry out extensive pre-condition surveys. Without this information, your supply chain may not take on ground conditions risk and as a client you will carry the risk of variations post contact. However, if you provide all survey information to tenderers you stand a better chance of being able to pass this risk over to your tenderers.
Once you have run your tender competition, it’s important to check that prices are sustainable to avoid contractors seeking a large volume of post contract variations to recover their financial position. An example of this could be an abnormally low tender price which you should investigate further with the tenderer through face to face dialogue and technical challenge. For example, if their price is abnormally low compared to others, they may have priced a non-compliant material in anticipation they will persuade you to vary the works in their favour post contract.
If variations do occur, how can you minimise the impact?
Implementing and agreeing a variation is nearly always after an event has occurred and you are in the process of negotiating and agreeing the impacts. However, to get early sight of the variation before it has occurred or at the outset provides you with the opportunity to mitigate it or remove it all together by discussing and exploring what the options are with the contractor.
Most contracts contain obligations on the contractor to provide early warnings of a variation occurring. The penalty for not providing such warnings being the valuation of any subsequent variation is considered on the basis as if the contractor had given an early warning i.e. as if the client had been given the opportunity to mitigate it.
Identifying variations early can come from many sources but accurate programmes that are updated regularly and measured against the baseline can provide early indications of issues and help to focus on the coming two or three weeks ahead, allowing the parties to resolve issues as they go. Copies of site diaries, labour allocation sheets and comparison of actual versus planned manhours. Also, progress reports including earned value management can provide early indication of issues that could manifest into variations.
As a client, it’s important to stipulate in your contract scope what reporting requirements you would like. The emphasis here is on your supplier providing you early sight of issues that you can act on and mitigate.
Linking back to the above in terms of risk management, if an event occurs that constitutes a variation to the contractor, make sure you have made adequate provision in your contingency allowance in order that your development budget is not exceeded. You should rely on your designer to appraise you on what the key risks are and your QS to assist in valuing these risks.
How do you ensure value for money in variations?
Where possible, the value of variations is based on the rates and prices provided by the contractor in their tender and therefore bound into the contract as the pricing document. This is on the basis the rates have been provided under a competitive tender situation and are likely to close to or better than current market rates.
However, they can only be used provided the variation works are of a similar nature and carried out under similar conditions. Contractors will usually argue against using bill rates on the basis the conditions to use them have not been met e.g. the works are incidental, out of sequence or materially different. Conversely, as a client you should check tender returns for any unusually high rates e.g. the rate for excavation is very high and the likelihood of the quantity being amended is also high which could lead to disproportionate value for variations.
The case in point here is Henry Boot Construction versus Alstom Combined Cycles (1999) where an abnormally high rate from their bill of quantities was used for a variation which provided them with a large profit. Alstom argued that a fair assessment should be made but at trial the judge ruled that contract rates were “sacrosanct, immutable, and not subject to correction” and they bound both parties equally. The Court of Appeal reinforced the judge’s decision.
If new rates or prices are used, then look to benchmark with developments of a similar nature that you may be involved with or in the absence of this look to use a pricing book such as Spons.
What are the options if you are unable to agree a variation in a reasonable time frame?
Firstly, whilst issues can arise over what is, and therefore is not, included in a contractor’s price just because an item of work is not listed in the pricing document, specification or on the drawings does not necessarily mean a variation is required. This is because whilst the works may not be expressly listed, they are nonetheless required and the contractor should have included them in their price.
For example, the pricing document is unlikely to list every single nut, bolt and screw but they are still required. Item coverage in a standard method of measurement will make it clear what is included or not but if you are using a schedule of work then be clear in your scoping document that it is all information combined the contractor is deemed to have allowed for and not just the pricing schedule.
Secondly, if you have instructed a variation, received a quotation but you are unable to agree on the impact on both cost and time, then as the client or employer you can make your own assessment. However, whilst you have instructed a change and therefore the contractor will have a contractual obligation to act on that instruction, you cannot impose a loss on them i.e. if the contactor can demonstrate true loss and expense related to a variation then you are obligated to consider this in your assessment. Failure to do so is likely to end up in formal dispute resolution.
Lastly, consider if works can be omitted or deferred to a later date if the impact to cost and time is too great at the point of instruction to demonstrate value for money e.g. can the works be retrofitted by another third-party contractor post completion? Another alternative could be to instruct the contractor to prepare quotations based on different scenarios e.g. when the works are carried out i.e. days or nights versus acceleration of the works, differing types of material, retaining risk as the client or the contractor to take all risk. This will allow you to make fully informed decisions before instructing a variation to proceed.
As many tender competitions are driven towards the lowest price, contractors will naturally seek to exploit opportunities for variations post contract. They may even under price work to win it and then seek to recover this shortfall once they’re in contract. For many clients, their key driver is price certainty and a desire to avoid varying the works once awarded due to the obvious disruption, additional cost and impact to the programme this can cause.
The best way to avoid or minimise variations is being clear in your requirements from the outset and then transposing these into your invitation to tender and the final contract documents. The time to obtain the best value for money price is during a competitive tender situation. Even if you receive price returns that are qualified and include PC or Provisional Sums, seek to negotiate these into a firmer price before award. If the project starts with a clear, concise and unambiguous scope, supported by a fully detailed price that reflects the requirements, then you can hold the contractor to their price and programme in delivery.
Where you are unable to get absolute certainty, ensure you have made adequate allowance for any employer risk events in your development budget so if variations do occur, you have provisions to pay for them.