change orders | Adroit Consultants, LLC

Variation and Variation Orders: Important Considerations

Posted on March 27, 2019March 27, 2019 by Adroit

Introduction

A variety of reasons may increase or decrease the amount of work required by a contract. These increases or decreases are either directed or constructive. This article briefly describes each of these main categories of variation. It also outlines the potential implications of variations and variation orders from the time and cost management perspectives.

In general, owners have the contractual right to make changes to the work outlined in the original contract. The terms variations, modification, and changes are often used interchangeably.

Variation types

Since variations not only impact contract scope of work but also they potentially have time and cost implications, it is important to identify various types of variations and recognize potential effect of each type of variation on contracts. Examples of the most common variations include:

Changes in means and methods or material to be installed
Differing or unforeseen site conditions not envisioned in the original contract price
Modifications that change the planned work sequence as originally envisioned
Changes to the scope of work due to constructability issues or conflicts between work elements
Changes in plans and specifications
Corrections made due to errors or omissions
Modifications as a result of the actions or inactions of third-parties

Directed variations

A directed variation is issued when the owner specifically directs the contractor to make a change. This type of variation may or may not affect the contract price. A directed variation that influences only the schedule is an example of a directed variation with no effect on the contract price. As another example, a directed variation that impacts a project’s configuration, work sequence, or space requirements may adversely influence labor and equipment productivity on-site. A directed variation with cost impact may reduce or add the contract price. Directed variations are typically not complicated because the owner specifically directs the contractor to make a change and as such, directed variations are easier to deal with.

Constructive variations

Constructive variations, on the other hand, occur as a result of non-owner-directed events that implicitly necessitate a variation. Unlike directed variations, the owner does not specifically direct the contractor to make a change in case of a constructive variation. Instead, as a result of non-owner-directed events or actions or inactions of the owner, the contractor is forced to modify the scope specified in the contract or incur additional costs. Typically, constructive variations are not easy to recognize because they generally occur due to non-owner-directed events or circumstances. In addition, in case of a constructive variation, the owner does not typically have an explicit acknowledgment of a variation to the original scope of work set forth in the contract. Examples of the most common types of constructive variations include:

Verbal communications that implicitly necessitate making changes
Deficient drawings or specifications
Ambiguity in architect-provided responses to information requests
Differing site conditions
Over-inspection

Implications

Although deductive variations exist, variations typically increase contract prices. This increase is due to increases to direct material, labor, and equipment prices. Nevertheless, the impacts of variations are often not limited to direct costs. Variations often result in the loss of efficiency and as such, the adverse effects of variations need to closely be examined to ensure their consequences are fully evaluated.

Conclusion

It is important to identify variations in a timely manner, especially in case of constructive variations whose effects are not explicit and readily recognizable. The reasons for each variation need to properly be identified and documented in proper tracking logs. Moreover, the effects and implications of each variation need to properly be documented to ensure sufficient documentation and historical records are readily accessible to substantiate contractual entitlements.

Author: Dr. Maryam Mirhadi, PMP, PSP | CEO and Principal Consultant

If your project has been affected by multiple variations or variation order and they have adversely affected labor or equipment productivity on-site, or if you are interested to investigate the extent of time and cost impacts due to variation orders, Adroit will be able to assist in assessing these impacts. For more information, please contact us.

Pricing Change Orders

Posted on May 26, 2018August 7, 2018 by Adroit

Maryam Mirhadi, Ph.D, PMP

Owners typically have the contractual right to make changes to the scope of work outlined in contracts. Since these changes impact contracts’ scope of work and they potentially have time, cost, and productivity implications, it is important to give proper consideration to pricing change orders.

Pricing is either backward or forward. Backward pricing is used when the pricing is partly or wholly based on the actual cost of a work performed. Forward pricing, however, is based on the estimated cost of work that is yet to be performed.

If the forward pricing approach is used to price change orders or change order requests, the estimated cost of work is prepared based on the projected cost of materials, systems, products and permanent equipment needed to execute the work plus the costs of resources that need to be acquired in implementing the scope of work. The first category of costs is associated with those items that remain as part of the facility or the system being implemented whereas the second category of costs referenced above is associated with project resources (including workforce, temporary equipment, tools, and machinery) that do not remain in the project but are necessary to accomplish project activities. It is recommended that practitioners differentiate between these two categories of costs to ensure the cost of project deliverables can be differentiated from the resource costs.

It is important to account for projected levels of productivity in pricing change orders because the resource usage rate needed to perform a changed work may differ from the resource usage rates required to implement a work under normal circumstances in which no change is introduced. For example, if changing a scope of work adversely impacts labor productivity, the estimated usage rate of workforce originally used to estimate the unimpacted work does not necessarily suffice to complete a changed (i.e., impacted) scope of work. As such, in pricing change orders, the effects of change on the original scope of work need to be assessed to adjust the estimates.

One of the techniques that can be effective in assessing the impact of a changed work is assessing the project cost flow. Cost flow and cash flow are often used interchangeably. It is important, however, to identify the purpose each of these tools intends to serve. A cost flow diagram shows the budgeted amount of money that is needed over time to make progress as planned. A cash flow diagram, on the other hand, provides the estimated sums of money to which a contractor has access over time. Assessing the project cost flow can help analyze excessive costs and overruns by comparing the budgeted (i.e., time-phased estimates) cost of performing the changed work with the sums of money originally needed to make progress as planned. This assessment can help identify the adverse effect of the change on the resource costs needed over time.

This assessment can be insightful only if the cost flow and estimates are prepared at a sufficiently detailed level. Otherwise, they cannot provide an insight into the impact of change because of the lack of granularity of the pricing data available. Properly documenting the basis of estimates and using proper cost breakdown structures are two other important considerations in budget and cost flow documentation. Detailed budgets or cost flows are prepared by relying on certain assumptions and information available at the time of preparing these estimates. These assumptions and information should properly be documented in a document, entitled “basis of estimate”, for future references.

Per the Federal Acquisition Regulation (FAR), cost estimates used in government contracts have to be reasonable, allocable, and allowable. Moreover, pricing data must be current, accurate and complete. The following excerpts from the FAR define reasonableness, allocability, and allowability of costs:

In defining the reasonableness of costs, Provision 31.201-3 of FAR states:

A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of a competitive business.

In defining the allocability of costs, Provision 31.201-4 of FAR states:

A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship.

Per the FAR, a cost is allocable only if it:

(a) is incurred specifically for the contract; (b) benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received; or (c) is necessary to the overall operation of the business, although a direct relationship to any particular cost objective cannot be shown.

Per the FAR, the factors that need to be considered in determining whether a cost is allowable include the following:

Reasonableness
Allocability
Standards promulgated by the CAS Board, if applicable; otherwise generally accepted accounting principles and practices appropriate to the particular circumstances.
Terms of the contract
Any limitations set forth in this subpart

It is also important to differentiate between direct and indirect costs in pricing change orders and determine which types of direct or indirect costs have to be included to accurately prepare cost estimates. Typical direct costs of executing construction activities include direct labor and workforce, equipment, material, and services provided to each project activity. Direct costs can be assigned to specific project activities whereas indirect costs are intended to cover overhead expenses that are needed to manage, administer and support the work. Indirect costs are not typically assignable to particular project activities. General conditions costs support various aspects of the work and they are typically assigned at the project level, not at the activity level. Therefore, they are typically considered among the indirect costs unless a different definition of indirect costs is adopted.

Based on what was discussed above, it is important to give proper consideration to pricing change orders. The proper use of pricing approaches including backward or forward pricing is the first step towards properly pricing change orders. The other considerations is to identify the time, cost, and productivity impacts of changes on the original scope of work. Cost flow diagrams can assist in better identifying the impact of change on a project cost, schedule, and productivity. It is also important to ensure proper pricing and estimating practices are used to ensure estimates are reasonable, allocable, and allowable. An effective use of cost engineering techniques throughout the process plays an important role to ensure the estimates prepared for change orders are current, accurate and complete.

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Changes that arise from design-related causes

Posted on March 26, 2018August 7, 2018 by Adroit

Dr. Maryam Mirhadi, PMP, PSP

Contract documents for a construction project consist primarily of the agreement, conditions of the contract, drawings and specifications, and any addenda issued to clarify, or modify the bidding or proposal documents before the contract for construction is signed. As such, construction drawings and specifications are parts of the legal documents of the agreement that are issued to delineate the requirements regarding the materials, products, systems, installation guidelines and procedures, standards and workmanship, and quality aspects involved with the execution of the work. This short article identifies some of the design-related factors that may result in change orders.

Defective specifications are examples of design-related issues that may result in contract modifications. An owner may specifically direct a contractor to make changes to the contract scope of work if it finds out that the specifications are defective. It is more likely, however, that defective specifications result in constructive changes. Incomplete or inaccurate specifications are examples of defective specifications.

Here are examples of changes that may occur due to design-related reasons:

Changes due to incomplete specifications: If specifications provide insufficient information necessary to implement the work outlined in the contract, they are considered incomplete. In addition, if specifications provide inadequate information in coordinating construction details between different design disciplines (e.g., structural, mechanical, electrical), specifications are considered incomplete. A complete set of specifications are intended to provide adequate information necessary to execute the work to achieve the project objectives set forth in the contract.

Changes due to design discrepancies: If the construction drawings associated with different trades are inconsistent, a design discrepancy exists between contract documents. In addition, differences and discrepancies among plans, specifications, and details or discrepancies between planned and actual equipment details may be indicative of design discrepancies that need to be rectified by issuing proper change orders.

Changes due to physical or technological constraints: Specifications may also be considered defective if a project design does not provide adequate space for fitting all the elements or does not meet physical or technological constraints that need to be considered in design and construction. Depending on the level of complexity of the issue, site conditions, and other technical and contractual requirements, resolving such issues may require changes in design, modification of requirements, and subsequently making minor or major adjustments on-site where appropriate.

Changes to satisfy regulatory requirements. Design documents are supposed to satisfy the requirements of applicable codes, standards, and regulations. Therefore, if the project team finds out that the project scope of work needs to be modified to properly satisfy regulatory requirements, a change order may be needed to ensure the requested change is properly reflected on design documents and implemented to satisfy regulatory requirements.

Latent conditions: Some changes are made due to differing site or subsurface conditions, unknown at the time of bidding. They are conditions within the project site that are materially different from what was shown on the contract documents or those that substantially differ from conditions that are obvious and apparent.

Other changes that occur due to design-related reasons may include changes due to a change in needs and expectations, changes made to address value engineering concerns, and modifications due to technology-related needs, and those due to errors and omissions. It is important to identify, properly document, and control changes over the course of projects to ensure project scope is managed in an effective manner, and to ensure time and cost overruns arisen from scope-related issues are minimized.

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Types of Change in Projects

Posted on October 24, 2017November 3, 2018 by Adroit

A variety of reasons may cause an increase or decrease in the amount of work from the scope of work specified in the original contract. These reasons result in either directed changes or constructive changes to the project’s scope of work. This article briefly describes each of these main categories of changes. It also outlines the potential implications of changes to a contract scope of work from the time, cost, and productivity perspectives.

In general, owners have the contractual right to make changes to the scope of work outlined in the original contract. Since owner changes impact contract scope of work and they potentially have time, cost, and productivity implications, it is important to identify various types of change in project scope of work and recognize potential effect of each type of change on project contracts. Examples of the most common changes include:

Changes in means and methods or material to be installed
Differing site conditions not envisioned in the original contract price
Modifications that change the planned work sequence as originally envisioned
Changes to the scope of work due to constructability issues or conflicts between systems
Changes in construction, prescriptive, proprietary, or performance specifications
Corrections made due to errors or omissions
Modifications as a result of the actions or inactions of third-parties

A directed change is issued when the owner specifically directs the contractor to make a change. This type of change may or may not affect the contract price. A directed change that influences only the schedule is an example of a directed change with no effect on the contract price. As another example, a directed change that impacts a project’s configuration, work sequence, or space requirements may adversely influence labor and equipment productivity on-site. A directed change with cost impact may reduce or add the contract price. Directed changes are typically not complicated because the owner specifically directs the contractor to make a change and as such, directed changes are easier to recognize.

Constructive changes, on the other hand, occur as a result of non-owner-directed events that implicitly necessitate modifying the scope of work. Unlike directed changes, the owner does not specifically direct the contractor to make a change in case of a constructive change. Instead, as a result of non-owner-directed events or actions or inactions of the owner, the contractor is forced to modify the scope set forth in the contract. Typically, constructive changes are not easy to recognize because they generally occur due to non-owner-directed events or circumstances. In addition, in case of a constructive change, the owner does not typically have explicit acknowledgment of a change to the original scope of work set forth in the contract. Examples of the most common types of constructive changes include:

Verbal communications that implicitly necessitate making changes
Deficient drawings or specifications
Ambiguity in architect-provided responses to information requests
Differing site conditions
Over-inspection

It is important to identify changes in a timely manner, especially in case of constructive changes whose effects are not explicit and readily recognizable. The reasons for each change need to properly be identified and documented in proper change management logs. Moreover, the effects and implications of each change need to properly be documented to ensure sufficient documentation and historical records are readily accessible to substantiate contractual entitlements. If your project has been affected by multiple change orders and they have adversely affected labor or equipment productivity on-site, or if you are interested to investigate the extent of time and cost impacts due to change orders, Adroit will be able to assist in assessing these impacts. For more information, please contact us.

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