Managing Contract Variations

Contract Variation:

A variation is an amendment to an original contract that changes the various aspects of the contract. Variation may be related to the time, cost, and quality or to the deliverable to the project and sometime may be with the methodology of work to be carried out. Variation in one aspect affect other components of the project. For example, increase in scope of work likely to cause changes in the project cost and delivery time.

Variations should be undertaken in line with the procurement policies of the company. Variations should not be used to cover poor performance or serious underlying problems. It is required to follow procurement guidelines and consult relevant stakeholders before accepting and processing variations.

The reasons for the variation should be clearly documented. The variation should be well documented, properly filed and clearly explained about what needs to be done and who is responsible for carrying out the task. 

Contract Variation Checklist:

Key issues to consider in managing contract variations include:

  • following the procedures required by the contract
  • assessing the reasons for the proposed variation and whether these may indicate an emerging or actual performance problem
  • assessing the impact of the proposed variation on the contract deliverables, particularly whether the variation or the work it represents is actually required and whether it was part of the original contract deliverables
  • determining the effect the proposed amendment will have on contract price
  • considering the authority for making the variation obtaining and documenting the required approvals
  • Properly documenting details of the variation and its impact
  • meeting any reporting requirements such as updating the entity’s contract register, raising change orders, updating the financial forecast as required

Some general but useful definitions those comes often in contract management:

Principal: Any project owner, or initiator, inviting or receiving proposals or tenders.

Consultant: A person who provides specialist advice and/or professional services.

Contractor: A person who provides building and construction works and services, and includes subcontractors and suppliers.

Intellectual property: Any patent, registered design, trademark, name or copyright and includes trade secrets, list of suppliers, customers and manufacturing methods.

Party: ‘Party’ includes but is not limited to: Principals, contractors, subcontractors, suppliers, consultants, employees, employees

Superintendent: The Superintendent appointed under the General Conditions of Contract.

Tender: An offer in writing, which includes price, in response to an invitation to execute works, supply goods or associated services.

Tenderer: Any party submitting a tender, including contractors, subcontractors or suppliers.

How to minimize contract variations:

  1. Remember the time when you are in stronger position to negotiate terms on quotes and tenders submitted or the variations proposed.
  2. Do not agree to any variation clauses without considering how it will operate on a site. If necessary, insist that an appendix is added to the contract detailing the paperwork and the time frames for agreement for both parties. Contracts are often written by those with little site experience. It is unlikely that both parties will want to stop work and down tools whilst the paperwork and costs involved in a variation are agreed, however by continuing to work you must be sure that you will be reimbursed appropriately for working on this basis.
  3. Make sure you have your own procedures in place for documenting variations. One person should have the responsibility for handling and agreeing variations and ensuring all the paperwork is done and agreed in writing in a timely way. If paperwork is not agreed quickly you are at least aware that there are potential problems regarding payment and in a position to decide what course of action to take.
  4. Either project manager or contract administrator depending upon the authority must ensure that all the documentation for variations is completed in the agreed time frame.
  5. Make sure that payment terms and conditions and methodology of work on site.
  6. Make sure everything agreed should be in writing. There in no meaning of verbal agreement when arises disagreement and conflict while carrying out work. 

Possible causes of Variations:

Variations in construction contract occur for a variety of reasons. Most variations cause project delays, increase in project cost and disputes between contractors and the client.

Below is a comprehensive possible causes of variations:

Client Related Variations which may include, but not limited to:

  • Changes of plans or scope
  • Changes of schedule
  • Client’s financial problems
  • Inadequate project objectives,
  • Replacement of materials or change in work methodology
  • Inability in making timely and prompt decisions
  • Lack of flexibility
  • Change in specification

Consultant Related Variations

  • Change in design by consultant to meet certain standard or legislative requirements

Contractor Related Variations

  • Lack of contractor’s involvement in design and/or not understanding contractual requirements

Other Variations: There are still other factors which may cause variations to the contract. Some of them are:

  • Weather conditions
  • Safety considerations
  • Change in government regulations
  • Change in economic conditions
  • Socio-cultural factors
  • unforeseen problems

Murdoch and Hughes (2008) suggest that there are three ways in which variations might arise:

  • clients may change their minds about what they asked for before the work is complete;
  • designers may not have finished all of the design and specification work before the contract was let
  • Changes in legislation and other external factors may force changes upon the project team.

Unavoidable Variations:

Sometimes variations are necessary in order to minimize adverse effects due to unexpected events or circumstances. They may be required to avoid health, safety or security problems or too meet legislative requirements. Such variations may affect the scope of work as well as timing and methodology of carrying out work.

Some examples of unavoidable variations are:

  • Increased project cost due to unanticipated ground conditions, hazardous materials or existing services
  • Variation to overcome a fault in design documentation which, unless it is remedied, could result in health, safety or security problems or does not meet the minimum specification requirements
  • Variation to overcome a change in statutory requirements that has occurred since tenders closed.

In general, following are considered as frequent and harmful variations:

  1. Change in Scope – Client requesting change in design and scope of work
  2. Unforeseen Conditions – Site Condition differ from the expected so variation requested by contractors or professionals
  3. Professional errors and omissions – variation initiated by contractor and professionals

Why is there a problem, why doesn’t the contractor just do what they are contracted to do?

The reasons for contract problems arising are many and varied and while it may appear that a contractor is not doing what they are contracted to do, it is often not that simple. A problem could exist for any number of reasons. These could include situations such as:

  • The requirements of the contract are not clear or are open to misinterpretation. For example, something such as “delivery is to be within 10 days” could mean 10 calendar days, 10 business days or even 9 days. In these situations assumptions are often made which may lead to a problem arising.
  • The expectations for the contract are not realistic or well defined. This may result in the specific requirements not being covered under the contract or the outcomes not being achieved. For example stating that the contract reporting is “as required” rather than specifying what reporting will be required. This can lead to frustration for all parties as the required data may not be available or additional costs may be incurred.
  • Contractor performance is not monitored, discussed or documented. This may occur for many reasons such as the performance measures are not included in the contract, the measures are ambiguous or not relevant, and there may be issues with resourcing or communication. If a contractor is not made aware that there is a problem with its performance; and given the opportunity to rectify the situation, the problem will remain unresolved and potentially escalate.
  • Establishing a contract, but not having suitable processes in place to support the management of the contract. For example, it would be good practice to put in place a communications book for a cleaning contract to document, monitor and resolve cleaning issues. Establishing sound processes assists to minimise the risk of miscommunication, unnecessary or unauthorised contract variations and budget blowout.
  • Communication problems. Having limited, or poor communication, or even a personality clash between the parties may lead to communication difficulties. Selecting a suitable contract manager and having an appropriate communication strategy is an important factor in managing stakeholder relationships and minimising contract problems.

Having good communication with your contractor and ensuring that the roles, responsibilities and the requirements are understood by all parties will help to avoid problems and make for smoother contract management.

I have collected some useful publications related to contract management which you can download by clicking on the links available below. These can be used as learning resources and may not apply to your particular situation.

  1. Construction Australia_Variations_A Comprehensive Overview
  2. Contract Management Guide
  3. Contract_Management_Handbook
  4. Contract-Construction Management
  5. Controlling Cost Overrun Factors in Construction Projects in Malaysia
  6. Cost Deviation in Road Construction Projects
  7. Cutting Risk is the Target
  8. LGSA Contract_Management_Discussion_Paper Nov 2009
  9. Managing Contracts
  10. Managing Post Contract Variations
  11. Managing_Contract_Problems_-_Information_Sheet
  12. QLD Government Contract Management Framework
  13. Strategy for Management
  14. The 12 Best Practices in Contract Management
  15. Variations in Government Contract in Malaysia
  16. VCCI-Best-Practice-Guide-for-Tendering-and-Contract-Management
  17. Guide to Contract Management
  18. New Home Construction Contract – Sample
  19. Checklist for Contract Monitoring