Variation Orders in Construction Projects

Prepared by Özgenur Baştuğ

Abstract

Construction projects are complex long-term projects with dynamic nature. They bring together multiple parties within different disciplines and require them to work coherently in a designated area to construct a structure with a constrained budget within a specified time. Most of the construction projects are incomplete in terms of design, procurement, contracting prior to the start of the construction due to their complex nature. Project properties are determined and finalized during the construction of the project and changes are exerted within the process.

Although the ultimate goal during the planning phase would be to minimize the changes and unexpected situations, it is almost impossible to plan a construction project without subjecting it to change during the construction phase. While these changes may stem from so many different reasons like material quality, change in design, time considerations, etc. they can be minimized as much as possible with careful planning and execution.

Any deviation from the work scope agreed in the contract is considered as a variation in a project. A variation order (also called change order) is a formal document issued either by the contractor or the client for changes in the project such as changes in the project scope, design, completion date, contract price, etc.

By keeping in mind that variations will be needed at some point of the project, these possible changes must be foreseen before the start of the construction phase. To be able to protect the project from the unforeseen extra costs and disputes with the contractors, variation order format should be prepared carefully within the planning phase of the construction. Variation orders must be clear and detailed without leaving any important information related to description of the work, pricing and timing missing.

Variation Order: Definition & Content

Any deviation from the work scope agreed in the contract is considered as a variation in a project.

A variation order is a written agreement to modify, add to, or otherwise alter the work from that set forth in the contract. In general, variation orders involve change in scope, time and material for additional work, extra costs for additional working hours. Due to dynamic and complex structure of the construction industry changes in the construction projects is inevitable and variation orders are utilized in all types of projects.

According to FIDIC Red Book, each variation may include :

• Changes to the quantities of any item of work included in the Contract.
• Changes due to quality and other characteristics of any item of work.
• Changes to the levels, positions and/or dimensions of any part of the works.
• Omission of any work unless it is to be carried out by others.
• Any additional work, plant, materials or services necessary for the permanent works including any associated tests on completion, boreholes and other testing and exploratory work.
• Changes to the sequence or timing of the execution of the works.

It must be noted that the variations may be initiated any time before the take over certificate of the works is issued, and the variation orders are formed either by the request of the client/owner or with the recommendation for a change from the contractor.

Content of a Variation Order

Since variation orders are many times the reason for a conflict between the agreed parties a variation order must be clear, it should involve no discrepancies. It should involve the work to be done, where and when the work should be executed, the payment method and time, changes in the duration, etc. Therefore, preparation stage of the variation order should be handled very carefully. Variation orders should particularly involve below mentioned information in order not to be the source of conflict/dispute later on between the agreeing parties  :

• Identification of variation order
• Description of variation order
• Reason for change
• Change in contract price
• Change in unit prices (if applicable)
• Change to contract time
• Statement that secondary impacts are included
• Approvals by owner’s and contractor’s representatives

Causes of Variation Orders

The potential causes of the variation orders and the agents who are causing these orders are investigated by many researchers. As a conclusion of the research conducted, four main agents were suggested for the variation orders. These are clients, consultants, contractors, and some external agents. In these agents, it must be noted that clients and consultants are the main drivers for the variation orders.

Potential reasons of the variation orders and related agents who are causing these variations can be summarized as in the figure below:

According to research conducted (by , , , ,, ) ;

• The main drivers of the variation orders are the clients which are followed by the consultants.
• Variation orders are mainly issued for the additional works.
• The most common causes of the variation orders are:

• Change in plans: Caused by the changes made by clients. They may happen due to insufficient involvement of the client in the design phase, lack of understanding of the client in terms of design or merely a change of mind or requirements.

• Change in scope: Occurs due to inadequate planning in the project definition phase.

• Financial problems: Client may undergo some financial problems leading to some budget constraints or may simply seek to make some savings. This problem may lead to change in schedule, specifications and the quality of the construction.

• Conflicting contract documents: Contract documents must be clear, there should be no room for misinterpretation. Details in the contract must be sufficient. If a contract fails to those, then it results in misinterpretation of the actual requirement of a Project These misinterpretations may later on result in variation orders, conflicts, delays in the project, etc.

• Impediment in prompt decision making process: It is highly important for a project that the decisions should be taken as fast as possible in order to avoid extra costs and delays. Therefore, it is also an important factor for the success of the projects. The lack of this results in variation orders during the life cycle of the project.

• Change in design: Changes in design are quite common in the fast track projects where the construction phase starts before the completion of the design. While the changes in the design phase, or the initial part of the construction phase do not have much adverse effects, changes in the later phases may cause severe impacts on the project.

Preparation of Variation Orders

Preparation Process of the Variation Orders

Variation Order Procedure Flowchart (Own Chart Modified from )

Variation orders can be either requested by the contractor or issued by the client. Processes followed in these cases slightly differ from each other.

If the variation order is requested by the contractor:

1. Contractor prepares a variation order request form and submits to the client.
2. Variation order request is reviewed and evaluated by the client and if it found necessary the request is approved.
3. After the approval of the request for variation order, proposed document is discussed between the client and the contractor including the effect of the variations on time and cost.
4. Upon agreement, final version of the signed variation order including the scheduling and cost breakdown is submitted to the client by the contractor.
5. Client accepts and signs the variation order and the work described in the variation order may start.

If the variation order is issued by the client:

1. The need for a variation is determined by the client and the variation order proposal is initiated.
2. Initiator variation order is prepared and submitted to the contractor.
3. Proposed variation order is evaluated by the contractor.
4. After the review of the contractor, proposed document is discussed between the client and the contractor including the effect of the variations on time and cost.
5. Upon agreement, final version of the signed variation order including the scheduling and cost breakdown is submitted to the client by the contractor.
6. Client accepts and signs the variation order and the work described in the variation order may start.

It must be noted that if by any reason the variation is deemed unnecessary for the client, then the client has the right to deny the variation order.

Important Points During the Preparation of Variation Orders

While preparing the variation orders, the changed work should be considered in detail. According to Levy , before the submission, variation orders should be complete in every aspect. There should be no need for any further explanation and the variation order should cause no question marks regarding scope, cost or schedule. Below mentioned items should be considered for a detailed and complete variation order :

• The reasons for the variation should be explained in detail and there should be sufficient documentation attached to the variation order to describe the changed condition. If necessary, copies of drawings, specifications can be included to prove and back up the need for the variation.
• Steps required to implement the variation should be explained in detail.
• Any impact on the target completion date or any other schedule impact on the completion of work should be detailed in the variation order. A detailed scheduled should be submitted within the document.
• Any permits that might be required and the estimated time for obtaining these permits should be indicated.
• Any impact on the direct and indirect costs should be considered and the detailed cost breakdown should be included in the variation order.

Negotiation of Variation Orders

Problems Encountered During Negotiation of Variation Orders (Own Fgure Modified from )

Before a variation order is issued, the terms on the variation order should be reviewed in detail by both parties and agreed on. In many cases, meetings are held for the negotiation of the terms in the variation orders. There are problems encountered while negotiating. The most common ones are the determination of the cost, impact of the variation order on the schedule and required time extension. These are discussed in detail until an agreement is achieved by both parties. The negotiation process, is one of the problems with the variation orders since they extend the time for the approval of the order, require extra work for both parties and may cause dispute between client and the contractor.

Cost determination is the most common problem encountered during the negotiation since it directly affects the project cost. Direct and indirect costs, revised rates, additional preliminaries are discussed and often may lead to disagreement between the two parties.

Determination of the time required is another most common problem encountered during the negotiation. There may be disagreement between the parties regarding the duration of the work indicated in the variation order and its impact on the overall schedule of the project.

Duration of the approval process may be one of the issues in the negotiation process. Variation orders are reviewed and discussed in detail. It might take time to come to an agreement between the two parties, and also after the agreement it might take a while the variation order to be approved. This causes problems for the contractors and may delay the works.

Impacts of Variation Orders

Construction projects involve complex operations which cannot be accurately determined in advance. Variation orders can be considered as escape points from the contract when the changes are required to the contract. These changes which are executed via variation orders, may satisfy the needs of the client for the overall project, correct the problems faced during the construction phase and to be able to complete the project with maximum efficiency. On the other hand, variation orders may cause significant problems throughout the course of the project if they are not handled carefully.

Variations can be divided into two as beneficial and detrimental variations:

Beneficial Variations

Beneficial variations are the type of variations which are good for the project. They provide positive impact to the project; therefore, they are welcomed by the management of the project. These impacts can be:

• Reduction in cost,
• Reduction in time,
• Improvement of the quality standards,
• Omission of the errors,
• Reduction in the degree of difficulty in the project.

Detrimental Variations

Detrimental variations are the type of variations that reduce owner value and have a negative impact on a project. They should be minimized as much as possible to avoid the problems. It must be also noted that the detrimental variations may not seem detrimental in the first place but due to their timing they might be considered as detrimental. They may have to be applied due to lack of any other alternative available at that moment of the project. Potential impacts of the detrimental variations can be:

• Cost overruns,
• Time overruns,
• Disputes between the parties of the contract,
• Adverse effect on the professional reputation of one or more parties,
• Additional specialist equipment/personnel,
• Additional health & safety equipment/measure,
• Degradation of health & safety,
• Degradation of quality.

As a common conclusion of the research made on the impacts of the variation order, it has been found that the most common impact of the variation orders is the cost overrun followed by time overrun:

Cost Overrun

Variation orders are generally prepared for the additional works; therefore, they will cause the increase in the cost due to:

• Time and material charges,
• Overheads,
• Rework and stand by time,
• Loss of productivity,
• Change in cash flow due to inflation.

Time Overrun

Variation orders might affect the project completion time adversely due to:

• Time spent during the preparation, negotiation and approval of the variation order,
• Extra time needed for the additional works in the variation order,
• Time spent due to loss of productivity,
• Loss of time due to delayed material delivery for the extra works.

Annotated Bibliography

The following list provides resources for further research and study on variation orders:

• Edward R. Fisk, Wayne D. Reynolds (1997): Construction Project Administration

Construction Project Administration can be used as a guide for the successful management of a construction project from design phase to close out. It has a complete chapter dedicated to variation orders which is used and referenced in this page quite a lot. The book is very useful if one wants to learn more about specific aspects of the construction management since each subject is discussed in detail with examples.

• Sidney M. Levy (2000): Project Management in Construction

Project Management in Construction aims to provide relevant information about each phase of the construction projects for the managers and general contractors. It has a chapter for the variation orders in which the author describes many aspects of the variation orders from content of the variation orders to pitfalls to avoid during the preparation of the variation orders.

• International Federation of Consulting Engineers. (1999): FIDIC Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer.

Also known as FIDIC Red Book, it contains the conditions of contract for construction. There is a section dedicated to the variations in which the content of the variation orders and the variation process are described.