Contract variations have been described as a disease, and the best remedy to a disease is one of prevention, rather than cure.  To do this, we must focus on the cause of the variations rather than the symptoms which are the additional payments, scope creep and lack of clear technical and commercial scope definition at the start of the engagement.

Ideally if contracts are well thought through, have well defined specifications and clarity around risk and expense allocation between the parties they should run without variations, in the absence of extenuating circumstances. However, contract managers seem to generally accept that there will be variations in their contract; this is especially prevalent in large infrastructure projects, where variations generally account for a significant percentage of a projects budget, hence the need for contingency funds in these projects.

So what are the main causes of contract variations and what can project or contract managers do to mitigate the risk of variations on their contracts?

Excluding situations where variations are required as a result of genuine unforeseeable circumstances arising in the project, the vast majority of contract variations come down to three key issues. The good news is there are solutions to all these issues that will help your organisation to minimise the amount of variations on your contracts, through identifying the causes and preventing them occurring in the first place.

1.  Poor planning: inadequate upfront planning is a major cause of variations. It occurs when people carrying out the procurement process don’t allow enough time upfront to set the project up for success. Issues with poor procurement planning can be avoided by allowing enough time in your project timelines for stakeholder engagement, getting alignment on the objectives of the procurement activity, and preparing a robust tender evaluation plan that ensure you are comparing apples with apples including qualifiers and assumptions from service providers. This will assist and engage a provider who is aligned to your strategy and objectives for the project and who can provide a value for money price based on good information.

2.  Inadequate drafting: poorly drafted specification and contract documents often lead to contract variations as it often results in a different understanding by the service provider and the contracting party around vital aspects or the services, works or goods to be provided. An ambiguous specification can be looked upon by a potential tenderer as full of risks and challenges to deliver.   If they win the work based on providing a very competitive price with many qualifiers and assumptions, it may enable the service provider to issue variation requests that they claim were out of scope of the agreed contract. The preparation of good documentation for procurement activities can be achieved by undertaking the following activities (where appropriate):

  • Ensure there is a clear understanding of what is required. If producing a specification for an internal stakeholder, ensure you identify and agree their requirements and ensure they are fully understood. This activity needs to be undertaken for all project stakeholders, especially those who will be involved in managing the delivery of the project.
  • Research the market by talking to suppliers, other purchases, industry associations to identify possible solutions, indicative costs and realistic timelines to undertake a similar project.
  • Identify the possible risks associated with the procurement activity so that the risks can be allocated between you and the service provider and mitigation measures can be built into the documentation
  • Work to identify and highlight upfront any issues that may hinder the ability of the service provider to fulfil your requirements (ie. is the site in a confined space, are there particular environmental factors that may impact on performance, challenging geotechnical conditions etc)
  • Identify the scope of the contract, and be clear about what is in and out of scope
  • Provide a detailed background history and previous documentation to the contract to ensure the market understands your expectations, objectives, and key success factors for the procurement

3.  Lack of clarity: a lack of clarity particularly around risk allocation and where the responsibility for particular project activities and expenses lie is another major cause of contract variations. Consider an example of a waste management contract that is being let by a council, where there is a need for both internal and contract staff to be involved in the delivery of services to the community. It is vital to be clear upfront on who is responsible for managing which elements of the service, such as customer complaints, and whether this be managed with by the service provider or the council. A good way to manage this is to be clear on expectations upfront by having discussions or workshops with your service providers to agree on these issues and ensure both parties are aligned. The Project Expense Table and the Risk Allocation Table are great tools that we use with our clients at BRS to assist them with this process.

Despite best endeavours though, there is still a chance that variations will arise as a result of circumstances that were unforeseeable to both parties, such as a change in legislation or unexpected site conditions. In the event this occurs you can minimise the impact of these variations using the following tips:

  • Always ensure you obtain a price in writing for the variation including a detailed breakdown of works to be completed. Don’t be afraid to challenge and benchmark prices externally through good contract clauses if you think they are too high.
  • Avoid double charging by the service provider by analysing the marginal cost of providing the additional services. The service provider will have built fixed cost into the original contract price, but these costs are unlikely to be relevant for the variation, so should not be charged again or double charged.
  • Do not agree (either verbally or in writing) to a variation request until you have alignment with the service provider on the impact of the variation on the project in terms of both cost and time.
  • Go back to the project expense and risk allocation tables to ensure the variation is in line with what was outlined up front as part of the procurement process.  It will ensure there are clear expectations around what is a project expense, what is part of their rate and what is being picked up by the client.

The challenge for many organisations is that they are often too focussed on managing variations when they arise – they try to cure the disease rather than prevent it. However a little bit of time spent upfront to prevent variations through focusing time and effort into your procurement processes and expectations upfront can pay huge dividends when it comes to managing your contracts, mitigating variations and meeting budgets.

Are you more focused on prevention or cure?  Are you clear on the causes rather than the symptoms?