Reviewing Variation Orders in Construction Contracts.

Introduction

Variation orders (also known as change orders) are an integral part of construction projects, as they address modifications to the original scope of work after a contract has been signed. In large-scale construction projects, these changes are almost inevitable due to various factors such as design changes, unforeseen site conditions, and client requests. Proper management and review of variation orders are crucial to maintain project timelines, budgets, and contractual integrity.

This guide will cover the essential aspects of reviewing variation orders in construction contracts, including their purpose, types, causes, key steps in reviewing them, and practical tips for managing variations effectively.

1. What is a Variation Order?

A variation order is a formal document used to record and authorize changes to the scope of work specified in the original construction contract. These changes can affect the cost, schedule, or quality of the project, and they typically require adjustments to the contract terms.

Variation orders are legally binding amendments to the contract and should be carefully documented to avoid disputes between project stakeholders (clients, contractors, and subcontractors). They can include modifications such as:

• Changes to design or materials
• Additions or deletions of work
• Alterations to construction methods
• Adjustments due to unforeseen site conditions

2. Types of Variation Orders

There are generally three types of variation orders that can occur in construction contracts:

1. Additive Variation Orders

These are changes that involve adding new work or requirements to the original contract. For example, a client may request additional rooms or amenities that were not included in the initial design.

2. Deductive Variation Orders

In contrast to additive orders, deductive variation orders reduce the scope of work. A client may choose to omit certain features to cut costs or streamline the project. For instance, they may decide to use less expensive materials or remove some non-essential elements from the project.

3. Substitution Variation Orders

Substitution orders involve changing the materials, equipment, or construction methods from what was originally agreed upon. For example, the contractor may propose a more efficient construction technique or the use of alternative materials due to supply chain issues or cost considerations.

3. Common Causes of Variation Orders

Variation orders can arise from a variety of sources, including:

1. Design Changes

Design modifications are one of the most common causes of variation orders. This could be due to changes in architectural plans, structural requirements, or client preferences. Often, changes happen after construction has begun, requiring adjustments to materials, labor, and schedules.

2. Client Requests

Clients may ask for changes after construction begins, such as adding new features, altering the layout, or upgrading materials. These changes can impact both cost and time.

3. Unforeseen Site Conditions

Site conditions that were not anticipated during the design phase can necessitate a variation order. Examples include discovering underground utilities, encountering poor soil conditions, or facing environmental issues that require special handling.

4. Regulatory Requirements

Sometimes changes in local building codes, safety regulations, or other legal requirements occur after the contract has been signed. These changes may require adjustments to the project scope to comply with new regulations.

5. Errors and Omissions

Mistakes in the design or incomplete information in the contract documents can lead to the need for variation orders. For example, missing dimensions or conflicting specifications may require adjustments during construction.

6. Force Majeure

Unexpected events such as natural disasters, strikes, or pandemics can cause delays or changes in construction methods, materials, or schedules. This often necessitates a variation order to adjust timelines and budgets.

4. Key Steps in Reviewing Variation Orders

To effectively manage variation orders, it’s essential to follow a structured review process. This ensures that changes are necessary, justified, and well-documented. Here are the critical steps involved in reviewing variation orders:

1. Identify the Need for the Variation

Before proceeding with a variation order, it is essential to identify whether the proposed change is necessary. This involves analyzing the root cause of the variation (e.g., design change, client request, or unforeseen condition) and determining its impact on the project.

2. Evaluate the Scope of the Variation

Once the need for a variation is established, the next step is to evaluate the scope of work affected by the change. This includes identifying the specific areas of the project impacted by the variation (e.g., materials, labor, or schedule) and the extent of the required modifications.

3. Estimate the Cost and Time Impacts

A thorough analysis of the cost and time implications is crucial. This includes:

• Estimating the direct costs of the variation (e.g., additional materials, labor, or equipment).
• Evaluating the indirect costs such as delays or disruptions to the existing schedule.
• Assessing potential impacts on the overall project timeline, including changes to critical path activities.
  Contractors typically submit a cost breakdown along with the variation order request, which should be reviewed by the project team for accuracy and justification.

4. Review Contract Terms

The original contract should outline the procedure for managing variation orders. Review the specific clauses related to variations, including:

• Notification procedures: Does the contract require formal notice before a variation order is approved?
• Pricing mechanisms: Are variations priced using predefined rates, cost-plus agreements, or negotiated terms?
• Extension of time provisions: Does the variation qualify for an extension of time under the contract?
• Approval authorities: Who has the authority to approve variation orders (e.g., client, project manager, or engineer)?

5. Approve or Reject the Variation

Once the variation is fully evaluated, the project manager or client can approve, reject, or request modifications to the proposed variation order. In some cases, a negotiation may be required to agree on the costs, scope, and time implications.

6. Document the Variation Order

Proper documentation is essential to avoid disputes later in the project. The variation order should include:

• A detailed description of the change.
• The cost breakdown.
• Any agreed-upon schedule adjustments.
• Approval signatures from all parties (client, contractor, project manager).
  Proper documentation ensures that the contract is amended accurately and transparently.

7. Implement and Monitor the Variation

Once approved, the variation order should be communicated to the project team, and the necessary adjustments should be made to the construction schedule, procurement, and resource planning. Monitoring the implementation of the variation ensures that the change is executed as agreed upon and does not disrupt other aspects of the project.

5. Managing Variation Orders in Construction Projects

Variation orders can have a significant impact on the project budget and timeline if not managed effectively. Here are some tips for minimizing the negative effects of variation orders:

1. Establish a Clear Variation Management Process

Ensure that the project contract contains a well-defined process for managing variation orders, including notification procedures, pricing methodologies, and timelines for approval. Having a clear process helps prevent misunderstandings and ensures that changes are dealt with efficiently.

2. Minimize Design Changes During Construction

One of the best ways to reduce the number of variation orders is to finalize the design as much as possible before construction begins. Regularly engaging with stakeholders during the design phase and conducting thorough design reviews can help minimize post-contract changes.

3. Use Contingency Budgets

Variation orders can affect project costs, so it’s essential to account for potential changes by including contingency budgets in the project plan. This allows the project to absorb some variations without exceeding the overall budget.

4. Communicate Clearly with Stakeholders

Proactive communication with all stakeholders can help minimize unexpected changes. Regular updates, meetings, and consultations ensure that stakeholders understand the project’s progress and any potential variations that might arise.

5. Monitor and Track Variations

Track all variation orders carefully, ensuring that they are logged in a central system. Use project management software like Primavera P6, Microsoft Project, or Procore to monitor variations and their impact on cost and schedule. Keeping an up-to-date record allows project managers to quickly assess how multiple variations are affecting the project.

6. Negotiate Variations Wisely

When dealing with variations that involve increased costs, contractors and clients should engage in open negotiations. The goal should be to reach fair agreements that reflect the true cost and impact of the variation while keeping the project on track.

6. Practical Example of Variation Order Review

Imagine a construction project for a residential building where the client requests to upgrade the kitchen finishes from standard to premium materials after the contract has been signed. This change requires a variation order.

Step-by-Step Review of the Variation Order:

1. Identify the need: The client has requested a change to the kitchen finishes, requiring premium materials like granite countertops and stainless steel appliances.
2. Evaluate the scope: The contractor reviews the new specifications and identifies the additional materials required and any changes to labor (e.g., specialized installation techniques).
3. Estimate cost and time impacts: The contractor provides a cost estimate for the upgraded materials and additional labor. The project manager assesses whether the change will extend the schedule due to procurement delays for the premium materials.
4. Review the contract terms: The contract allows for material upgrades but requires the client to bear any additional costs and possible schedule impacts. The project manager confirms that the variation qualifies under the terms of the contract.
5. Approve the variation: After reviewing the cost and time implications, the client approves the variation order, agreeing to the additional costs and a two-week extension to the project schedule.
6. Document the variation: The variation order is formally documented, signed by the client, contractor, and project manager, and added to the contract file.
7. Implement and monitor: The procurement team orders the premium materials, and the project manager monitors the work to ensure the changes are implemented as per the variation order.

Conclusion

Variation orders are an unavoidable aspect of construction projects, but with careful review and management, they can be handled effectively without causing major disruptions to cost or schedule. By following structured processes, maintaining clear communication, and leveraging technology to track variations, project managers can keep projects on track while meeting stakeholders’ evolving needs. Properly managed variation orders can even improve project outcomes by adapting to unforeseen challenges or enhancing the final product to meet client expectations.