Variations and Change Orders in Tender and Contract

In construction and other types of contracts, variations and change orders are common occurrences. These terms refer to adjustments in the scope of work, costs, or timelines after the contract has been signed. They are essential for addressing unforeseen circumstances or changes in the project's requirements. This tutorial will explain the concepts of variations and change orders, their importance, and provide a real-world example.

1. What Are Variations and Change Orders?

Variations refer to modifications or changes in the original scope of work outlined in the contract. These changes can arise from unexpected site conditions, new client requirements, or errors in design. A change order is a formal document issued to authorize the change, specifying the adjusted scope, cost, and time implications.

2. Reasons for Variations and Change Orders

Variations and change orders can be caused by several factors, such as:

• Design Changes: When the client requests changes in the design after the contract has been signed, it may lead to variations in the scope of work.
• Unforeseen Site Conditions: During construction, unexpected site conditions like hidden underground utilities, unstable soil, or environmental factors may require changes to the work.
• Regulatory Changes: Changes in building codes, safety regulations, or environmental laws may require modifications to the work or materials used.
• Errors or Omissions: Mistakes in the original design or scope of work may be identified during the execution of the project, requiring adjustments.
• Client Requests: The client may request additional work or changes to the project scope during construction, which would necessitate a change order.

3. Process of Managing Variations and Change Orders

The process for handling variations and change orders generally follows a series of steps to ensure that both the client and contractor agree on the changes and their implications. These steps include:

• Identification of Change: The contractor identifies a variation or the client requests a change to the scope of work.
• Assessment of Impact: The contractor assesses the impact of the variation on the cost, timeline, and resources needed. This is often referred to as a "cost impact assessment."
• Approval of Change: The contractor submits a formal change order proposal to the client, outlining the changes, revised cost, and schedule adjustments. Both parties must agree to the change order before it is implemented.
• Implementation: Once approved, the changes are incorporated into the work. The contractor proceeds with the modified scope of work and adjusts the project plan accordingly.
• Documentation: All variations and change orders must be documented in writing, with a clear description of the change, cost adjustment, and timeline update. These documents serve as an official record for both parties.

4. Real-World Example: Construction of a Residential Building

Let’s consider a real-world example of a residential building construction project to illustrate how variations and change orders are handled.

Example: Residential Building Construction

A contractor has been hired to build a residential apartment complex. The initial contract specifies a set of plans and materials, with a total value of $2,000,000. However, during construction, the following variations and change orders occur:

• Variation 1: Design Change by Client
  The client requests a change in the interior layout of the apartments. The changes include additional walls and larger bathrooms. This variation increases the scope of work and results in an additional cost of $50,000. A change order is issued, and both parties agree to the new design and cost.
• Variation 2: Unforeseen Site Condition
  During excavation, the contractor discovers underground rock formations that were not identified in the initial site survey. This condition requires the use of specialized equipment for excavation, resulting in an additional cost of $30,000 and a delay of two weeks. The contractor issues a change order to account for the additional cost and revised timeline.
• Variation 3: Regulatory Change
  A new safety regulation mandates the installation of additional fire safety systems, including sprinklers and alarms. The contractor submits a change order reflecting the new cost of $20,000 to install the required safety equipment.

In this example, the contractor has encountered three variations: one due to a design change requested by the client, another due to unforeseen site conditions, and a third due to a regulatory change. Each of these changes required a formal change order to document the impact on cost and schedule.

5. Impact of Variations and Change Orders on the Project

Variations and change orders can have several impacts on a project:

• Cost Impact: Variations typically lead to changes in the overall cost of the project. Some changes may be relatively inexpensive, while others may significantly increase costs.
• Timeline Impact: Changes to the scope of work or unforeseen conditions can delay the project. The contractor may need additional time to complete the work, resulting in project extensions.
• Resource Management: Additional resources or specialized labor may be required to accommodate the variations. This can affect resource allocation and project planning.
• Contractor’s Profit Margin: While some variations may result in increased costs, they can also offer opportunities for contractors to earn additional revenue through change orders. However, handling variations efficiently is important to avoid disputes and maintain a good client relationship.

6. Legal Aspects of Variations and Change Orders

In a construction contract, variations and change orders must be addressed in accordance with the contract's terms. Most contracts include clauses specifying how variations should be handled, including:

• Approval Process: Contracts typically require formal approval of any variations or change orders before they can be implemented.
• Cost and Time Adjustments: The contract should specify how adjustments in cost and time are calculated and documented in the event of a variation.
• Dispute Resolution: If the client and contractor disagree on the validity or cost of a variation, the contract may outline a dispute resolution process, such as mediation or arbitration.

7. Conclusion

Variations and change orders are inevitable in most construction and project-based contracts. It is essential for both parties to clearly understand the process for handling changes, including how changes will be assessed, approved, and documented. A well-managed change order process ensures that the project can adapt to unforeseen conditions or client requests while maintaining transparency and fairness for both parties. Proper documentation and clear communication are key to avoiding disputes and ensuring a successful project outcome.