Managing Construction Variations: Best Practices to Minimize the Impact of Project Changes

Variation is a normal part of any process, with differing equipment, materials, and people inevitably producing different results. While a small amount of variation is easy to plan for and resolve, unexpected or unexplained events can sometimes lead to changes that are harder to rectify. The mitigation strategies are unique for each industry, but what is a variation in construction, and how can it be handled effectively?

In this blog post, we review the definition and purpose of construction variations, as well as the categories of change most often encountered. We also provide some useful tips that help contractors and clients manage construction variation proactively.

What are Construction Variations?

Construction variations are changes to the scope of work for a construction project that occur after the date the contract has been implemented. Variations can take the form of additions, substitutions, or complete omissions, and all contracts must allow them to be completed.

Although variations are not desirable, they are sometimes unavoidable for complex projects when design changes are called for, technological advancements cause projects to run long, or statutory (legal) conditions, material changes, safety precautions, and other factors impact a project in process.

All variation in construction involves a valuation process where additional material, labor, and equipment costs are assessed and compared to predefined rates in the contract (if applicable), or market rates when newly defined activities are required. A variation usually requires the submittal of a formal change order that is captured within the construction contract documents once it is approved by both the client and contractor. Most contracts also include specific provisions explaining how variations are to be managed.

What Is the Purpose of Construction Variations?

Construction variations provide the flexibility required to make changes throughout the course of a project that may be necessary due to unforeseen circumstances. Without variations, contractors and clients would be locked into the original contract terms, even when changing conditions or requirements make them difficult or impossible to uphold. Construction variations allow new work or alterations to be incorporated while still managing the cost and schedule impact and ensuring contractors and subcontractors are compensated fairly for their work when project contingencies are exercised.

Variations play a major role in the construction industry, and in many instances, not having proper control of these variations can lead to cost and budget overruns. Variations not correctly managed and captured could spell disaster for any contractor, large or small, and these will inevitably impact on the contract, possibly having dire consequences for the relations between the contractor and consultants. This, in turn, could lead to disputes, and in an industry that is already adversarial in nature, it’s a scenario that we are unfortunately familiar with.

Types of Variations in Construction Contracts

Construction variations can be driven by various factors, and they are categorized broadly depending on their impact and origin. These variations can generally be classified as:

• Directed variations that are driven by client requests for project changes.
• Constructed variations based on unexpected factors such as drawing discrepancies and site conditions.
• Deductive variations are caused by a spike in material, labor, or equipment costs.

A positive variation increases the scope of work, along with the project cost, whereas a negative variation reduces the overall cost. For example, removing several rooms from the floor plan before construction might lead to a negative variation.

Design variations

Changes to the design are a common occurrence, especially for fast-paced projects that do not leave sufficient time to model and collaborate on the various design alternatives. This type of variation can entail modifications to documentation, including architectural plans, engineering drawings, and construction specifications. Depending on the project phase when they occur, construction variations related to design can have a significant impact on cost and schedule.

Material variations

A material variation refers to a discrepancy between specified materials and actual materials used for a task or project. Construction variation related to materials can be caused by approved substitutions for commodities such as bricks, lumber, and concrete, mistakes during procurement, or changes to client material preferences after the contract is signed. Depending on the circumstances, a material change can lead to either a positive or negative variation.

Scope of work variations

A scope of work variation refers to any modification to the original scope defined in the contract. This category of variation can include material and design changes, but it also encompasses changes based on unforeseen site condition issues like soil contamination, system upgrades, or client-initiated changes such as flooring, plumbing, or fixture upgrades. For example, additional site excavation work to remove underground boulders might be considered a scope of work variation.

Contractual variations

Changes to the contract itself can also lead to variations. Contract adjustments can stem from administrative or legal clauses that are reinterpreted during the project, budgetary constraints, omissions from the original contract, or force majeure events. Depending on the circumstances, variations in contract terms can also lead to cost and timeline updates that impact contractors and clients. Additional contract issues leading to variations include:

• Changes in project payment terms or milestones
• Subcontractor reassignments requested by either party
• Insurance coverage or performance bond updates
• Alterations to the dispute resolution process

Regulatory changes

Important changes to laws, codes, or standards can also lead to deviations when they are introduced during the project. Updated zoning laws, environmental regulations, or energy efficiency standards can filter down to new material or design changes, and increase the original scope of work. Variations impacting labor laws or employment regulations can alter working hours and wages, potentially disrupting the project schedule and budget.

6 Tips for Successful Construction Variation Management 

While it is important to realize that construction variation is an unavoidable part of doing business, excessive changes can create challenges that threaten the success of the project. Cost overruns can cause the original budget and contingencies to be exceeded, while implementing variations can easily disrupt the project timeline.

With so much at stake, it is not surprising that variations sometimes lead to disputes and conflicts between clients, contractors, and subcontractors or put project quality standards in jeopardy. The best approach is to carefully plan and prepare for the unexpected rather than simply hoping variations do not occur.

So, how do leading contractors globally deal with scope changes and variations? How do we keep the client and consultant updated on changes, and how do contractors prove the cost that has been incurred by completing these variations? What about extensions of time claims and proving Indirect costs? There are many questions and scenarios that could possibly be disputed, and they invariably are.

Awareness of any variations in real-time allows the project team to take immediate action before the variations seriously impact both profit and delivery. A few common-sense best practices help to minimize the impact.

1. Stakeholder communication

Open communication between all stakeholders ensures everyone is aware of the variations and their own roles and responsibilities in the process. Real-time collaboration between clients, contractors, designers, and other construction roles also improves decision-making and problem-solving processes so that logical solutions can be quickly created, documented, and approved. Construction management software is a useful tool for sharing information and documentation related to variations to improve visibility throughout the process.     

2. Verify subcontractor activity

Subcontractor issues can lead to variation, especially when monitoring practices are inadequate, activities are not completed satisfactorily, or schedules are not upheld. Effective subcontractor management is the most proactive way to mitigate potential issues:

• Performing thorough subcontractor screening and qualification
• Clearly documenting deliverables and responsibilities
• Regular verification and supervision to ensure quality standards are upheld
• Making the change management process and software accessible to subcontractors

3. Regular reporting and monitoring

Monitoring processes, including regular inspections and audits, help to mitigate the impact of variations by ensuring all work adheres to the latest specifications and contract requirements. This allows project teams to avoid unplanned deviations or proactively identify where discrepancies call for corrective actions. Regular reports on observations, risks, safety, and cost issues make this information clearly visible to clients and other stakeholders who may recommend changes to address project trends.

4. Contingency planning 

A contingency is a percentage of a project’s budget set aside for unforeseen expenses, including variation cost in construction and other variables that can lead to overruns if not managed effectively. Rather than applying preset dollar amounts to cover construction contingencies, risk assessments, historical data reviews, and statistical analysis can help to predict the level of variation more accurately so an appropriate contingency budget can be established early on.

5. Variation clauses in contracts

Including variation clauses in contracts is a proactive way to minimize the impact later in the project. This makes it important to ensure the stated information is clear and unambiguous and includes rules and expectations for variation reporting, approval, and timing. Variation clauses should also include a detailed process for resolving disputes to ensure these issues do not take valuable time and attention away from project completion.

6. Utilize construction management software

The days when manual methods and spreadsheets sufficed for construction variation management are long past, so software solutions for project management, change order handling, and contract management are now essential tools of the trade. Intuitive software also makes it easier to monitor subcontractor performance and predict variation to establish more realistic contingencies and timelines.

Many companies in the AEC industry have adopted construction software solutions to manage most aspects of their business, from estimating, planning, link and forecasting, financial accounting, Cost Value Reconciliation, and Earned Value Management. Unfortunately, the majority of these have not, as of yet, identified the power and importance of having all of these functions integrated, which, in turn, leads to variations and overruns taking weeks or months to identify and resolve correctly. In many instances, many of the items mentioned above don’t correlate with each other in any way, leading to inconsistencies during monthly reporting.

The ability to immediately identify variances with the required accuracy and detail to take action hinges on 10 critical components:

1. Pricing new items that have not previously been priced or identified and being able to differentiate between the original scope and variations.
2. Changing the status of the Variation: Has it been approved, unapproved, or waiting for approval? Management could view all these statuses to make the correct commercial call. Automated construction reports could validate the differences between the original scope and the change.
3. Allocate Variation Codes to identify new bill items that are possible scope changes or contract instructions.
4. Identify new resources on the construction procurement list and update the buying list accordingly.
5. Projected cost integration with the preconstruction planning schedule to effectively reconcile consumption of resources in real-time.
6. The organization of the projected cost model must include cost and activity codes to facilitate the required comparison.
7. Linking Indirect or Preliminary items directly related to the variations is very important when dealing with “Extensions of time” claims.
8. The projected cost model must have the facility to action cost and time re-calculation based on actual rate and quantity performance, identify what is actually happening on site and forecast revised final costs.
9. The information and data source relating to actual cost must be web-based to enable input of real-time costs from wherever that cost information is captured.
10. Cost value Reconciliation is possible due to matching coding structures between all software packages.

These 10 components can be found in modern, state-of-the-art construction software applications, leading the way in increasing profitability and reducing cost and budgetary risks in the construction industry.  These systems come at a cost, but this pales when compared to the true cost of overruns, profit loss, disputes, and possible relationship damage.

Conclusion 

Construction variations can make or break complex projects, so managing, reporting, and collaborating on changes and their cost and schedule impact is no longer optional. The advanced suite of RIB software solutions addresses the complexity and importance of variations with industry-leading tools to promote centralized communication and scheduling, integrated change control and estimation, and streamlined document management.

RIB BuildSmart is a web-based cost management and enterprise accounts solution that provides actual plus accrued cost by contract in real-time from the site, plant yard, and head office – wherever costs are incurred.  Organizing the income statement by contract, plant, and overheads allows data capture and appropriate reporting to each area.  Actual and accrued costs are managed in a single SQL database and reported by activity and cost code for immediate and detailed comparison with projected costs at a precise point in time.

RIB BuildSmart is trusted by thousands of companies worldwide to improve their efficiency, cost control, and overall project execution. Get your free demo today and discover how our professional cost management software can transform your organization!