A variation order is a step in the change management process that enables the implementation of changes to the construction project brief or scope of work. The variation orders have to be approved by the client, the contractor, and the architect.

After the first scope is established, complete with the total cost to be paid and the precise tasks to be carried out, a client may change their mind about the proposed finished project. These changes after evaluation need to be incorporated into the original construction contract.  

The success of a construction project performance can be seen from the timeliness of completion of the implementation of work that has been agreed upon by the owner and contractor.

Additionally, projects with plenty of variation orders result in the contractor’s productivity levels being lower than expected.

The impacts that these variation orders have on the overall performance of the project are as discussed below:

Project Costs Overruns

Variation costs refer to the direct expenses and revenue losses that reasonably result from or are connected with the variation. This may include any increased design, construction, manufacturing, commissioning, decommissioning, or financing expenses.

There are two clearly defined phases, namely the pre-construction and construction phases, which are particularly significant in construction projects.

The pre-construction phase typically uses fewer resources than the building phase, hence the construction phase is when cost planning is concentrated.

Clients want to be aware of the final cost of their construction projects. Clients believe the final building costs should ideally match the initial tender estimate.

There are two types of costs; direct costs and indirect costs. Although sometimes the classification may interchange for both, some factors may qualify to be both either direct or indirect.

Direct Costs Associated with Variation Orders

These include the following:

  • Increased time-related charges and overheads
  • Increased material charges
  • Reworks and standing time
  • Inflation, changes to cash flow, and loss of earnings
  • Management time, head office, and site charges
  • Cost for redesign and administration of the variation order
  • Unplanned site meetings
  • Labour expenses during the waiting time

Increased Time-Related Charges and Overheads

These are costs that arise due to time delays.

Time may be wasted on a particular task, consequently affecting the overall project delivery time. This will trickle down to the effect of items such as plant, insurance, and other general preliminaries which will have to be extended due to the increased time.

Increased Material Charges

During the implementation of the variation order, the prices of materials may go up, directly affecting the project’s overall estimated budget as the contractor quoted earlier.

Direct Cost of Reworks and Standing Time

When the variation order is issued, other works already covered may have to be uncovered. Uncovering work is tied to a cost that will result in increasing the overall cost.

Also, time will be lost as other contractors for instance have to wait for the variation works to be implemented so that they could resume their work. While this happens, the overhead charges continue to pile up. The cost of storing the materials for example may go up in this instance.

Inflation, Changes to Cash Flow, and Loss of Earnings

During the implementation of the variation orders, there may be inflation and this will negatively affect the cost of construction. Consequently, this may affect the cash flow and affect the progress of the project. In the long run, the client will lose earnings as initially envisaged.

Management Time, Head Office, and Site Charges

Initially, both the management side of the project and the contractor have a budget for their expenditure throughout the life of the project execution. Site charges, including electricity, security, and other relevant site costs, will automatically go up.

This will also affect the administration costs for the management and head office due to such issues as overtime etc.

Cost for Redesign and Administration of the Variation Order

Some variations require redesigning and this, more often attracts charges from the designing team. Administration of the same from the project manager’s side will attract more charges which will be borne by the client.

Cost of Unplanned Site Meetings

Unplanned meetings will have to be convened and this will lead to more costs as the parties involved will have to claim their mileage and expenses incurred.

Labour Expenses During the Waiting Time

During the execution of the variation orders, other labourers would have to be put to wait as the order is being executed. These labourers have to be paid as they wait. This cost may be borne by the contractor but will consequently be transferred to the client. This cost can be avoided if variations are properly managed.

Indirect Costs Associated with Variation Orders

Indirect costs include the following:

  • Overhead costs
  • Affected profits
  • Taxes
  • Change in cash flow due to financial charges;
  • Loss of productivity due to interruption where the gang has to familiarize itself with new working conditions, tools, and materials
  • Litigation-related costs in case disputes arise due to the variation order.
  • Increased time-related charges

Overhead Costs

The costs of administration may be direct or indirect as seen and explained above.

Affected Profits

The profits on the side of the client may be affected because they will have to be earned later than planned or may be less than envisaged.

Taxes

Variation orders will increase the cost of construction generally and this will consequently increase the taxes to be paid. It may not be necessarily direct but it may come through the materials or other statutory charges.

Change in Cash Flow due to Financial Charges

When the client procured a credit facility for the execution of the project, a delay in completion will lead to the imposition of penalties due to default. This in turn results in a loss of revenue.

Loss of Productivity Due to Interruption

This is especially where the labour gang has to familiarize themselves with new working conditions, tools, and materials.

There will be loos of productivity as they learn how to implement the task. Consequently, this will lead to even further delays.

Litigation-Related Costs in Case Disputes Arise

Some variation orders may lead to disputes which when not solved through the alternative dispute resolution methods normally stipulated in the contract, lead to litigation which is even way costly.

Project Time Overruns

Clients require their construction projects to be completed within minimum time limits.

It is anticipated that projects finished within the shortest possible time achieve some monetary savings. Contractors are heavily penalized when they exceed the original project delivery date.

The penalty imposed is meant to compensate damages suffered by the client owing to the prolonged delivery period. Variation orders issued during various phases of construction projects negatively affected both the completion time and costs of projects.

Quality Degradation

In contracts with a significant degree of risk for unknown variables, for example, lump sum, contractors may cut corners on quality and quantity to maximize profits.

If variation orders are frequent, they may potentially affect the quality of work. Quality may be compromised as contractors try to compensate for losses when they are not optimistic about recovering.

Poor Health and Safety

Where changes are brought about, sufficient health and safety information and appropriate resources are to be made available to the contractor to execute the work safely.

Changes in construction methods, materials, and equipment may require additional health and safety measures. Consequently, this may require the contractor to provide the principal contractor with any information which might lead to the compromising of the health and safety of any person at work.

This will include all personnel carrying out construction work or any person who might be affected by the work of such a person at work.

This might justify a review of the health and safety plan.

Poor Professional Relations

A construction project is not merely brick and mortar brought together. Rather, it creates professional relationships between parties to the contract.

Each project completed constitutes an added experience for participants and their reputation builds up. But disputes may arise between parties to the contract due to variation orders.

Misunderstandings may arise when contractors are not satisfied with the determination of the valuation of variation orders by the client’s consultant.

Parties to a contract are left to argue over the cost, time effects, and due compensation of a variation order.

Unless a mutually acceptable solution is agreed upon by the parties, the valuation of variations in the form of variation orders will continue to remain at the forefront of disputes and claims making their way ultimately to arbitral tribunals or the corridors of justice.

The maximum project performance would be achieved if the work invariably flows smoothly within time limits and the anticipated budget.

Conclusion

We have seen that the presence of variation orders can greatly impact the performance and successful implementation of a construction project.

This happens by way of introducing project cost and time overruns, possible quality degradation and possible negative effects on the project’s health and safety aspects and the professional relationships among project team members.

Although changes are sometimes inevitable, the project team needs to do thorough work during the pre-construction to ensure all possible client requirements are exhausted and included in the project brief and the project’s scope of work.

Also, the client should be made aware of the impact the introduction of changes may have on the health of the project beforehand. This will help in proper planning. It will help the client to have an understanding of the impact of their actions during the construction phase of the project. That being said, thank you for reading this blog post. If you have any feedback, leave your comments in the comment form below.

Cosmas Karisa

I’m a Quantity Surveying graduate from the University of Nairobi with more than five years of office and construction site experience. I have been in charge of several construction projects that have informed my expertise in matters of construction contracts, cost control, project management, and sustainable design research. Also, I teach construction technology on my YouTube Channel.

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