The Contracts in Public and Private Projects of Oman

Introduction

Unscheduled changes in construction contracts cannot be ruled out and they often cause additional work than planned. Such extra works are likely to cause additional cost and time to complete the construction project (Civitello, 1987). Understanding of the terms of the contract by the parties is bound to vary, which may give rise to changes in the scope of work. However, since the parties to the construction contract have diverse viewpoints chances for disputes to arise between owners, contractors and subcontractors are more. Moreover, in the present day’s context, because of the fact that construction schedules are compressed for faster completion, building activity starts even before the final design is completed (Chen & Hsu, 2007).

This might lead to the following of inaccurate design. Because of the changes in the needs and preferences of the industry, changes in the employers’ needs from the contractors are inevitable. All these factors have led to significant increase in the change orders in construction projects, often leading to disputes among various parties involved in the project. It is to be accepted that owners and design professionals must have the liberty to provide change orders, so that appropriate changes can be made in the construction projects to suit particular needs of the employers. Any construction project is subject to change orders and change is defined t o include any modification in the original scope of the construction contract. Such changes may have significant implications on time, cost and quality of construction. If the contractor is unable to manage the changes swiftly, it might lead to serious issues in project completion giving rise to claims (Assaf et al 1996).

The contractors must also be willing to carry out these change orders; but they must be compensated properly for the additional time and cost involved in executing the changes. Although the owners realize that change orders are likely to have an effect on specific tasks, they fail to appreciate the ripple effects such changes might bring to the entire project schedule. Coffman (1996) observe that in mechanical construction, because of the interconnection between different activities, changes in one activity are likely cause changes throughout the entire project.

The additional cost of change orders to the contractors will reflect in the form of requirement of additional materials, conflicts in the schedule of existing project activities, occasions of rework of work already executed, stoppage in the momentum of the project progress and reduced labor efficiency (Hanna et al., 1999). Financial impact of change order on most of the items affected by the change orders can be measured. However, it is difficult to precisely measure the effect of change orders on labor efficiency. Change orders thus might seriously impede the progress of the construction projects. Because change orders present a risk for both the contractor and the employer, they must be accepted and managed properly. In this context, this research attempts to find out from the all the project stakeholders such as clients, consultants, contractors and subcontractors, the impact of variation orders, the problems encountered because of the variation orders and the possible resolution to the problems and issues resulting from variation orders. Variations in the construction industry in Oman appear to be a common phenomenon as the working in the industry is affected by several factors such as weather conditions, lack of cost data, shortage of resources, lack of experienced contractors and frequent design changes by employers.

Variation Order – a Background

A variation order or change order as it is sometimes called, can be defined as a “written authorization provided to a contractor approving a change from the original plans, specifications, or other contract documents, as well as a change in the cost” (Means, 1991). For the purpose of this research a variation order is a modification provided in writing after the construction contract has been signed. Therefore, some of the variation orders can occur before the commencement of construction activity. The variation order includes “(1) additional or modified scope of work; (2) errors and omissions in plans and specifications; (3) changes required by governmental entities; (4) design changes; (5) overruns or underruns in quantities; and (6) conditions impacting on schedule, the time of completion or the method or manner of performance of the work,” (Libor, n.d).

Most of the construction contracts provide for such variations by including a “changes” clause. Such a “Changes” clause is beneficial to both the contractor and owner as in increases the flexibility of construction contracts by providing for the variations without the necessity for a new contract for incorporating any addition, deletion or modification of a project requirement. The “Changes” clause allows suitable modifications to be made to plans and specifications, which would precisely reflect the intended project outcomes of design personnel and the employer. These modifications can be carried out without breaking contractual requirements, when the “changes” is present in the construction contract (Libor, n.d).

The clause provides the procedure for assessing the impact of changes to compensate the contractor for the additional work in respect of the variation orders. Another advantage of including the changes clause is that it enables the contractor to highlight modifications that will improve the project performance, as he is sure of receiving the differential cost for the extra tasks, which he is expected to perform following the variation orders. However, there are limitations on the employer to issue variation orders. For instance, the employer may not issue variation order which has the effect of brining fundamental changes in the scope of the contract. In view of the significant impact of variation orders on the project outcomes and the financial implications they have on the stakeholders, this paper attempts to explore the causes and effects and the likely remedies for the impact of variation orders.

Rationale and Purpose of the Study

The purpose of the current research is to explore the impact of variation orders on construction projects from the purview of clients, consultants, contractors and subcontractors, who are the major stakeholders of a construction contract. The impact is explored to ascertain the problems encountered by the stakeholders and the eventual resolution to the issues.

Engineer has the power to make any variation orders of the form, quality or quantity of the Works or part thereof subject to the approval of the Employer. Such order would result in increase or decrease the quantity of any work included in the contract. There are instances of omissions of work from the scope. Further the Engineer is empowered to change the character or quality or kind of any such work. This may result in change the levels, lines position and dimensions of any part of the works. At times it becomes compulsory, on the part of the Engineer to order for additional work of any kind necessary for the completion of the work. Further the faulty designs although the consultant fails to accept causes more concern, conflicts, cost and time over run. There are cases of interferences by the client results in variations. This state of affairs makes the consultant and contractor at tacit unease. Because of the misunderstanding created on account of variation orders, disputes and claims become a constant affair in the construction industry. In this context, the results of the current study are expected to add to the existing knowledge on the ways to resolve the problems encountered because of variation orders in construction contracts.

It is to be emphasized that such variation orders shall in anyway vitiate or invalidate the contract. The law provides the contractor to get compensated in a manner that valuation of such variations shall be taken into account when ascertaining the contract price. It’s being provided that orders for variations to be in writing but confirmation of verbal instructions considered as an order in writing. The basis of prices for variations shall be the rates and prices set out in the contract as decided by the Engineer who shall agree a suitable rate with the contractor, failing which the rates shall be fixed by the Engineer. Contractor’s prices at times found to be below the market prices. Contractors may at a loss if such prices are fixed for the variations. In such cases a controversy occurs between all parties concerned. The law is impartial by compensating the contractor on variations exceeding ten percent on certified completion of the works.

Though the procedures look simple but in reality a disagreement prevails between all the parties directly involved as to the agreement on time, money and quality. Though the consultancy agreement emphasizes the Consultant to obtain three or more quotations; in majority of the cases this activity is performed by the contractor who takes time until favorable quotations as to money and time are received at his hand before submitting to Engineer.

In Oman interdepartmental differences exist on payment issues. It takes more than three months to get the formal approval of such variation orders. Certain departmental circulars prevent the contractor from claiming this money through interim payment applications. Contractor’s long wait make them to seek various means; including and not limited to negotiating the quality or inflating the prices. This in turn leads to time over run and the contract price going beyond the budget. In case no savings on re-measurements or contingency is available, contractors again compelled to wait for longer period. This state of affairs prevents the client to establish a supply chain management. The delay of payment makes the other contractors refrain from actively participating in the future tenders too.

Objectives

The main objectives of the study can be summarized as follows:

  1. To verify the type of variations issued.
  2. To verify the circumstances under which such variations are ordered.
  3. Pricing policies carried out under usual circumstances
  4. Problem confronted by clients, consultants, contractors and subcontractors
  5. Analyzing the problems and means of resolving them.

Hypothesis

This study hypothesizes that variation orders in construction contracts have significant impact on the progress of construction contracts in the Sultanate of Oman and have been the major cause of delays in completing the project resulting in disputes and claims among the parties to the contracts.

Structure of the Dissertation

To present a comprehensive research report this dissertation is structured to have seven chapters. Chapter One introduces the research topic, provides the rational for the research and establishes aims and objectives and hypotheses to conduct the research. Chapter Two outlines the generic review of variation orders in construction contracts. In Chapter Three the reasons behind variation orders in construction projects are explored through a literature review. Chapter Four presents a description of the impacts of variation orders on construction contracts. Chapter Five restates the research objectives and illustrates the methodology that was used to achieve these objectives. The justification of using the questionnaire is stated. This chapter also describes the questionnaire design, survey sample scoring system and methods of analysis. Chapter Six contains data collected through the questionnaire and the analysis of the results from the questionnaire. The results are illustrated using bar charts and graphs. This chapter includes results interpretation and discussion on the results. Chapter Seven summarizes the research findings and based on the results of the research a relevant conclusion is drawn. Recommendations to avoid problems relating to variation orders and recommendations for further research in the area form part of this concluding chapter.

Generic View of Variation Orders

The purpose of this chapter is to present a review of the literature relevant to variation orders in construction contracts.

Introduction

One of the main defective elements of public works projects is the large number of variation orders issued during the progress of the construction projects. These variation orders are the causes for delays in completing the projects as well as for cost overruns (Burati et al. 1992). Reduced productivity and project utility is the most detrimental outcome of the variation orders and it renders large investments in infrastructure ineffective. Various causes for issuing variation orders have been identified by the literature, which make the task of management difficult (Burati et al. 1992; Hsieh et al. 2004; Josephson et al. 2002). Possibility exists for preventing the undesirable situation of issuing change orders, if a systematic analysis of the chain of events that lead to issue of variation orders is undertaken and the causes analyzed, which is the central focus of this study.

A variation in general is any departure from an established scope and schedule of activities. “Stated differently, this is a change in any modification to the contractual guidance provided to the contractor by the owner or owners’ representative.” Variation in respect of a construction contract may include changes made to plans already approved, or contract specifications agreed upon by the parties or modifications in any other documents relating to the execution of the contract. A variation order represents a formal document, which effectively modifies the terms of the original contract and it also forms part of the contractual documents relating to the project (Fisk, 1997; O’Brien, 1998). A variation order (also called a change order – the two terms are used intermittently in this work, both denoting the same thing) is an order in writing signed and issued by the owner to the contractor. This order is issued at a time after the execution of the original contract. It authorizes the contractor to effect a change in the agreed work or an adjustment in the contract amount or in the agreed time for the completion of the project (Clough and Sears, 1994). Ibbs et al. (2001) state that variation orders are an inevitable element in the construction projects. Therefore, to mitigate the likely issues arising from variations, a contingency sum is provided for in every construction contract for meeting the possible variations in the project, and at the same time to keep the overall project cost without change.

Condition of Contract Clauses as to Variation Orders

Every construction contract provides a specific procedure detailing the process by which the variations can be handled. Arain and Pheng (2005) observe that a variation order represents a modification requested to any of the terms of the construction contract made by the owner or the representative of the owner. A variation order is an official authority to alter a prior conclusion made and the new decision is likely to change the scope of the work or the project goals in a material way (Bennett, 1985). In construction management practice site instructions issued by the architect will represent the variation order. Uff (2005) states that disputes often arise on the determination of whether an instruction is to be treated as a variation, because the contract does not contain any provision which defines the nature and scope of a variation. According to Ssegawa et al. (2002) no definition has been evolved as to what constitutes a variation in the context of construction contracts. It cannot be said that all the instructions of the architect constitute variations (Wainwright and Wood, 1983).

Clause 3.3 of the general conditions of FIDIC (1999) contain provisions which enable the consultant to pass any directions or changed design details in accordance with the contract, which the engineer considers essential for the further progress of the project in a proper manner or for rectifying mistakes, if any in the construction process. However, not all of the instructions of the engineer may cause changes in the contractual arrangements. Consequently it is proper to consider only some of the instructions as variations, while others cannot be considered so. Finsen (2005) identified the following types of instructions which might occur during the progress of a construction contract. They are instructions issued (i) to vary the works, (ii) with a view to resolve discrepancies, (iii) with the purpose of reiterating or enforcing the already existing contractual provisions, (iv) for dealing with monetary allowances and (v) in protection of the interests of the client. The following table illustrates the category of instruction which will be a variation order.

It must be noted that not all the instructions are variation orders. Only those instructions, which are issued to amend the design, quality and quantity of works, will be treated as variation orders. Similarly, those instructions that are issued to correct any differences found in the project documents need to be treated as change orders. To a certain degree, the directions which are meant to restate the provisions of the construction contracts are not treated as changes. However, these instructions might be treated as variation orders in the event they are incidental to the amendments in the design, quality or quantity or with the removal of discrepancies. If the instructions are omitted from the original contract for any reasons, then such instructions will become variations. Instructions concerning additional funds will be considered as variations to the extent that they relate to the first two directions mentioned above. Instructions issued to protect the interests of the clients are not variation orders, because they do not attempt to change the terms of the contract that was originally entered.

Variation Order Request by the Consultant

Under different circumstances, the consultant may make a request for variation in the construction contract. In certain cases, the consultant directly requests for variations and in other cases the failure of the consultant to fulfill certain of his obligations gives rise to variations in the construction activity. In contemporary professional practice, the consultant has given the facility of requesting for changes in improvements in designs (Arain, et al. 2004). In those projects, where the construction is started before finalizing the design there is the likelihood of more number of variations being requested for accommodating changes in designs (Fisk, 1997). These changes will have serious adverse impact on the progress of the project, depending on the timing of the request for changes.

When the consultant commits some errors or omissions in designs, he may have to issue variation orders to rectify these mistakes (Arain et al. 2004). As a result of these variations, there might be delays in the completion of the project and they may give rise to loss of productivity (Assaf et al. 1995). In cases where there is a conflict between the contract documents, the consultant may have to resolve the conflicts by issuing variation orders. The conflict will lead to misinterpretation of the actual contract requirements (CII, 1986). It is important that the contract documents are concise and complete to convey the exact requirements to the contractor. Insufficiency in the details shown by the contract documents will lead to delays and disputes among the parties. It is the responsibility of the consultant to provide the exact scope of work for all the players. Inadequate mentioning of the scope of work in the contract document is most likely to result in variation requests by the consultant (Fisk, 1997).

Employer’s Role related to Variation Order Requests

The employer as the originator of the project has a significant part to play in any construction project even from the start until the project is completed. Because of this position, the employer has a control over the incidence of change orders in different phases of the project. Because it is the employer, who fixes the project goals, he sets up the project scope and determines the quality norms expected to be met by the contractor. In the case of public projects, the responsibility for the coordination with other governmental project stakeholders lies with the employer or the client organization. It is for the employer to ensure that the obstacles to the progress of the project are eliminated. The employer has to align the interests and requirements of all the project stakeholders. Failure to achieve this will result in frequent change orders, giving chances to the contractors for making claims against the employer in respect of both time and cost overruns.

According to Uyun (2007), mostly the change in the requirements of the employers leads to the issue of variation orders in construction contracts. For instance, the employer may rethink on the future needs of the completed works and therefore would like to change some of the specifications or scope of work, irrespective of the stage of the construction work. The employers may be categorized into those who have reasonable knowledge and experience in the construction industry and those who do not have such knowledge. The employers having professional knowledge usually take part in the designing and they will be able to offer technical suggestions to the design and planning staff. This type of participation by the employer is likely to avoid the issuance of much variation orders during the progress of the construction. The professional guidance provided by the employer in the design enable them not to rely completely on the design team and thus minimize the opportunities for change requests at a later stage.

The employers who do not have any technical knowledge fully rely on the expertise of the design team and they may not have clear idea as to whether their requirements have been completely met. Uyun (2007) observes that in some instances it may be tough to understand the precise expectations of the employer. When the objectives of the project are not properly defined at the start of the project, there is every chance that the employers change their minds and request for changes along the construction process.

Those employers who have met with unexpected financial crisis during the progress of the contract are likely to request for variations in the scope of work, so that they may be able to meet their financial obligations. The variations requested under conditions of financial strain of the employer may include changes in the design or scope of work in the construction or replacement of materials. The employer under such circumstance may also request for change in schedules. These variation orders are most likely to affect the quality of construction work apart from leading to high maintenance cost.

Contractor’s Role as to Variations

It is not uncommon for a contractor to be the origin agent for variation orders in a construction contract. Sweeney (1998) is of the opinion that all the participants of a construction project must be alert to find problems along the progress of the project. All the project stakeholders must understand that the instructions passed on by the consultant might have some flaw or other. Therefore, it is the obligatory on the part of the contractor to request the engineer to issue a change order, whenever he comes across a technical issue that might affect the progress or quality of work. Levy (2002) remarks “general contractors or their subcontractors may discover an obvious discrepancy, omission, error or conflict in the contract documents,” (Ndihokubwayo, 2008).

Under such circumstances, the contractor has an obligation to request the architect or consultant to review the issue identified and issue a variation order to eliminate the deficiency or error. The contractor when requesting the architect to issue a variation order must also discuss the potential cost and time required to correct the mistake and agree on the additional costs and extension of time before issuing the variation order. “A contractor may propose alternative construction methods where his experience shows that the proposed technology will not fulfill the desired fitness and function of a design,” (Ndihokubwayo, 2008). Acharya et al (2006) cite the incidence of a roof leakage in a school construction because of the mistake in the design. Had the contractor been an experienced one, this problem would have been avoided. Variations in construction may occur because of defective workmanship and lack of familiarity of the contractor with local conditions. Poor management and lack of efficiency in communication on the part of the contractor may also give rise to occasions for issuance of variation orders. The consequence of such incidents is not only the financial loss to the contractor but also the contractor may lose his reputation in the market.

Final Approval by Tender Board

Especially in government or public sector construction projects, “Tender Board” is the superior authority for finalizing any contract terms. All the contracts approved by the Tender Board have to be carried out in letter and spirit by the contractors in order to become eligible for payment under the construction contract. The engineer or the consultant certifying the bills of the contractor strictly follows the approved terms of the contract. Tender board is responsible for ensuring that the procurement policy of the owner is observed during all the tendering process and therefore the board assumes the responsibility for specifying the terms of the construction contracts based on the recommendations of the planning and design team. The contract documents provide for detailed quantitative and costing specifications as well as the timing of the project schedules to ensure timely completion of the project. Variations whether requested by the owner or the contractor are bound to affect the cost and time estimates approved by the tender board. Therefore, it becomes necessary that any variation orders are passed by the tender board before taken up for execution.

In public sector projects, there is large scope for constraints because of the existing rules and procedures (Scott and Pandey, 2000). In these projects, the project manager is not given any authority to approve unilaterally variations in the contract terms that will add to the construction project costs. The approval for variations has to pass through the tender board before they could be approved by the concerned ministry or the higher authority of the public institution. Usually variations which involve costs within a certain percentage (say 5%) of the contract value are automatically approved by the ministry or the finance department of the institution. Variations costing a value above this percentage have to go through the approval of the tender board.

Few Examples of Variations

A number of causes have been identified, which may give rise to variations in construction project contracts. Changes made in the contract specification are the prime examples of variations. Changes may also relate to the design or construction method. Changes in the project schedule for any reason will also amount to a variation. For instance natural causes like excessive rains may affect the normal project schedule to be carried out easily resulting in the parties agreeing for probable changes in the schedule of completion of different project activities. Such changes agreed upon may be initiated through issuing a variation order (Hsieh et al 2004).

Alterations or amendments to the design already agreed upon between then owner and the contractor may lead to the issuance of a variance order. The design change may be to accommodate the new expectations of the owner, which was not considered originally at the time of finalizing the design specifications. Changes brought in a construction process to meet the health and safety standards represent variations to a construction contract.

Costing Variations

The contractor and the consultant by mutual agreement decide on the method of valuing the variation orders. In many instances owners complain that the contractors try to make more earnings through variations. However in reality contractors tend to lose money where there are frequent variation orders are issued (Thomas and Napoltan, 1994). Arriving at the cost of variations is a challenging proposition in the cases of contracts following “fixed price” or “lump sum” contract arrangement. On the other hand, in the case of “cost plus” because the cost is directly transferred to the client, no issues arise in costing variations.

Generally in case of all variations, cost and time adjustments are discussed and settled before the contractor actually executes the changes requested. However, this method will become workable only when the parties to the contract commit to work on the variations with commitment and open mind. The second method of costing variations is to use the unit costs when the contract adopts the unit prices method. However, prices per unit mentioned in the contract may not be taken for calculation of additional costs without considering the scope and extent of work involved in the variations ordered. The method of adopting unit prices for costing variations is not in favor by many owners (Hester, 1991). Under a third method of costing the contractor is allowed to proceed with the execution of variation instruction after the fact adjustment. This practice is risky and gives rise to many opportunities for disputes and resultant claims, when the method is adopted for handling variations in fast track projects. While executing the variation order usually the contractor prepares a record of transaction called the “variance” to record all changes made. The variance presents details of the variations in the quantities as well as the variations in the scope of the tasks considering the changes.

Conclusion

This chapter presented a generic view of variations in construction contracts. Generally the construction contracts contain a variation clause outlining the conditions under which a variation order can be issued including the authority under which the execution of a variation order can be undertaken. A consultant can request for a variation for modification in the design or adding to the specification or to clarify any discrepancy in the contract documents. The employer or owner has a significant role to play in deciding on the variations. It is observed that the technical capabilities of the owner may go a long way in reducing the variations as he can contribute to express his specific needs and expectations by participating in the project even at the planning and design stage. One cannot undermine the role of the contractor in carrying out the variation orders. In many of the instances of variations the contractor may have to pay for the changes in the work if the variations are brought because of his mistakes or omissions or such changes have been requested to facilitate the work of the contractor. For any variation to be effected the approval of the final tender board is mandatory as the variation will represent modification in the original terms of the contract approved by the tender board. The chapter cited few examples of variations in construction contracts. Costing the variations is a challenging aspect and the method of costing varies depending on the type of contract method adopted. The next chapter deals with the reasons for the occurrence of variation orders.

Reasons behind Variations

Variations become an inevitable element in almost all construction projects (Ibbs et al. 2001). Owner may prefer to change the scope of the contract at any time during the progress of the project to meet his various needs. Similarly market conditions may necessitate some changes in the parameters of the project. Based on the latest technological developments the engineer might decide to alter the design or construction method, which will also lead to variations in the construction project.

“The engineer’s review of the design may bring about changes to improve or optimize the design and hence the operations of the project. Furthermore, errors and omissions in engineering or construction may force a change. All these factors and many others necessitate changes that are costly and generally un-welcomed by all parties” (Arain & Pheng, 2010).

Thus, variations may be the result of a number of factors. This chapter presents a discussion on different factors that are likely to cause variations in construction projects.

Introduction

Based on the purposes, changes can be classified in different ways. Changes in a construction project can be classified depending on the cause that necessitated the change (Burati et al.1992; Thomas and Napolitan, 1994). Classification of changes based on originator facilitates better calculation of the cost impact of changes and hence are considered ideal. Number of causes has been identified, which lead to issue of change orders. Design changes, which are the major source of variation orders, have been found to cause more than 52% of the variations (Burati et al. 1992). Design changes can be categorized into (i) variations resulting from improvements in design process – changes necessitated based on review of designs, advancement in technologies or review of activities from constructability aspects are some of the examples of this type. (ii) Owner initiated changes, which include changes in the scope of the contract and (iii) process changes introduced by the architect or consultant based on his expertise – this type include changes like addition of instrumentation that might have an impact on the facility.

A classification of changes can be made based on the net effect of such variations on the scope of the contract (CII Publication, 1990; Fisk 1988). They are (i) additive change involving additional work to the scope, (ii) deductive change eliminating some activity and thus reducing the scope of the contract, (iii) rework caused by deficiency in quality of work already executed, (iv) changes necessitated by force majeure – these changes entitle the contractor a revision in the project schedule in addition to cost adjustments subject however to the conditions of the contract.

A third way of classifying the changes is based on the procedure followed to effect the respective changes (CII Publication, 1990; Fisk, 1988; Cox, 1995). This type of categorization of the changes is considered important from a legal purview. The changes are (i) formal or directed change – when the owner or his representation introduces the change by operation of a change clause under the contract, (ii) Constructive change necessitated by the acts or omission to do certain acts by the owner or his representative. Normally, the changes effected by the acts or failure of the owner are not regarded as changes and hence are potential sources of disputes and resultant claims. Fisk (1988) identifies mistakes in the contract documents or wrong understanding of the clauses by the stakeholders result because of lack of attention of the employers. (iii) cardinal changes are changes that take place in a construction project, which are outside the scope of the contract. These changes are executed only after the entire contract is renegotiated or the complete scope of the contract is redefined. The following sections contain discussions on variations resulting from the actions of or to facilitate the requests of various stakeholders to a construction contract.

Variations resulting from Additions

The construction process is subject to the influence of changes in various events, the course of which is difficult to predict. These variables may emanate from various sources. “These sources include the performance of construction parties, availability of resources, environmental conditions, involvement of other parties and contractual relations,” (Furaih, n.d). Interestingly some of these factors give rise to opportunities for making additions to the existing construction works. This section discusses the variations resulting from additions to the construction works.

Change orders have been found to be a regular affair in almost every construction works (Thomas et al. 2002; Oladapo, 2007). Harbans, (2003) point out that even if careful planning has been done in respect of a project, it is possible that some variations might become necessary as the construction progresses. Therefore, construction contracts provide for possible variations considering the nature of the works involved (Finsen, 2005; Wainwright and Wood, 1983). Variations can occur because of number of reasons including improvements in constructions (Hanna et al., 2002; Ssegawa et al., 2002; Harbans, 2003; Uyun, 2007). Additions normally are suggested by the owners so that the construction project meets his expectations. Owners are likely to change the plans or scope of the work because of insufficient planning at the stage where the project scope is defined. Addition to works may also be caused by the reason of the lack of involvement of the owner in the planning and designing phase of the project. Under normal conditions the cost of additions will have to be bear by the owner if the additions are introduced in the works to facilitate the owner. There may be instances where the contractor might suggest some additions to improve the performance of the project so that the project can be completed before schedule. Even in such instances variation orders issued by the owner for effecting such improvement may have to be carried out by the contractor at the expense of the owner as the owner will become the ultimate beneficiary of such additions to the contract works.

Additions may also result because of changes in health and safety consideration of workers. For example, it might be necessary to add health centers or children crèches in an industrial building on the consideration that number of employees is likely to increase and such provisions are mandated by the applicable labor laws.

Variations resulting from Omissions

Omissions to include certain requirements of the owner in the contract documents or the design specifications will lead to the necessity of issuing variation orders (Hanna et al. 2002). It may so happen that the design team has omitted to consider peculiar ground conditions or the neighborhood considerations while planning the construction project. Some of these factors may lead to variations in construction contracts. The omissions may also relate to some of the health and safety conditions overlooked by the design team. Although most contracts provide for the possible variations of these omissions in the form of a variation clause included in the construction clause, certain omissions are likely to have significant impact on the work schedule and cost. In these cases the variations on account of omissions are to be discussed among the parties to agree on the cost and time before a variation order is issued amending the existing contract conditions (Finsen, 1999; Wainwright and Wood, 1983).

Variations resulting from Alterations

Alterations in construction works are common. The alterations may be suggested to facilitate either the owner or the contractor. In some instances the alterations may be needed to carry out the construction activities in an efficient manner. These alterations may be in the construction method or in the work already executed. In any case the cost impact of the variations because of the alterations suggested is an important factor to consider for fixing the responsibility on a particular party. In case the alterations are suggested to facilitate the contractor the variation orders have to be executed at the cost of the contractor. A mutual agreement may be arrived in sharing the cost and in providing additional time in cases where the alterations need to be undertaken for efficient performance of the project (Finsen, 1999).

Variations resulting from Change of Lines and Levels

Specific forms of construction contracts have a standard clause providing for a “change in the levels, lines, position of dimensions of any part of the work under the contract” (Topic 8). This clause implies that the owner retains the right to issue a variation order in respect of changes in the levels or lines representing the scope of providing for the execution of additional work in the construction contract using variation orders. Variations may occur because of insufficient investigation of the site by the design team. In some cases additional improvements in underground may be needed to ensure proper construction. Situations like need for enhancement of underground monitoring or seepage found after excavation may also cause issuance of variance orders in some of the construction projects. Changes in ground levels are a significant issue that may give rise to variations.

Variations to facilitate the Client

Variation in a construction contract may be classified as “one of the following: an unavoidable variation; a variation for the convenience of the client; or a variation for the convenience of the Contractor (or Consultant),” (New South Wales Government, 2008). Variations to facilitate the client include those changes requested by the owner because of a change in his expectations. These changes do not represent unavoidable variations, because it is possible to continue and complete the project even without carrying out the proposed changes. The variations initiated for the convenience of the clients are most likely to change the scope of the contract and almost in all instances will lead to additional costs. Even the variations suggested to reduce the scope of the work may entail some additional cost. “This is because variations are valued by adding the cost of the extra work, plus a margin and subtracting the contractual value of the work taken out of the contract. The actual cost of the added work can often be greater than the contractual value of the work taken out of the contract,” (New South Wales Government, 2008). Reworks suggested under the variation and the delay and disruptions caused by variations ordered to facilitate the client will have associated costs increasing the total outlay on the project.

It is essential to provide the required money and to approve the variations, before any variations to facilitate the clients are ordered to be carried out. The money provided should be adequate to cover the additional cost needed to carry out the changes. The cost in the case of variations may include the actual expenses and losses of the contractor and other additional amounts of fees if any.

Al-Moumani (2000) studied the impact of change order in public construction projects undertaken in the Sultanate of Oman. The study included case studies and field survey and found that alterations in owner requirements is the most frequent cause of changes in the construction projects. The research also concluded that changes in requirements lead to delays in completion and cost overruns and consequent claims on parties to the contract.

Variations to facilitate the Contractor

Variations requested by the contractor are the ones which are issued for the convenience of the contractors. These variations represent “unavoidable variations”. It is not obligatory on the part of the owner to agree for a variation which is intended to facilitate the contractor. However, the variation may add to the value of the project. Whenever a contractor makes a variation request to facilitate himself, the owner may consider the request just to keep better relations with the contractor. It is important that the contractor provides sufficient details to the owner to make proper evaluation of the variation request of the contractor. The owner may choose not to authorize the variation to facilitate the contractor, until he evaluates the variation request and agrees for the full impact of such variation. The owner may also insist that the contractor takes full responsibility to ensure that the proposed variation does not affect the remainder of the activities of the project.

Variations due to Unavoidable Events

Unavoidable variations are ordered to reduce the adverse impact of events or circumstances, which are unexpected. These variations are initiated to eliminate health, safety or security issues and these variations normally do not affect the scope of the work. Cases of unavoidable variations include

  • “a variation to minimise the increase in cost or other adverse impact of a latent condition (for example unanticipated ground conditions, hazardous materials or existing services); or
  • a variation to overcome a fault (for example an error, ambiguity or inconsistency other than an omission or lack of completeness which may be the responsibility of the Contractor) in the Principal’s design or documentation which, unless it is remedied, could result in health, safety or security problems or prevent work from continuing; or
  • a variation to overcome a change in statutory requirements that has occurred since tenders closed,” (New South Wales Government, 2008).

A failure on the part of the owner to issue an instruction in the above circumstance may result in the contract being completed. In the event of such failure, the owner shall be deemed to have committed a breach of the contract. It is important that the client be aware of the consequences, if he fails to react to the above situations immediately and initiate actions to mitigate the problem by issuing unavoidable variation orders. If the owner does not provide proper instructions to take care of the above situations giving rise to unavoidable variations, there is the likelihood of the owner incurring extra costs say for example covering delay in completion or rework of works already completed.

Variations resulting from Design Factors

Variations in a construction contract may arise because of a number of factors including design factors. Normally a construction project started before the completion of the design aspects is likely to face more number of variation requests (Finsen, 2005). The variations in works contracts may occur because of defects, errors or omissions in designing or in planning. These errors and omissions include mistaken quantity estimates, mistakes in planning, lack of adequate arrangement of contract interfaces, lack of consistency between drawings and site conditions, improper citation of specifications in the contract documents. The responsibility for variations because of design factors will fall on the planning and design department.

Variations due to Miscellaneous Reasons

Variations may be requested by either the owner or the contractor to ensure health and safety of workers.

“In certain construction processes, there are unforeseeable situations where the contractor needs to do whatever it takes to maintain the work schedule by making certain changes without violating safety regulations. Such changes can be either as minor as to lead the construction to clearing out an unplanned site path or vehicle route, or so overwhelming as to have to reschedule project activities or even adopt a new construction method,” (Hseih et al., 2004).

Where there is the need to change the construction method, it is necessary to issue a variation order.

Natural incidents such as typhoons and torrential rains affecting the safe progress of the construction work. In these instances and in other instances such as landslides, flooding it may become necessary to change the original schedule of the project by issuing necessary variation orders. Change of work rules is another significant cause of variation, especially when the project runs for a longer duration. The work rules and regulations which were effect at the planning and design stage might be changed by the governing authority later at the construction stage necessitating the issue of requests for variations. Similarly, changes in decision-making authority during the period the project continues give room for variations in construction contracts. With the change in decision-making authorities, the interpretation of regulations might vary and the risk to the continuance of the project because of changes that are not within the control of both the contractor and the owner must be mitigated by issuing variation orders. It is usual that in any construction project the neighborhood concerns are taken into account at the planning and design stage to avoid expensive variations at a later stage of construction. However, in some instances factors like “lack of experience, absence of proper authorization or simple shortage of time” the neighborhood considerations might have been omitted to be considered and some of them might arise at a later stage leading to variations in contract terms.

Conclusion

In practice, a number of factors lead to the generation of variation orders in construction contracts. This chapter contained a discussion on some of the major causes for the variations to arise. Owners might decide to change the scope of the construction work to meet any change in their expectations from the contract outcomes. Under such circumstances the owners might add new works to the scope of the contract which is an important cause of variation. Omissions by the planning and design team also are a factor that leads to large number of variations in construction projects. Apart from additions and omissions, there may be instances where the consultant, the contractor or the owner might suggest some alterations to the existing working methods or work completed. The alterations may be suggested for an effective improvement in the project performance. Change of lines and levels may also be an element brining in variations. Variations in construction contracts may be categorized to include variations because of unavoidable events, variations to facilitate either the client or the contractor. Changes in designs may also lead to variations and the chapter also cited a number of other reasons for variations to arise. The next chapter presents a discussion on the impact of variations.

Impact of Variation Orders on Contracts

Introduction

Impact of variation orders has been the subject matter of several research works (CII 1996, CII, 1990a 1990b; Clough and Sears, 1994; CII 1994a 1994b; Thomas and Napolitan, 1995, Fisk, 1997; Ibbs et al. 1998). This chapter presents a discussion on the impact of variation orders on the construction projects.

According to CII publication 6-10 (1990), the impacts of variations in construction contracts can be grouped under (i) direct cost impact, (ii) direct schedule impact and (iii) indirect or consequential impact. The direct cost effects are limited to the construction activities in which the variations are to be applied. The owner may experience a positive or negative impact of the change, which in turn will be the opposite for the contractor. In some instances, the changes may not have any effect for both the contractor and the owner. Direct cost impact comprises of two elements – labor cost and material cost. It is always easier to determine the material cost impact with certain level of accuracy. On the other hand, it is not easy to calculate the effect of labor charges precisely because of the impact of variations on labor productivity and the uncertainty on the scope of the changes on the works. Impact of labor cost may lead to degradation in productivity, delays in completion and demolition of already constructed portions and rework of them.

Direct impact of changes on the schedule of construction activity can be documented easily after the change is effected, because one could get all the necessary data for estimating the effect. However, such estimation is not possible before carrying out the variations because of unexpected changes in labor productivity, accessibility of required materials and schedule changes. When there is a penal provision in the contract, the loss on account of changes in schedule may become very expensive. Zeitoun and Oberlender (1993) report on the schedule changes at 9% of the contracted schedules covering 71 fixed price contracts, which were the subject of their study. Ibbs et al. (1998) remarked on the impact of changes requiring schedule acceleration as “a high level of fast tracking generally does not result in any more changes than non-fast tracking projects.” The study by Ibbs et al (1998) found that more variations in the activities tend to take place towards the completion of the project, which might lead to high labor intensity and more rushed finishing operations.

It is the normal tendency of the project stakeholders to overlook the indirect or consequential impacts of changes in construction contracts. Indirect or consequential impact may affect the progress of other associated works at a later date and thus will lead to delay in the completion of the total project. Therefore, it becomes important that the owner and the contractor take into account the direct and indirect impact of variations, while incorporating a change clause in the construction contract.

Thus variations in construction contracts lead to consequences that significantly affect the progress of different work packages and thus causing delay in the entire project. This situation is referred to as “Ripple Effect.” According to Thomas and Napolitan (1994), “while much has been said about the ripple effect, there have been no quantitative studies showing the magnitude of these effects.” Zeitoun and Oberlender (1993) made a failed to attempt the ripple effect. Nevertheless, Work Breakdown Structure (WBS) has been developed as one of the effective evaluation tools for arriving at the impact of consequential impact on large projects. The following sections present a detailed discussion on various impacts of variation orders on construction projects. The discussion formed the basis for the development of the questionnaire as the survey instrument.

Cost Overrun as a Result of Variations

Supported by well-structured project schedules, construction projects are most likely to achieve maximum performance and a smooth flow of work to ensure the completion of the project within the stipulated time meeting the required quality expectations. However, seldom construction projects are completed in time to meet the original time table because of the influence of several factors including design slippage and amendments (Al-Hakim, 2005). Frequent incidence of variation orders has a negative effect on the progress of construction projects (Thomas et al. 2002). According to Ibbs (1997a, 1997b), by adversely affecting productivity and project costs, variation orders impede project performance largely. Arain and Pheng (2005) observe that variation orders in construction contracts, though undesirable are inevitable reality to be faced by the parties. Hanna et al (2002) are of the opinion that projects with many variation orders affect productivity and thus lead to delay in execution of the contracts. Variation orders affect the project performance in terms of cost overruns.

Variations may be categorized as beneficial and detrimental variations. Beneficial variations include those variations which help improving quality of construction and reduction of cost overruns. They also help in improving project performance by better scheduling and reduce the degree of difficulty in executing the project. Ibbs et al (2001) find detrimental variations to reduce the value to the owner by having a negative impact on the performance of the project. Variations involving cost of the project may be beneficial or detrimental depending on their impact on the total project cost. Because the need to order for changes in the construction contract is a matter of practical reality, the owner has to be careful in requesting variation orders resulting in additional costs to the project. On the other hand the project team may be able to take advantage of beneficial variations which work to reduce the cost of the project. Variations in construction contracts may result in significant variations in direct and indirect cost of the project. The variations and variation orders involving changes in costs may be detrimental to all the parties.

Kaming et al (1997) studied the influence of various factors on construction contracts causing escalation of time and expenses. They found that material costs are a major cause of escalation of costs in construction projects. Construction projects involve two major phases – preconstruction phase and construction phase, with the construction phase consuming more resources than the preconstruction phase. Therefore, in the construction phase more attention is focused on cost planning. The employers are keen to know the total cost of completion of the project in advance and they also prefer to have the cost of completion equal their original estimate as per the tender.

Nevertheless, many of the construction projects are subject to cost overruns. It is to be noted that all variation orders do not result in cost overruns. Variation orders that cause deletion of works lead to reduction in costs, while on the other hand variation orders involving additional works lead to escalation of project expenditure (Ssegawa et al. 2002; Arain and Pheng, 2006). Arain and Pheng (2005a) found that change orders issued during institutional building constructions have led to considerable escalation of construction expenses. Mohamed (2001), based on the study of the impact of change orders in different sewer overflow projects found that expenses increased up to 7% of the estimated costs. Bower (2000) identified the following direct costs, as being associated with change orders.

“Bower (2000) identified the following direct costs associated with variation orders: Time and material charges related to immediately affected tasks; Recalculation of network, increased time-related charges and overheads; Reworks and standing time; Timing effects for example winter time; Inflation, change to cash flow and loss of earnings; and Management time, head office and site charges. While the direct costs associated with a variation order can be easily calculated, Bower (2000) argued that indirect costs are more difficult to quantify,” (Ndihokubwayo, 2008).

Any change or alteration in the design of a project is most likely to result in increased project cost (Clough and Sears, 1994). In order to protect against the cost impact of variations involving additional cost because of unexpected events, every construction contract provides for a contingency sum at a certain percentage of total project cost. The purpose of the contingency amount is to ensure that the project progresses without difficulty even in case of the occurrence of any detrimental variations. Increase in indirect cost results from the necessity to supply additional materials to take care of reworks or additional works taken up as a result of the change order initiated. Loss of productivity because of change order may also have an effect on the direct and indirect cost of the project. When the productivity of labor is affected because of variations the contractor may have to employ additional workers to complete the work within the agreed schedule. Loss of productivity however cannot be measured precisely to arrive at the addition to the project cost because of variation orders issued. Change in scope of work is the most significant variation that is likely to have an adverse impact on the project cost. Change in the scope of work is again within the decision of the owner. Therefore, the owner has a significant role to play in preventing the occurrence of any cost variation in the project.

Time Overrun as a Result of Variations

It is the wish of the clients that their construction projects are completed within the scheduled time and they expect to achieve monetary gains, when the project is completed within the shortest time possible. The employers apply heavy penalties to the contractors when they exceed the original project schedule and prolong the delivery period. The contractor is made to make good the losses incurred by the client because of delays in completion. Variation orders have been found to be one of the causes of time overruns in many construction projects (Chan & Yeong, 1995; Mohamed, 2001). Change orders issued at different stages of construction projects result in time overruns and lead to delays in completion (Koushki, 2005). Hanna et al (2002) found that frequent change orders lead to considerable reduction in productivity. Reduced productivity leads to time overruns and consequent delays in completion. Yogeswaran et al (1997) have categorized time overruns into excusable and non-excusable. Excusable delays, “relieves the contractor of liability for liquidated damages and the latter is due to the contractor’s culpable delay,” (Ndihokubwayo, 2008). Non-excusable delays arise because of the culpability of the contractor.

Quality Factors resulting from Variations

Patrick and Toler (n.d) observe that in contracts with considerable degree of risk for unexpected events, in the fear of having to pay damages for time overruns, contractors have a tendency to cut corners on quality of materials so that they may be able to maximize their earnings from the contracts. If because of uncertainties variation orders are more frequent such orders are most likely to affect the quality of the final work. “Quality may be compromised as contractors try to compensate for losses they are not optimistic about recovering” (Ndihokubwayo, 2008). It is observed that the quality of the work may become poor because of frequent variation orders issued, as the contractor may attempt to make good his losses by compromising on the quality of materials and project outcomes (Fisk, 1997). Low productivity caused by variations may also lead to quality issues as the contractor may have to employ new manpower some of whom may not have the required experience.

Health and Safety

Provision of health and safety measures may have to be revisited in case of frequent incidence of change orders. For instance Clause 5.3 (e) of the OHS (2003) prescribes that in the case of variations, the contractors must be provided with sufficient information on health and safety considerations, where there is variation orders issued in respect of construction projects. The contractor must also be provided with appropriate resources for maintaining good health and safety conditions. This requirement becomes valid because variations in construction procedures, supplies and implements may need extra provision of health and safety measures (Arain & Pheng, 2005). Clause 5.14 of the OHS (2003) places an obligation on the contractor to provide adequate information to the principal contractor on the health and safety of workers who might be affected by the variations in the construction works. The principal contractor must be informed about the circumstances which might need a review of health and safety plans because of variations.

Misunderstandings

A construction project cannot be considered just a business venture; but it leads to the creation of a professional association among the parties to the construction contract. With the completion of each project the experience of the participants go up and their reputation also enhances. However, variation orders lead to disputes and claims among the parties, as a result of which misunderstandings may arise. Opportunities for misunderstandings may arise because of the dissatisfaction of the contractor with the valuation process of the variation orders by the consultant. Variation orders give rise to arguments over the cost, time for completion and payment of compensation under variation orders (Bower, 2000). “Possibly because contractors are not confident about the outcome of such negotiations, they usually request higher values for variation orders than the actual cost incurred. Bower (2000) opined that consequently there is tension between parties as the contractor continually pushes the client to settle claims for additional costs while invariably feeling that the reimbursement has been insufficient,” (Ndihokubwayo, 2008). This misunderstanding affects the relationship between the parties (Bower, 2000). Mismanagement of variation orders is most likely to lead to disputes between the owner and the contractor (Charoenngam et al. 2003).

Loss of Credibility

Variations in construction projects arise mainly because of misinterpretations of the clauses of the contract, as it is always not possible that the employer can precisely express the project objectives and his expectations by incorporating them in the clauses of the construction contracts. The ambiguity in some of the provisions will lead to misunderstanding among the parties (Sun & Meng, 2009). In cases where the parties are unable to reach an amicable resolution of the issue, disputes arise necessitating the submission to arbitration for settlement. Some of the issues may have to be decided by the courts if they cannot be resolved through arbitration. When the dispute as a result of variation orders is submitted to courts for settlement, such instances create negative publicity for both the contractor and the owner.

Any supplier or other counterparties transacting with the owner or creditor may consider the transaction with either of them undesirable and therefore would become cautious in dealing with the parties under dispute. This represents loss of credibility to the contractor and the owner. Similarly, when the contractor or owner is not successful in executing his claim and recover damages from the other party, financial constraints may ensue affecting the progress of the construction activities. This may result in withholding the payments to others including its employees and suppliers. The withholding of the payments by the contractor or owner will be viewed as the step leading to the insolvency of the parties and will act to reduce the credibility of the parties acting under the construction contract.

Loss of Chain Management

Variation orders in construction projects are likely to cause serious disruptions in construction supply chain management. Impact of these change orders will have serious impact resulting in team effect of claims, which eventually will result in extension of time and productivity degradation including quality issues (Construction Industry Institute, 1995). Reduced work pace in some schedules of the construction project, because of variations is most likely to affect the progress of work in the other project activities. Consequently there will be disruption in the chain management, which is likely to impede the progress of the construction project. (Hanna et al. 2005).

Harmful Impact on Project

Li et al (2001) observe that significant increase in the project costs and delays in the completion of the projects are the most frequent effects of variations in the construction industry. In many construction projects, the cost and time overruns have a combined effect to result in reduced earnings to the owner. Because variations might significantly affect the productivity adversely, the contractor may find it difficult to meet his financial obligations (Aibinu & Jagaboro, 2002; Bower, 2000). Earlier research has found negative correlation between variations in contracts and the productivity. Variations in construction projects, while affecting the present working schedule of the projects are likely to impede the future schedules leading to delays in completion. Because project completion will be delayed by variation orders issued by different project stakeholders, the contractor may be inclined to proceed with certain project activities in an accelerated phase affecting the quality of work completed.

This may in some cases lead to rework. The owner and the contractor are most likely to lose the floats available in the different project activities because of the time lost in the process of claiming and settling the disputes among them (Josephson et al. 2002; Love et al. 1999). Such instances lead to further delays in the completion of the project. The major harmful effect is the strain on the relationship between the contractor and the employer. Since claims arise from changes in the contractual terms, which define such relationship, any claim is bound to affect the normal and cordial relationship between the two parties. Differences in understanding the reasons for variations in contractual terms lead to claims and counter claims (Goodacre and Hunter, 1990). Variations in construction contracts make the contractor face financial issues, which in turn may lead to use of inferior quality materials in the construction affecting the quality of final outcome of the project.

Conclusion

Variation orders leading to disputes and resultant claims in the construction industry impede the progress of the construction project largely. The impact of variations may lead to strained relationship among people resulting in slow pace of work. Variations also affect the quality of construction and lead to lesser lower employee morale and higher staff turnover. Cost-related issues such as extra payments to the contractors and problems in cash flows, extra funds required to replace the materials and equipments are the result of frequent variation orders. Besides creating strained relationships among the participants to the construction project, Variations may also result in loss of reputation in the market and health and safety issues concerning the workers involved in the construction project.

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