Presentation on theme: "PROF. KHEM DALLAKOTI VICE PRESIDENT, NEPCA Variations and Valuation of variations NOTHING ENDURES BUT CHANGE - HERACLAITUS."— Presentation transcript:
PROF. KHEM DALLAKOTI VICE PRESIDENT, NEPCA Variations and Valuation of variations NOTHING ENDURES BUT CHANGE - HERACLAITUS
Variations – key points to understand Project design and implementation involves different disciplines involving different professionals – variations are common in projects Many human and non-human factors and variables resulting from different sources ( performance of construction parties, environmental conditions, etc) are existent in a project Exists uncertainties and complex relationships within the parties Hence need of changes in a project – a practical reality Thus a need for Avoiding changes and avoiding variations
Variations – key points to understand Variation orders are undesired, but inevitable reality in construction implementation. The nature and frequency of variations varies from project to project Projects are bound to encounter variation – the objective is to keep them in an acceptable limit Delay and cost overrun both could be the result of variations. Should take advantage of variations when the opportunity arises Variations has unpalatable consequences in time and cost
Variations - key points Majority of the construction contracts allow a process for variations The team must be able to effectively analyze the variation and related immediate and downstream effects.
Nothing endures but change – Heraclitus Would have been better if there is no change in contract implementation Let us have Perfect design so not to have any changes latter Contractor could not make undue profit if there is no change in contract Corruption can be reduced to minimum if no change in contract implementation.
Issues of variations arises the questions how the change is made, the extent of authority of employer or the engineer to make the change, the nature of particular change ( how constructive or important), pricing of the variations etc.
The Need Litmus test for successful management Project success should not be based upon the fact that project was free of variation orders instead on the fact that variation orders were resolved in timel for the benefit of the project and ultimately to the parties. Ability to respond to variations for minimum adverse impact Mechanism for handling variation order Effective management of Contract variations Variations could be positive as well as negative Efforts shall be made from the start to the end of the project to better and professionally handle the process and variation itself. Identifying and analyzing potential variations as early as possible. Avoiding errors and omissions during design stage ( about 75% changes could have been avoided with better work in design stage) – thinking on what the project team can do to eliminate these potential problems. Well preparation of contract documents – corrections of contract document errors and omissions cause variations
The need A systematic way to manage variations Proper documentation of variations Knowledge from past project implementation would enhance the decision making process and avoiding errors. potential causes and relevant effects with possible controls for variations should be worked out Understanding root cause of variation order
Causes of variation order Potential cause of variation may be categorized as Owner/client related Consultant related Contractor related Other related
Owner/client related clauses Owner fails to fulfill certain requirements Changes of scope by owner ( insufficient planning and or lack of involvement of owner at design stage) Changes in schedule by owner Owners financial problem and aiming at reducing cost Inadequate project objectives – due to which inability of designer to develop a comprehensive design Delay in decision making Changes in specification by owner Poor procurement process
Consultant related VO Changes in design by the consultant – for the improvement ( more if construction starts before design is finalized) Errors and omissions in design and inadequate drawing and shop drawing details, ambiguous design details, design discrepancies, Conflicts in contract documents Inadequate scope of work for contractor and lack of coordination Technology change – beneficial variations Value management in design Complexity of design Lack of judgment and experience and knowledge of construction materials and equipment, honest wrong belief, obstinate nature Lack of data Change in specification by the consultant
Contractor related variations Lack of contractors involvement in design – lack of practical ideas Unavailability of equipment and skills/defective workmanship for complex technological projects, Fast track construction Contractors financial difficulties/desired profitability Different site conditions/unfamiliarity with local conditions Lack of specialized construction manager Lack of Contractors judgment-experience-communication- strategic planning Honest wrong belief of contractor Lack of data
Other related variation Weather conditions Safety consideration Changes in government regulations and economic conditions Socio-cultural factors Unforeseen problems – force mejure
Potential effect of variations Dispute Delay in project completion Increase in cost Hiring new professionals and increase in overhead expenses Delay in payment, logistic delays Quality and productivity degradation Procurement delay Rework and demolition Tarnish firms reputation Poor safety, poor professional relationship and disputes
How to control variation Control for variation can be initiated in three stages Design stage Construction stage
Design stage Clear and through project brief Review of contract documents/control the potentials for VO Freezing design Value engineering in concepts Professional involvement in the beginning of project design Owners involvement Thorough detailing Comprehensive site investigations Knowledge base for previous similar proejcts
Construction stage control Clarity of VO procedures and VO scope Logic and justifications and Written approvals Prompt approval process Restricted prequalification system – avoid use of open tendering Use of project scheduling/management techniques Owners involvement in construction phase Interface Ability to negotiate variations Valuation of indirect cost Team effort – CCC Continuous coordination/communications Sharing same data base by CCC Computarised decision support
Conclusion for variation issue Successful management of variation must start before the start of construction Due diligence during design phase A clear and through project brief Client involvement in design stage Defining project scope Allocating sufficient time for design Improving design detailing Compliance with government regulations Early identification of potential variations
Contract Clauses of variations Variations 51.1 – The engineer shall make any variation of the form, quality or quantity of the Works or any part thereof that may, in his opinion, be necessary and for that purpose, or if for any other reason it shall, in his opinion, be appropriate, he shall have the authority to instruct the contractor to do and the contractor shall do any of the following Increase or decrease the quantity of any work included in the contract. Omit any such work ( but not if the omitted work is to be carried out by the employer or by another contractor) Change the character or quality of kind of any such work Change the level, lines, position and dimensions of any part of the Works Execute additional work of any kind necessary for the completion of the Works Change any specified sequence or timing of construction of any part of the Works. No such variation shall in any way vitiate or invalidate the Contract, but the effect, if any, of all such variations shall be valued in accordance with clause 52. Provided that where the issue of an instruction to vary the Works is necessitated by some default of or breach of contract by the contractor or for which he is responsible, any additional cost attributable to default shall be borne by the contractor.
Clauses of variations Instruction for variations 51.2 – The contractor shall not make any such variation without an instruction of the engineer. Provided that no instruction shall be required for increase or decrease in the quantity of any work where such increase or decrease is not the result of an instruction given under this clause, but it is result of the quantities exceeding or being less than those stated in the Bill of Quantities.
Valuation of variations Fair to avoid further disputes Based on logic and rationale Within the provisions of contract Without mal-intentions Agreed basis as mentioned in the contract
Clauses of valuation Valuations of variations 52.1 – All variations referred to in clause 51 and any additions to the contract price which are required to be determined in accordance with clause 52 shall be valued at the rates and prices set out in the contract if, in the opinion of the engineer, the same shall be applicable. If the contract does not contain any rates or prices applicable to the varied work, the rates and prices in the contract shall be used as the basis for valuation so far as may be reasonable, falling which, after due consultation by the engineer with the employer and contractor, suitable rates or prices shall be agreed upon between the engineer and the contractor. In the event of disagreement the engineer shall fix such rates or prices as are, in his opinion, appropriate and shall notify the contractor accordingly, with a copy to the Employer. Until such time as rates or prices are agreed or fixed, the engineer shall determine provisional rates or prices to enable on-account payments to be included in certificates issued in accordance with clause 60.
Bid price – the basis for valuation of variation Clause 52 states that the valuing variations is the rates and prices set out in the contracts, assuming they are applicable and tender pricing is not unbalanced. Tender prices shall be the basis for determining rates and prices if it is reasonable to do so. It is usually said that because of variations taking place in construction performance, contractors will endeavor to catch up with respect to a low tender price by making a substantial profit as a result of variation pricing. Not only for this reason but as good contract administration, which always seeks to avoid disputes, the contract attempts to set in place alternatives to establish variations pricing.
Avoiding dispute while valuing variations For engineer, administration of clause 51 and 52 is extremely vital. Prompt negotiation and settlement with respect of the contract price can be made if the matter is considered both sensible and fair. It is more likely that a just adjustment of the contract price can be made if the matter is considered as early as possible Traditional approach is to postpone variation question until the end of the project and then attempt to settle everything at once, that leads to disputes and arbitrations. If variation pricing is considered and negotiated promptly it may prevent a dispute from arising at all. Partial payment for variation – payment shall be made on account at the rate fixed by engineer so not to affect contractors cash floe unfairly.
Unresolved variations - Claim and dispute When agreement on variation is not reachable clause 53 will be in effect and claims are lodged. Contractors intention to claim additional payment must be given to the engineer within 28 days after the event giving rise to the claim. This is important from the employer and contractors perspective for timely resolution or investigation and keeping records fairly.