PROF. KHEM DALLAKOTI VICE PRESIDENT, NEPCA Variations and Valuation of variations NOTHING ENDURES BUT CHANGE - HERACLAITUS.

PROF. KHEM DALLAKOTIVICE PRESIDENT, NEPCA

Variations and Valuation of variations

NOTHING ENDURES BUT CHANGE - HERACLAITUS

Variations – key points to understand

Project design and implementation involves different disciplines involving different professionals – variations are common in projects

Many human and non-human factors and variables resulting from different sources ( performance of construction parties, environmental conditions, etc) are existent in a project

Exists uncertainties and complex relationships within the parties

Hence need of changes in a project – a practical realityThus a need for Avoiding changes and avoiding

variations

Variations – key points to understand

Variation orders are undesired, but inevitable reality in construction implementation. The nature and frequency of variations varies from project to project

Projects are bound to encounter variation – the objective is to keep them in an acceptable limit

Delay and cost overrun both could be the result of variations. Should take advantage of variations when the opportunity arises

Variations has unpalatable consequences in time and cost

Variations - key points

Majority of the construction contracts allow a process for variations

The team must be able to effectively analyze the variation and related immediate and downstream effects.

Nothing endures but change – Heraclitus

Would have been better if there is no change in contract implementation

Let us have Perfect design so not to have any changes latter

Contractor could not make undue profit if there is no change in contract

Corruption can be reduced to minimum if no change in contract implementation.

Issues of variations arises the questions

how the change is made, the extent of authority of employer or the

engineer to make the change,the nature of particular change ( how

constructive or important), pricing of the variations etc.

The Need

Litmus test for successful management Project success should not be based upon the fact that project was free of

variation orders instead on the fact that variation orders were resolved in timel for the benefit of the project and ultimately to the parties.

Ability to respond to variations for minimum adverse impactMechanism for handling variation orderEffective management of Contract variations

Variations could be positive as well as negative Efforts shall be made from the start to the end of the project to better and

professionally handle the process and variation itself. Identifying and analyzing potential variations as early as possible. Avoiding errors and omissions during design stage ( about 75% changes

could have been avoided with better work in design stage) – thinking on what the project team can do to eliminate these potential problems.

Well preparation of contract documents – corrections of contract document errors and omissions cause variations

The need

A systematic way to manage variationsProper documentation of variationsKnowledge from past project implementation

would enhance the decision making process and avoiding errors.

potential causes and relevant effects with possible controls for variations should be worked out

Understanding root cause of variation order

Causes of variation order

Potential cause of variation may be categorized as Owner/client related Consultant related Contractor related Other related

Owner/client related clauses

Owner fails to fulfill certain requirementsChanges of scope by owner ( insufficient planning

and or lack of involvement of owner at design stage)Changes in schedule by ownerOwner’s financial problem and aiming at reducing

costInadequate project objectives – due to which inability

of designer to develop a comprehensive designDelay in decision makingChanges in specification by ownerPoor procurement process

Consultant related VO

Changes in design by the consultant – for the improvement ( more if construction starts before design is finalized)

Errors and omissions in design and inadequate drawing and shop drawing details , ambiguous design details, design discrepancies,

Conflicts in contract documents Inadequate scope of work for contractor and lack of coordination Technology change – beneficial variations Value management in design Complexity of design Lack of judgment and experience and knowledge of construction

materials and equipment, honest wrong belief, obstinate nature Lack of data Change in specification by the consultant

Contractor related variations

Lack of contractor’s involvement in design – lack of practical ideas

Unavailability of equipment and skills/defective workmanship for complex technological projects,

Fast track constructionContractor’s financial difficulties/desired profitabilityDifferent site conditions/unfamiliarity with local

conditionsLack of specialized construction managerLack of Contractors judgment-experience-

communication-strategic planningHonest wrong belief of contractorLack of data

Other related variation

Weather conditionsSafety considerationChanges in government regulations and

economic conditionsSocio-cultural factorsUnforeseen problems – force mejure

Potential effect of variations

DisputeDelay in project completionIncrease in costHiring new professionals and increase in overhead

expensesDelay in payment, logistic delaysQuality and productivity degradationProcurement delayRework and demolitionTarnish firm’s reputationPoor safety, poor professional relationship and disputes

How to control variation

Control for variation can be initiated in three stages Design stage Construction stage

Design stage

Clear and through project briefReview of contract documents/control the potentials for

VOFreezing designValue engineering in conceptsProfessional involvement in the beginning of project

designOwners involvementThorough detailingComprehensive site investigationsKnowledge base for previous similar proejcts

Construction stage control

Clarity of VO procedures and VO scope Logic and justifications and Written approvals Prompt approval process Restricted prequalification system – avoid use of open tendering Use of project scheduling/management techniques Owner’s involvement in construction phase Interface

Ability to negotiate variations Valuation of indirect cost Team effort – CCC Continuous coordination/communications Sharing same data base by CCC Computarised decision support

Conclusion for variation issue

Successful management of variation must start before the start of construction

Due diligence during design phaseA clear and through project briefClient involvement in design stageDefining project scopeAllocating sufficient time for designImproving design detailingCompliance with government regulationsEarly identification of potential variations

Contract Clauses of variations

Variations 51.1 – The engineer shall make any variation of the form, quality or quantity of the Works or any part thereof that may, in his opinion, be necessary and for that purpose, or if for any other reason it shall, in his opinion, be appropriate, he shall have the authority to instruct the contractor to do and the contractor shall do any of the following

Increase or decrease the quantity of any work included in the contract. Omit any such work ( but not if the omitted work is to be carried out by the

employer or by another contractor) Change the character or quality of kind of any such work Change the level, lines, position and dimensions of any part of the Works Execute additional work of any kind necessary for the completion of the Works Change any specified sequence or timing of construction of any part of the Works.  No such variation shall in any way vitiate or invalidate the Contract, but the

effect, if any, of all such variations shall be valued in accordance with clause 52. Provided that where the issue of an instruction to vary the Works is necessitated by some default of or breach of contract by the contractor or for which he is responsible, any additional cost attributable to default shall be borne by the contractor.

Clauses of variations

Instruction for variations 51.2 – The contractor shall not make any such variation without an instruction of the engineer. Provided that no instruction shall be required for increase or decrease in the quantity of any work where such increase or decrease is not the result of an instruction given under this clause, but it is result of the quantities exceeding or being less than those stated in the Bill of Quantities.

Valuation of variations

Fair to avoid further disputesBased on logic and rationaleWithin the provisions of contractWithout mal-intentionsAgreed basis as mentioned in the contract

Clauses of valuation

Valuations of variations 52.1 – All variations referred to in clause 51 and any additions to the contract price which are required to be determined in accordance with clause 52 shall be valued at the rates and prices set out in the contract if, in the opinion of the engineer, the same shall be applicable. If the contract does not contain any rates or prices applicable to the varied work, the rates and prices in the contract shall be used as the basis for valuation so far as may be reasonable, falling which, after due consultation by the engineer with the employer and contractor, suitable rates or prices shall be agreed upon between the engineer and the contractor. In the event of disagreement the engineer shall fix such rates or prices as are, in his opinion, appropriate and shall notify the contractor accordingly, with a copy to the Employer. Until such time as rates or prices are agreed or fixed, the engineer shall determine provisional rates or prices to enable on-account payments to be included in certificates issued in accordance with clause 60.

Bid price – the basis for valuation of variation

Clause 52 states that the valuing variations is the rates and prices set out in the contracts, assuming they are applicable and tender pricing is not unbalanced. Tender prices shall be the basis for determining rates and prices if it is reasonable to do so.

 It is usually said that because of variations taking place in construction performance, contractors will endeavor to catch up with respect to a low tender price by making a substantial profit as a result of variation pricing. Not only for this reason but as good contract administration, which always seeks to avoid disputes, the contract attempts to set in place alternatives to establish variations pricing.

Avoiding dispute while valuing variations

For engineer, administration of clause 51 and 52 is extremely vital. Prompt negotiation and settlement with respect of the contract price can be made if the matter is considered both sensible and fair.

  It is more likely that a just adjustment of the contract price can be made

if the matter is considered as early as possible   Traditional approach is to postpone variation question until the end of

the project and then attempt to settle everything at once, that leads to disputes and arbitrations.

  If variation pricing is considered and negotiated promptly it may prevent

a dispute from arising at all.   Partial payment for variation – payment shall be made on account at the

rate fixed by engineer so not to affect contractor’s cash floe unfairly.

Unresolved variations - Claim and dispute

When agreement on variation is not reachable clause 53 will be in effect and ‘claims’ are lodged. Contractor’s intention to claim additional payment must be given to the engineer within 28 days after the event giving rise to the claim. This is important from the employer and contractor’s perspective for timely resolution or investigation and keeping records fairly.

The End

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