Variations to contracts have caused more angst, disputes and misunderstandings than any other aspect of the contracting industry. Brain Seymour explains why you must be flexible.

Variations to contracts have caused more angst, disputes and misunderstandings than any other aspect of the contracting industry. Almost every project is liable to variations ranging from changes of mind by architects and clients to unforeseen problems raised by the main contractor or sub-contractors.

These variations can become a pecuniary loss if the conditions are not properly negotiated and documented at the beginning and throughout the life of the contract.

While changes have become an inevitable part of the construction process, submitting variations for acceptance, and receiving prompt payment for them can be a considerable challenge that adversely impacts the electrical contractor’s (EC) profitability. Major changes on a project can considerably alter final costs and schedules, and if handled inappropriately can result in detrimental disputes and possible litigation.

Cost is the most common area of disagreement in the variation process. These disputes usually revolve around recoverable direct costs, overhead and percentage of profit. The EC is easily able to justify direct costs, however indirect and consequential costs may require more discussion before acceptance. Often these indirect costs include loss of productivity due to unavoidable disruption to the original project schedule and workflow.

Large variations can cause a loss of productivity when labour, equipment and materials are diverted from the original contract work. In addition to the impact on the contract work, the variation work is generally more costly to perform than the original contract. ECs who fail to recognise and anticipate these impacts on the contract work will find their variations may be a financial loss.

Design changes – project design is usually finalised and agreed upon before tenders are called or contract signed. The client understands what is expected, however, once they see the project taking shape, changes to plans and specifications often occur after the contract has been awarded.

Errors in the original design which are often not recognised until the project is underway will be a basis for variations.

Financing – this is project cost budgeting which means allocating and proportioning over time budgets across project deliverables for a specific period. The initial budget cash flow sets a baseline for the project manager and provides a starting point for measuring and evaluating project performance.

The cash flow involves implementing a monitoring process to review the project’s progress against budgets and time schedules. This is a continuous process throughout the life of the contract. Variations can occur when there is an escalation of material/labour costs, unscheduled hold-ups or extension of time due to circumstances outside the EC’s control.

Scope of work – is a key project management document that describes what falls under the framework of a project, and what does not. Scope of work documents ensure that all parties agree on what tasks will be conducted and delivered in a project’s lifecycle. The most common variations on a construction project, changes in scope, are the result of an updated design and plan revision.

Typical variations in the scope of works:

• Modification of design – Design error or client-related, change requirement, innovative technology or unclear brief. Contractor-related, alternative installation methodology or use of available materials.
• Changes to quantity or quality of the works – quantity is self-explanatory, and quality may arise through new technologies and systems which have become available after the production of the initial contract.
• Discrepancy between drawings, specifications or bills of quantity – where quantities, diagrams and measurements differ between project documents.
• Works by others missing from all sectors – For example, submains to mechanical services switchboard missing from both electrical and mechanical documents.
• Conflict in shared space – Physical inability for electrical cable tray and HVAC ducting cannot fit in the same space. Usually, the electrical cable tray run must be re-routed.
• Schedule changes – most often occur as delays, extensions, compression and out-of-sequence work. Most subcontracts contain specific language about delays and prevent an EC from recovering costs due to scheduled delays.

Aesthetics – whilst this is a core design principle, the EC is rarely affected however, occasionally instances arise where exposed installations, lighting fittings and control cubicles are required specific colours or shades to complement the building design.

Technological advancement – can generate substantial variations, especially on long-term projects, when these new systems and equipment had not been invented, let alone manufactured at the time of tender.

Site conditions – although weather and acts of God are probably covered in the EC’s subcontract documents, they should be evaluated on a contract-by-contract basis. Unforeseen conditions such as an excessive rock in trenching, asbestos in sections of existing buildings and unsafe structures impact safety. If safety shuts down a site for an extended period, the EC should submit a variation for the demobilisation and remobilisation, extended general conditions and travel-related costs.

Non-availability of materials – especially during the COVID crisis, when materials are simply not available and changes are obligatory, variations need to be raised to reflect these changes.

Deletions from the original contract – these may not be a straightforward negative variation, as in most cases the preliminaries and overheads have been spread throughout all sections of the project and a substantial deletion will affect the bottom line.

Early occupation – if an owner/client negotiates to occupy part of the building prior to practical completion may cause the EC added costs. Additional labour in congested workspaces, restricted access and changed working hours. Additional costs may be incurred for relocating and dismantling equipment, scaffolds etc. between work phases.

Post contract variations – although there is rarely any provision made for these, the EC should be aware that the percentage may need to be increased from the original costing. It may be better to treat post-contract work as a separate contract, priced on today’s market rather than a variation to the original contract. Especially if there is a ‘Schedule of Rates’ in the contract.

Who is responsible? – before you even contemplate preparing a variation, establish who is the responsible party to authorise the instruction. There is a compendium of reports where ECs have not been paid for variations that have been issued by unauthorised personnel. Whether it is the prime contractor’s foreman, supervisor or project manager, you must have in writing who has the authority to accept your variations.

Get it in writing – There has been more controversy on the value of variations than any other phase of the contracts. My advice to new contractors is that you price the variations and get approval by way of a priced order prior to starting the work.

Many say, “the builder wants the changes NOW”. However, I would rather burn the midnight oil and work overnight on a variation estimate than start work without an agreement on price.

Conclusion – Variations are encountered on most building projects and must be addressed by procedures provided in the contract. Whether they are additions or omissions, they will have an impact on the final contract sum. Variations raised by the owner/client and passed onto the builder/head contractor which cause delays in the schedule must also be addressed by the EC.

By ensuring that all variations are administered in accordance with the contract documents, they must be in writing and in accordance with the contract procedure. The person signing off the variations must be aware of changes and be authorised to negotiate the final price and to be signed off by both parties.

Note: The information provided in this article does not and is not intended to constitute legal advice instead all information and content is for general informational purposes only. The reader should consult their own legal experts for specific contractual advice.