Negotiating Variations and Change Orders in Construction Contracts

Negotiating Variations and Change Orders in Construction Contracts

Understanding Variations in Construction

Variations (change orders) are modifications to the scope, design, or execution of work after contract award. Under FIDIC Clause 13, the Engineer may issue variations, and the contractor is obliged to execute them. The negotiation challenge is agreeing on fair valuation.

Variation Valuation Methods

1. Bill of Quantities Rates

When the variation is similar to BOQ items:

• Apply existing BOQ rates directly
• Adjust for quantity: if quantities change by more than 10% (FIDIC Clause 12.3), rates may be re-negotiated
• Pro-rata adjustment for partial similarity

2. Derived Rates

When work is similar but not identical to BOQ items:

• Break down into constituent elements: labour, material, equipment, overhead
• Adjust each element for the specific variation
• Example: BOQ has "concrete Grade 30 in columns at $200/m3" — variation requires "concrete Grade 40 in walls" — adjust material cost for higher grade, adjust labour for wall formwork vs column formwork

3. New Rates

When work is entirely different from BOQ items:

• Obtain market quotations from subcontractors/suppliers
• Use published rate guides (RICS, local authorities)
• Apply contractor's actual cost records from similar work
• Add agreed overhead and profit percentage (typically 10-15%)

4. Daywork

When work cannot be measured or valued:

• Use agreed daywork rates: labour per hour, equipment per hour, materials at cost plus percentage
• Record on signed daywork sheets with hours, equipment, and materials
• Consultant must sign daily — unsigned sheets may be rejected

Negotiation Strategy for Variations

Step 1: Define Scope Precisely

Ambiguity is the enemy of fair valuation:

• Use detailed scope sheets with drawings, specifications, and quantities
• Define what is included and excluded
• Agree on acceptance criteria before pricing
• Avoid "lump sum for all extras" — itemise for transparency

Step 2: Establish the Valuation Basis

• Agree which method applies (BOQ rates, derived rates, new rates, daywork)
• If new rates: agree the cost breakdown structure and overhead percentage
• If daywork: agree rates before work starts, not after
• Reference similar BOQ items or previous variations as benchmarks

Step 3: Assess Time Impact

• Does the variation affect the critical path?
• Use schedule impact analysis (time impact analysis or windows analysis)
• Negotiate extension concurrently with cost — do not leave time for later
• Document agreed extension in the variation order

Step 4: Negotiate the Package

• If multiple variations are pending, negotiate as a package
• Trade higher rates on some items for lower rates on others
• Include disruption impact in the package rather than as a separate claim
• Agree a global figure with itemised breakdown for record

Common Variation Disputes and Resolution

Dispute 1: "The rate is too high"

• Resolution: Open-book audit — review contractor's actual cost records
• Compare with market rates from other suppliers
• Use independent QS assessment

Dispute 2: "This is not a variation — it was in the original scope"

• Resolution: Refer to contract drawings and specifications
• Compare scope at tender vs current requirement
• If genuinely new work, it is a variation; if clarification of existing scope, it is not

Dispute 3: "Overhead and profit percentage is excessive"

• Resolution: Refer to contract — if contract specifies O&P percentage, apply it
• If silent, use industry standard: 10-15% for direct work, 5-7.5% for subcontracted work
• Negotiate lower O&P for large-value variations (economies of scale)

Dispute 4: "Concurrent delay means no extension"

• Resolution: Apportion delay between variation and other causes
• Only variation-caused delay on critical path qualifies for extension
• Use schedule analysis to isolate variation impact

Best Practices for Variation Negotiation

• Issue variation instructions promptly — delay creates cost escalation
• Negotiate rates before work starts, not after completion
• Maintain a variation log with status, value, and time impact
• Cap cumulative variations — if variations exceed 15-20% of contract value, consider re-tendering
• Include variation costs in monthly payment certificates — do not accumulate