CHAPTER EGHIT

VARIATION ORDER IN CONSTRUCTION PROJECTS

BY :-Abebe D.

MAY 2015

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IntroductionIn some literatures, variation order is referred or

named as change order. VO is any modification to the contractual guidance

provided to the contractor by the Employer or Employer's representative (Arain & Pheng, 2005b).

VO involve additions, omissions, alterations and substitutions in terms of quality, quantity and schedule of works.

• VO cannot be avoided completely• VO may arise from changes in the minds of parties

involved in the contract

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• Not all the Consultant's instructions constitute variation orders

• VO do not change the scope of work, in fact, the requirement of the VO must be within the original scope of work. Changes that are outside the scope of work require a supplementary agreement.

• VO are issued by the Consultant and must be given in writing or oral instruction should be subsequently confirmed in writing. Since the contractor is not bound to comply with the oral instructions, all oral instructions have to be confirmed in writing by either the consultant or the contractor.

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According to FIDIC Harmonised Edition (2006),VO may include:1. Changes to the quantities of any item of work included in the

Contract,2. Changes to the quality and other characteristics of any item of

work,3. Changes to the levels, positions and/or dimensions of any part

of the Works,4. Omission of any work unless it is to be carried out by others,5. 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, or

6. Changes to the sequence or timing of the execution of the Works.

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According to MoWUD General Conditions of Contract (1994), Variation Order may include:

a) Increase or decrease the quantity of any work included in the Contract,

b) Omit any such work, c) Change the character or quality or kind of any such work, d) Change the levels, lines, position and dimensions of any

part of the Works, ande) Execute additional work of any kind necessary for

completion of the Works and no such variation shall in any way vitiate or invalidate the Contract, but the value, if any, of all such variations shall be taken into account in ascertaining the amount of the Contract Price.

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Though the contract defines what constitutes VO, some typical examples of VO include, but are not

limited to: • The resolution of ambiguities, conflicts, errors, or

omissions within the contract documents;• New or unanticipated requirements imposed by third

parties, such as permitting agencies, railroads, and utility companies;

• Unforeseen environmental issues; • Design changes; • Material shortages (under certain circumstances); • Value engineering; • Safety-related changes; and• Alterations to the duration or sequence of work activities.

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Summery Of Contractual Changes

• Design Changes• Schedule Changes• Price and Cost Changes• Resequencing of Design & Construction Activities• Material Substitution• Modification to Construction Methods

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Classification of Variation Order in Construction Projects Arain & Pheng (2005b) distinguished two types of

variation orders, namely: beneficial and detrimental variation orders.

This classification is focuses on employer’s side A. Beneficial variation orders Is one issued to improve the quality standard, reduce

cost, schedule, or degree of difficulty in a project. Is a VO initiated for value analysis purposes to realise a

balance between the cost, functionality and durability aspects of a project to the satisfaction of Employers.

• A beneficial variation is initiated in the spirit of adding value to the project.

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• Generally, a VO is beneficial if it is initiated to enhance the Employer's value. Among others, the Employer's value system elements include:

Time, capital cost, operating cost, environment, exchange or resale, aesthetic/esteem and fitness for the purposeA beneficial variation:

Eliminates unnecessary costs from a project.Optimise the Employer's benefits against the resource input by

eliminating unnecessary costs.

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B. Detrimental variation orders• A detrimental VO is one that negatively impacts

the Employer's value or project performance (Arain & Pheng, 2005b).

• The Employer who is experiencing financial problems may require the substitution of quality standard expensive materials to substandard cheap materials.

• For example, on a construction project situated in a salty environment, steel window frames result in steel oxidation if selected in lieu of timber or aluminium frames

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However, In Oracle White Paper (2009) titled as

Change Management Best Practices for the

Engineering and Construction Industry,

VO is categorized as

Directed

Constructive and

Cardinal changes.

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A. Directed Changes

• Directed changes are changes that are directed

by the owner and are, therefore, understood by

the owner to be a change to the contract.Subject always to the specific requirements of the

contract, examples of directed changes include:• Addition or deletion of work ;• Revision to material specifications;• Revision to project phasing;• Change to site access or hours of operation ;• Change to contract duration

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B. Constructive Changes Constructive changes typically result from the

actions or inactions of the owner (i.e. Employer), and usually are not intended or recognized by the owner to be a change. Subject to the specific requirements of the contract, constructive changes might include:-

• Failure to disclose material information (superior knowledge);

• Impossibility or impracticality of performing the work as designed (constructability);

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• Imposition of joint occupancy or use of the project before completion;

• Slow turnaround of submittals and requests for information ;

• Untimely inspections • Constructive changes are usually more

difficult to recognize than directed changes and, therefore, often become the basis for a dispute, or in the worst case, a formal claim.

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C. Cardinal Changes

A cardinal change is a change that has the effect of making the work to be performed fundamentally different from the work the parties agreed to when the contract was bid and awarded.

A cardinal change is typically viewed as a breach of contract by the owner and a contractor is not obligated to proceed with a cardinal change if directed to do so by the owner

An example of a cardinal change might be an owner’s instruction to remove asbestos or other hazardous materials found on the project when the contract documents identified no such materials and did not provide for their removal.

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Causes of VO in Construction ProjectsThe causes of variation order may vary from project to

project.The following may be the causes of variation orders in

Construction Projects:• Omissions or discrepancies (inconsistencies) in the design;• Conflict discovered between the contract documents;• Inadequate working drawings; • Inconsistency between drawings and site conditions; • citation of inadequate specification;• ambiguous design details which are difficult to interpret;• Delay or Acceleration.

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• Insufficient site investigation by the Consultant;• Different underground condition or underground seepage after

excavation;• Suspension of work by the Employer;• Termination for convenience, when owner can terminate project

prior to its completion or delete major portions of the work;• Termination for cause or default of the Contractor– generally

due to poor or non performance by the contractor;• Safety considerations • Natural incident such as heavy rainfall, landslides, flooding and

failure of temporary form of work or earth-retaining shields• Change of work rules/regulation;• Changes of decision making authority during the course of

construction may be due to politics, general election, early occupation of the newly built facility or conflicting views by higher authorities;

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Effects of VO on Construction Projects performance: Variation orders affect project performance as they

adversely affect productivity and project costs.The following may be the effects of Variation

Order on Construction Projects performance:• Disputes between Employer and contractor ;• Cost overruns;• Additional payment for contractor;• Reduced Construction productivity of the Project;• Influencing labour activity through the entire project;• Time overruns (i.e. delay);• Rework ;

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…CONT’D• Demolition;• Rate and/or price adjustment;• Quality degradation;• Health and safety; and• Relationships between the project team.

Factors influencing the occurrence of variation orders;• The nature of the works, • The complexity of the project and • The procurement method.

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…CONT’D

The extent to which an activity is impacted by Variation order depends on a number of factors:

• Timing of the change(at early stage or at later stage),

• Extent of the change (whether small or large),• Re-works,• Re-ordering, • Job relocation, etc.

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Cont’d…

• Why a clause permitting variation of works is an essential feature of any construction Contract? ???

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Because • A clause permitting variation of works is an essential

feature of any construction Contract because without it the contractor is not bound to execute additional work or to make omissions or changes.

• The advantage of the variation clause is that it allows the architect or other designers to delay making some decisions almost until the last possible moment.

• The variation clause tends to encourage Employers to change their minds and embark on construction projects without having properly thought through their project requirements (i.e. functionality, durability and optimality).

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The VO Process

• Identification: Owner should notifies contractor of a planned or potential change

• Evaluation: The owner must decide whether to adopt the change or not. If discovered after the fact, it should be estimated.

• Approval: When both parties agreed to the change, a change order approval form is issued

• Incorporation: Once a change order is approved by the owner, it is issued to the contractor to modify the terms of the original agreements.

• Payment: Change work should be identified and listed separately on progress estimates and invoices.

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Managing VO in construction projects:The role of Consultant in managing Variation order in Construction Projects as follows:• Advising the Employer on technical, legal and financial

matters. • Issuing a Variation Order, where deemed necessary, for

improvement purposes.• Focusing more effort during the design phase because

this would contribute greatly to the reduction of the occurrence of variation orders during the construction phase.

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Cont’d…The role of Contractor in managing Variation order in Construction Projects:Advising the consultant to issue a variation order when

technical problem is discovered;Discovering an obvious discrepancy, omission, error, or

conflict in the contract document and request that the Consultant reviews that problem, discuss the additional costs to correct the situation, agree on a price, and authorise the variation order;

Proposing alternative construction methods where the contractor's experience shows that the proposed technology will not fulfil the desired fitness and function of a design:

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The role of Employer in managing Variation order in Construction Projects

• Spending more time and money on the design phase of the Project or work;

Direct costs associated with VO in Construction projects:I. resources used including labor, material, and plant to carry

out the actual variation orders; II. increase in overheads-related charges and professional

fees;III. cost of resources that were used to carry out the aborted

or substituted works;IV. cost of demolition of aborted or substituted works; and V. Cost for resources lying idle before the ordered task

restart

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Indirect costs associated with Variation order in Construction projects:

I. change in cash flow;II. loss of productivity;III. cost for redesign and administration of

variation order;IV. Litigation-related costs in case disputes arise

due to variation orders.

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Valuations of Variation Order on Construction ProjectsThe valuation of variation orders, while seen as an

administrative step in the remuneration of changes effected to the contract, is in reality a rather complex matter involving a thorough understanding of contractual provisions, costing principles and an exercise of fair judgment on the part of the valuers (Harbans, 2003).

The valuation of variation orders may be in the form of:• Rates where contracted rates are adopted, where the varied works are of similar

character and extent and executed under similar conditions to items in the contract bills (Wainwright & Wood, 1983; JBCC, 2005);

• Day works which consist of the payment of executed works on a basis calculating the prime cost of works including materials, labour, plant hire and transport plus a percentage addition as agreed between parties to the contract (Harbans, 2003);

• Quotation where contractors submit a quotation to effect the work contained in a variation order; and

• Quantum merits is a miscellaneous method where negotiated or agreed rates or payment are made on a reasonable sum (Harbans, 2003).

CASE • A painting subcontractor requested extra

compensation from the project’s general contractor for applying prime cost to structural steel that was supposed to be factory primed. The general contractor requested that the owner’s contract manager issue a backcharge to the steel supplier for the painting contract’s increased expense.

• While filling out the the backcharge form, the contract manager suddenly realized that the steel in question had not been purchased by the owner, but was bought by the general contractor under a recent change order to furnish and erect leave-out steel

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. …CONT’D

• Since the steel vendor was selected by the general contractor, the owner has no reason to invoke a backcharge. The general contractor was told to handle it’s own problem without involving the owner.

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What do you observe

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Thank you!!!

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QUIZZ

• List and described five steeps of the variation order Process ?