171 - Variations

8/8/2019 171 - Variations

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Australian Construction LawNewsletter Issue #15 47NPWC/NBCC "No Dispute" Paper 8 - Variations1. Introduction1.1. The terms of reference for the JWP in respect ofvariations were as follows:examinetheBritishPropertyFederation(BPF)systemand recommendwhichof its conceptsshould be adopted in Australia; propose guidelines for contractual arrangements for variations.1.2. Most variations to the project directed by a Principalcan be classified into two basic types, namely:Type (i) variations, caused by inadequate, incomplete orambiguous documentation; andType (ii) variations, caused by changes or additions toprojectrequirements.1.3. Variationsmayalsobedirectedto overcomedefectivematerials orwork. This special category of variation maybe appropriate in circumstanceswhere it is not realistic toremove and reconstruct defective materials or work.Procedures for dealing with suchvariations arediscussedin Section 8 of this paper. The term"variation" is usuallythoughtof as applying to matters described as Type (i) orType (ii) variations. Accordingly, unless the contextindicates otherwise, the term "variation" in this paperrefers only toType (i) andlorType (ii)variations and doesnot apply to variations to overcomedefectivematerialsorwork.1.4. As well as the Type (i) and Type (ii) classificationsdescribedabove,variations can also be classifiedas either"urgent" or "non-urgent". An "urgent" variation is avariation instructed after the commencement of the leadtimenecessary to allow the variation to beplanned, and toallow thepart of theWorks affectedby the variation to bere-planned, so that the variation can be carried out in anorderlymannerand inpropertradesequencewiththeotherproject work. Generally, the price for an "urgent" variation cannot be established before the variation work isperformed.1.5. Variations, andparticularlyurgentvariations, disruptthe orderly performance of the Works, demand a disproportionate amountofmanagementtime andresources, andthereby affectthe effectivemanagementofprojectquality,cost andtime. The propervaluation ofvariations is oftena complex matter,. particularly if the . variation affectscritical activities or resources. The indirect cost of avariation may not be apparent until the later stages of aproject.1.6. The Risk Allocation Model described in Paper 1 "RiskAllocation", indicates that the Contractor is entitledto full compensation for performing variations instructedby the Principal, or variations necessary as a result ofproblemswith design andlor documentation forwhich the,Principal is responsible. However, the subtle nature ofcertain of the factors that affect the performance of construction worksmeans thatit is sometimes difficultfor theContractorto identify and substantiate its proper entitlement.

1.7. Contractualprovisions shouldnot assist the Principalavoid the consequences of its variation requirements. Ontheotherhand, aPrincipalshouldbe given theopportunityto mitigate the extentof its liability. Timely communicationregardingvariations isnecessary toallow the effectivecostmanagementofprojects. (SeePaper 5 - "CostManagement".)1.8. The above observations indicate that variations, andparticularly "urgent" variations, benefit neither party,despite the traditional belief that Contractors make theirprofits fromvariations. Itis in theinterests ofallpartiesforthe number and extent of variations to be kept to a minimum.1.9. This response to the JWP' s terms of reference is setout under the following headings: Variationsunderthe British PropertyFederation (BPF) system; Guidelines for minimising the incidence ofvariations;Procedural requirements for dealing withv"ariations; Guidelines for minimising the cost of variations;Valuation of variations;Disputes regarding variations;Variations in respect of defective materialsand work; Summary of Findings.2. Variations Under The BritiSh Property Federation(BPF) System2.1. Under the BPF system, detail design development isnormally the responsibility of the Contractor, Le. theContractis basedon the Principal's performance requirements and specifications, except where the Principal hasparticular construction requirements. The Contractorusually employs specialist consultants to carry out thedetailed design on its behalf. In this respect, the BPFsystem mirrors certain aspects of detail design and construction contract strategy (see Paper 11 - "AlternativeContractStrategies").2.2. The procedures for raising and processing variationorders under the BPF system are set out in Section 5.5 oftheBPFManual. As theContractor is usually responsiblefor thedetaileddesign! documentation, theprocedures areframed to cater predominately for Type (ii) variations.Under the BPF system, one point control of variations isexercisedthroughtheClient'sRepresentative, (thePrincipal), and the value of a variation should be agreed ordeterminedpriorto authorising thework. TheBPF systemprovides for a bonus payment to the Contractorof50% ofany saving resulting from a Contractor-originated variation.2.3. Theprocedures forraising a variationorderunder theBPFsystemate describedin Section 5.5 (pp 54 - 56) of theManualof the BPFSystem. Thegeneral thrustoftheBPF


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Australian ConstructionLawNewsletter Issue #15 48variation procedures are appropriate for non-urgentType(ii) variations, but are inappropriatefor Type (i) variationsand urgent Type (ii) variations.3. Guidelines ForMinimising The Incidence OfVariations3.1. The incidence of variations can be reduced by:preparation of a carefully considered, objective, performance-orientated Principal ' sbrief;carefulpreparation andco-ordinationofdetaildesign and documentation;one-point control of variations;elimination or minimum use of provisionalsum items.3.2. Ensure that all Principalrequirements are fulfilled bythe design and documentation, that the Principal is acquaintedwith all planning solutions andin agreementwithsame, and that the Principal is made fully aware of theadversecost and time implications ofvariations during theconstruction stage.3.3. Aim for the highest standard of accuracy and adequacy indesign anddocumentation. Ensurethat sufficienttime (andadequate fees) are allocated to thedesign/ documentation process for anomalies to be resolved prior toconstruction. The design and documentation processshould be the subject of a formal Quali ty Assurancesystem.3.4. Ensure that the detail design and documentation isdescribed in objective terminology. Objective specifications are an essential requirement for the implementationof quality assurance systems. Subjective specificationscause uncertainty and misunderstandings, which lead toinefficiency, delay, disruption and increased costs.3.5. Ensure effective communication between the designandconstruction teams. Continuity of involvementof thedesign team throughout the construction stage of theprojectcan significantly reduce the incidenceof unnecessary variations, delays and disruption.3.6. In general, the designer should not be the Principal'sContract administrator, because of the tendency for thedesigner to amplify its requirements as the constructionproceeds. However, if the roles are combined for aparticular project, the designer/contract administratorshould take care to avoid ordering variations in this manner. The contract administrator should be aware that aninstruction to "clarify" requirements may be a variation.3.7. When properly priced, "last minute" and "multiple"variations areexpensive, after taking accountof theresulting delay anddisruption to theorderly performance of theproject. Type (ii)variations shouldnot beorderedwithoutcareful consideration of their viability. Variations whichare not viable or essential should not be implemented. Incertain instances it may be more appropriate to defer aproposed modification until after the project has reachedPractical Completion.3.8.0nepointofcontrolandresponsibilityfortheauthori-

sation of variations should be vested with the memberofthe project team responsible for managing the interfacebetween the design team and the construction team.3.9. Any amended drawing, specification or other document issuedduring theconstructionperiodshould haveallchanges highlighted and the document given an amendment revision number.3.10. Ensure that an allegedvariationis in fact avariation,and is not work already covered by the Contract.4. Procedural Requirements For DealingWithVariations4.1. Clearlydefinedproceduresfordealingwithvariationsshouldbe established, and all membersof theprojectteammade fully aware of their respective roles, in order toensure that the system operates smoothly. It is of primeimportance that variations receive prompt attention by allparties, particularlyvariations which affect critical activities or resources.4.2. Type (i) variations relate to thecorrectionofproblemswith the design andlor documentation. The Principal hasno option but to instruct such variations. Type (i) variations should be identified and instructed at the earliestpossible time.4.3. Procedures fordealing withType (i) variations shouldinclude the following steps:(i) When an ambiguity, error, omission, discrepancy, inconsistency or other fault is found in

the documents, it should promptly be madeknown to the member of the project teamresponsiblefor the authorisationof variations(the authorised person).(ii) Wherenecessary, theauthorisedpersonshouldpromptly discuss the most appropriate remedy for the faultwith therelevantmembers ofthe design team and the construction team.(iii) As soon as practicable after notification of thefault, the authorised person should issue aVariation Order to the Contractor correctingthefault anddirecting thattheworkproceedinaccordance with the instruction.(iv) As soon as practicable after receipt of theVariationOrder, theContractorshouldadvisethe authorisedperson if theVariationOrder islikely to result in an increase in price or timeandlor affect the interface with the work ofother contractors.(v)Where possible, the parties should agree apriceand, if relevant, an extensionof time for suchVariation Orderbefore the variation is carriedout.(vi) If pre-agreement of price andlor time for thevariation is notpossible, theContractorshouldsubmit the readily identifiable costs and delays resulting from the VariatioD. Order assoon as practicable (say not later than 28 days)after performance of the variation work.(vii)The valuation of most variations should becapable of being finalised in step (vi) above.However, for certain variations there will be


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Australian Construction LawNewsletter Issue #15 50instruction to be a variation or unreasonablydelays in submitting a valuation ofvariation,the Principal should be entitled toare m edy against the Contractor. (See Paper 9 "Claims", and Paper 10 - "Dispute Resolution,,).

(v) The Contract provisions should provide anappropriate balance between the legitimaterequirements of the Principal for prompt notice andvaluationofvariations, andthe legitimaterequirement of theContractorforpropercompensation for the performance of variations.(vi) A nominated member of the project teamshould have the responsibility for co-ordinating all functions of the variation processand for ensuring that all procedures are complied with, reports submitted and authorisations obtained.(vii)Contract administration procedures shouldbeaccompanied by an effective cost monitoring andreporting format to thePrincipal. Thefollowing data should be included with respect to variations: The budget allowance for Type (i)variations and costs committed todate;The progressive value of Type (ii)variations and the budget for ,them.(viii)The project budget and program should beregularly monitored and i f necessary updated

to reflect the effect of variations and otherdelaying events on the performance of theProject.(ix) Theindirectdelay anddisruption ripple effectthatmaybe caused by a variation may not becapable of being ascertained at the time ofperforming the variation. In such circumstances it may only be possible to analyse theindirect effect of variations and other factorsthat haveaffectedthepeiformanceof theproject at a later stage in the project. However,Contract procedures should ensure that theContractor does not delay the submission ofreadily identifiable costs merely becausethere may be ongoing indirect effects causedby variations and other delaying events. I f theContractorconsiders thattherewill be indirectcosts and delays associated with a variation,this should be advised to the Principal at thetime of submitting the statement of readilyidentifiable costs and delays.(x) VariationOrders shouldnotbeissued after theWorks have reached Practical Completion.Anymodificationsor additionalworkrequiredto be executed after Practical Completionshouldbe the subjectof a separate agreementwiththe Contractoror otherpersonsemployedby the Principal. If other persons are employed, the Principal s ~ o u l d take care not tovoidwarranties relating to the Works.

5.GuidelinesForMinimisingThe CostOfPerformingVariations5.1. Thecostofperformingvariations, andhencethepriceproperly payable by the Principal, may be minimisedthrough adherence to the following general guidelines:(i) Variation instructions shouldbe explicit as totechnical requirements and extent.'(ii) Contractprocedures should beconsistent andclearandnot open to uncertainty andambigu0us interpretation.(iii) Restrict each Variation Order to one changeonly.(iv) A variation should be instructed in sufficienttime to allow proper re-planning of the workundertheContract, andto allow theworktobecarried out in an orderly manner in propertrade sequence.(v) Keep the number of variations to a minimumto avoid the additional costs incurred as aresult of the compounding effect of multiplevariations.(vi) Whereverpossible, avoid"urgent"variations.Urgent variations are expensive and have ahigh potential for delay, disruption and laterdispute.(vii) Whenever possible, the parties shouldagree the price for a variation prior to authorising the varied work to proceed. However, it may not be practical to pre-agreedthe valuation of "urgent" variations. A delayin authorising a variation pending agreementon price may cause a "non- urgent" variationto become an "urgent" variation.(viii)Where a variation is instructed prior to agreement on price, "without prejudice" progresspayments should be certified and paid pending resolution of the final price.

6. ValuationOfVariations6.1. The Risk AllocationModel indicates that variationsare aPrincipal's obligation/risk, and that theContractorisentitledto full and fair compensation for the performanceof variations to theproject instructed by thePrincipal, andforvariationsnecessary as aresultofproblemswith designand/or documentation for which the Principal is responsible. Contractualprovisions should not assist the Principal avoid the consequences of variations.6.2. Where practicable, the price for a proposedvariationshould be agreed prior to the Principal authorising thevariedwork. Ingeneral, thisprocedure isonlypractical fornon-urgent variations where the pricing and agreementprocess for the proposedvariation can becompletedpriorto the start of the lead time necessary to allow the variedwork to beproperly planned and to allow the variedworkto be carried out in an orderly manner and in proper tradesequence with the performance of the project.6.3. Ifvariationworkis of asimilarcharacterandexecutedunder similar conditions to work described in the Bills ofQuantities, then itmaybeappropriateto apply therelevantprices or rates contained in the Bills of Quantities.


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Australian ConstructionLawNewsletter Issue #15 516.4. However, urgent variations are not carried out underthe same orderly conditions as the original contract workdescribed in theBills ofQuantities. When itis reasonableto do so it may be appropriate to establish a fair valuationof the direct cost component of an urgentvariation basedon anextra - overincrease in the prices and rates setout inthe Bills of Quantities.6.5. If theconditions underwhich avariationis performedare so differentto the conditions under which the originalContract work would have been carried out there may beno reasonable alternative but to build up from first principles a reasonable price for the variation based on jobspecific data and other relevant factors.6.6. Thevaluation ofvariations, particularly urgentvariations, may include costs relating to the delay and disruptioncaused by thevariation. Itmaybe appropriateto state,as separate valuations items, the direct costs and theindirectcosts incurred carryingout an urgentvariation, sothat the Principalis awareof thecostpenalty to the projectof urgent variations.6.7. The pricing and payment structure ofmost constructioncontractsis basedon theconceptofprogresspaymentsbeing made monthly in respectofworkcarried out duringthepreviousmonth. ThePrincipalshouldmake"withoutprejudice" progress payments in respect of variations,even if the final. prices of the variations have not beenestablished.6.8. If payment for a variation is notmade until after thefinal price for a variation has been agreed or determined,the valuation may reasonably include for the financingcosts incurredby theContractorduring theperiodfrom thedate of the nextprogress payment after the variationworkwas performed to the date when payment is made.6.9. The directcost and immediate ripple effect of a variation should be established within a reasonable specifiedtime after the performance of the variation. The indirectdelay anddisruption ripple effect thatmay be caused by avariation may not be capable of being ascertained at thetime ofperforming thevariation. In such circumstances itmay only be possible to analyse the indirect effect ofvariations andother factors thathave affectedtheperformance of the project at a later stage in the project. Thevaluation of the indirect component of a variation shouldbe addressed progressively after identification and submittedas soon as practicable. TheContractprocedures forvaluing variations shouldrecognise this two stageprocessintheestablishmentof thepropervaluationofcertainvariations' particularly urgentvariations.7.DisputesRegarding Variations7.1. If a Subcontractor's claimrelates to a variation, or analleged variation, to the Head Contract Works, (and assumingthe technical documentationfor theSubcontractisthe same as that included in the head contract), theSubcontractor's entitlement in respect of the variationshould be resolvedin a single forum pursuantto the termsof theHeadContract. TheContractor andtheSubcontractor shouldco-operate toprepare submissions to the Principal in respect of the disputed variation and accept the

resolution of the dispute, whether by negotiation, arbitration or other means, as binding on both parties.7.2. Such procedure overcomes the potential problemsassociatedwithparalleldisputeresolutionprocedures underthe Head Contract and the Subcontract in respect of thesamematter.7.3. TheContractorshouldensure thatonly thosemattersthatare relevantto thePrincipal's responsibilities aredealtwith in this manner; it is inappropriate to forward to thePrincipal components of a Subcontractor's claim that arematters properly limited to theContractor and not mattersfor which the Principal could be held accountable.8. Variations In Respect Of Defective Materials OrWork8.1. If the Contractor's materials or work is not in accordance with the Contract, it is normal practice for theContractor to remove and replace the defective materialsor work.8.2. In certain circumstances, it may be more appropriatefor the defective work to be "varied", such that the defective work as varied satisfies the Principal's requirementsfor the project.8.3. If thePrincipal agrees to vary the defective work asdescribed, the Contractor should not be enti tled to anextensionof time or paymentfor such variation unless the. variation causes an increase in thevalueto the Principalofthe Works, in which case a valuation of the variationshould have regard to such increase.8.4. ThePrincipal and the Contractor should agree on anyincrease or decrease in the Contract price or time for sucha variation prior to the variation being instructed.8.5. ThePrincipal should be under no obligation to ordersuch a variation merely to assist the Contractor.8.6. A Contract provision dealing with this class of variation is set out in Clause 30 of AS2124-1986.- Reprinted with the permission of the NationalPublic Works Conference and the NationalBuilding and Construction Council.

171 - Variations

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