7.9. Variation order approval process

Variation orders in general are;

(a) Amendment to the contract values due to the introduction of non-tendered items (NT items) or changes in the specifications during the course of execution resulting in changes in the contracted values and consequent change in the scheduled time or increasing the scope of services of the GC resulting in additional preliminaries and

(b) Extension of time (EOT) due to delays in the Project for reasons attributable to Client with or without Entitlement of cost (EOC).

Let us look at each of them separately.

7.9.1. Variation order – NT teams and an increase in the scope of GC services

There are two critical steps in the variation order viz (a) Establishing the change in values & its approval and (b) Amending the Contract to changes the contracted values & extension of time.

Despite the best efforts in getting clarity in the Design at tendering stage, due to site constraints and execution challenges or at times due to client requirements, variation in works could emerge. Change in values of Contract has to be handled much before the execution of work such that there is enough opportunity to arrive at the correct values agreeable to the Contractor as well as the Client. Change in time has to be handled sooner the delays have been identified, and mitigation measures applied.

Most often, the Contract would have a suitable provision or methodology of arriving at the values of variation orders which is usually derived based on (a) similar work in the BOQ with adjustments for changes or (b) arriving at units costs of various components of the work like material, labour, overhead etc. and adding a fixed margin towards the work. These are all established processes and used in the industry for ages.

Another vital aspect which might get raised by the GC is the requirement of additional services/attendance required for either as acceleration program or attendance required by the NSC such as additional scaffolding, cranes, hoists etc. Such requirements need to be treated as NT items and approved. Since the scope matrix is supposed to have been already agreed with the NSC and the GC, the additional cost should not be attributed to the Client unless it is part of the acceleration program for the Client's delays attributable to the Client.

No cost of acceleration program for delays attributable to the Contractor should be entertained and should always be borne by the Contractor in default unless there is specific approval from the Client management otherwise.

If GC provides additional attendance, or services falling in NSC scope but the NSC cannot procure the same, the GC should be encouraged to negotiate and provide the same directly to the NSC and back charge them and not involve the Client for the same.

7.9.2. Extension of Time (EOT) & Entitlement of cost (EOC)

Extension of time or EOT with or without additional cost for the extended time or sanction of additional cost with or without EOT is an integral part of any contract management.

EOT arises due to delays in Project for reasons attributable to the Client.

Firstly, this can be managed efficiently only when we have clarity between the Contractor and the Client on what is required and when, and who is responsible for the same. Such transparency is usually captured in the Contract document.

The most significant four reasons for EOT comes from

There is nothing wrong in giving EOT if the reasons are attributable to the Client. The challenge is to evaluate and agree on the quantum of delay due the same, challenging the Contractor and agree on the quantum of impact on the critical path and how much of recovery/ crunching could be done before arriving the extent of the delay. Due to reasons attributable to the Client, there may be a necessity of extension of time after exhausting all options to mitigate the delays.

Most often, the delays are seen in linear basis, which is not the case in reality. Delays could happen, but if the same is not on the critical path with float available accommodating the delay, the delay won’t impact the overall schedule end date provided appropriate action is taken in a timely fashion.

A typical contractor is unlikely to disclose the delay attributable to him until he finds an opportunity to seek EOT attributable to client-generated and seeking entitlement to the Client’s account. The final agreed delays have to be in terms of delays in the critical path and not on activities having float to absorb the delays.

In one of the recent instances, the Contractor claimed abnormal EOT for a flooding event, and when we deep dived into the Schedule before the occurrence of the event, there was a delay from contractors’ side which was persisting. In that instance, we permitted the EOT only for the extended days net of delays before the event, which was not accounted till then.

The typical contractor behaviour would always be linear viz. conserve all the float and do not exercise crunching of Schedule. Any delays from contractor side are kept on the side and as and when there is a case of Client driven EOT to push them under that pretext, such that the floats conserved earlier can be used for only Contractors lead delays.

We do not suggest and typecast call contractors under the same behaviour. This is only an example of how things can go wrong if we are not careful and thorough, maintaining the data. The person who is approving the delays, should be cognisance of all of the above and make sure the evaluation is done based on facts and data.

Another critical issue is capturing the delays periodically say every month or as and when an event occurs. A too frequent analysis is also wrong as it would consume lots of administrative time in addition to short term outlook towards the Schedule. Too large a gap between two evaluations would also lead to loss of reliable data for evaluation.

One possible option could be to do a monthly delay analysis data with causes and actions initiated and adjust the Schedule. So, from the schedule point of view, as explained earlier in Schedule management, we shall have a base schedule, and we shall have an updated Mitigation schedule. The updated mitigation schedule should be updated once in a month to start with and eventually move on to quarterly, by resorting to crunching and exploring catch up possibilities. Only the net result should be allowed to be impacted on the Mitigation schedule, and such net delay should be split between Contractor delays and client lead delays and documented. We have dwelt upon the schedule management extensively, so the limited point here is, as and when a Mitigation schedule is updated, the EOT analysis should be done for the net agreed delay and contractually documented. As one of the best practices, during the weekly meetings, the possible delays and mitigation procedure should be discussed.

In case of delays due to reasons attributable to Phoenix, an extension of time shall be given and additional cost [(i) proportionate Civil preliminaries if the civil work is affected, (ii)GC Preliminaries and (iii) GA Cost, in proportionate to the extended period attributable to Phoenix] shall be payable. No other claim shall be entertained. Towards this, a detailed execution program / micro schedule with men, material, machinery and cost loaded programme shall be provided by GC within two weeks of awarding of LOA. Suitable penalty charges shall be invoked upon missing two intermediary milestones for no reasons attributable to Phoenix. Upon suitably mitigating the delay within the next milestone and zero delays, penalty charges will be revoked

7.9.3. Approval of Variation order for NT items and EOT/EOC

The variation order (for NT items and EOT/EOC) would need to be approved by the Client, and this cannot be micro-managed as it may result in delays. So, we have proposed a standard approval mechanism for the variation order.

For the purpose of approval, the variation order has been categorised as under;

1. 10 lacs in the budget in each instance up to 1% (cumulative) of each work order and/or (B) impact of time less than one month (Cumulative)
2. Variation order Between 10-25 lacs in the budget in each instance up to 2% (cumulative) of each work order
3. Variation order (A) Between 25 lacs -1 crore in the budget in each instance up to 5% (cumulative) of each work order and/or (B) impact of time 1- 3 months (Cumulative)
4. Variation order beyond Rs.1 crore in the budget in each instance or beyond 5% (cumulative) of each work order and/or impact of time beyond three months (Cumulative)

Each of the above variations is approved by a different set of people, and the process is given in Appendix 20 - Use Transmittal 49 Rev 1 dated 10 Dec 2020 as appendix