What price variations?

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I wish you all a Happy and Prosperous New Year. I hope you are refreshed, and by now it will seem like any holiday was in the distant past.

Don’t forget our annual conference is to be held in Wellington in April, and to submit your registration.

I thought I would start the year with the topic of variations. Some clients and consultants seem to believe that contractors make “heaps of money” from variations but, in reality, they can be a nightmare to administer from the contractor’s point of view and, in many cases, for very little financial return.

Getting paid for variations 

Variation payments may be delayed for a variety of causes, which may be caused by the payer, the payee or both. Causes may include:
• variations not promptly priced and submitted for approval,
• variations promptly priced but not claimed until final account,

• variation prices submitted without details,
• payment for agreed variations only, but no agreement on submitted prices,

• dealing with the “easy” variations first — credits are approved quickly but major variations put aside for the final account, and
• the project budget may be exceeded by variations.

Variations may involve disruption, replanning, pricing and documentation. As it is often difficult to ascertain the true costs of the changes arising out of the variation, the full costs associated with variations are seldom recovered.

The most successful projects, and the most profitable for all participants, are usually those with few variations. A high value or number of variations sometimes reflects the poor quality of the contract documents, and ineffective project planning.

Managing claims for variations

Contractors and subcontractors can improve cashflow by adjusting their variation pricing and claim procedures.

Following these basic variation management practices will help ensure that variations are promptly priced, approved and paid. Instructions should be in writing and:
• accept only written instructions that clearly describe changes,
• confirm oral instructions immediately in writing — the recipient should confirm if the person issuing the instruction does not do so, and
• avoid commencing work on variations unless the price has been agreed. 

Price variations promptly
• Treat pricing variations as a high priority.
• Submit variation prices promptly, with adequate details. Use the variation submittal form on the RMBF web site (see www.masterbuilder.org.nz).

• Where an instruction does not expressly state that it is a variation, state clearly on the price submittal why the work is believed to be a variation.
• Give reasons for any different rates used, eg, where the work is carried out under circumstances different to the corresponding original work.
• Encourage the other party to discuss concerns about variations.

Authorise variations promptly
• Promptly review and approve or respond to variation submittals.
• Wherever possible obtain written acceptance of variation prices before proceeding with the work.
• Deal with differences in variation values while matters are fresh in the minds of people involved in the project.
• Refer disputed variations to adjudication.

Include variations in payment claims
• Include an up-to-date list of variations in each progress claim. Use a payment claim form, and
• claim variations progressively when priced and/or approved.

Further information regarding final accounts, adjudication and the like can be obtained by referring to the Registered Master Builders Federation Business Best Practice book.
This book is available for purchase through the Registered Master Builders members web site, www.masterbuilder.org.nz.