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Construction Claims & Disputes | The Cumulative Impact of Variations

Construction Claims & Disputes | The Cumulative Impact of Variations

All construction projects are unique and affected by different factors and stakeholders.
 

Whether it be the employer changing their requirements, the engineer’s design containing errors, or external factors such as changes to laws/regulations or differing site conditions, one thing is for certain—change is inevitable.

Most construction contracts contain mechanisms to accommodate and incorporate changes, often placing an obligation on the contractor to assess, prepare, and furnish a proposal to the employer, setting out details of that variation, an estimate of the increase/decrease to the contract price, and any requisite adjustment to the critical milestone dates.

Ultimately, from a contractor’s perspective, should the scope of work increase, the mechanisms allow the contract price to be adjusted (reasonably compensating it for the additional works) and the critical milestone dates extended (relieving the contractor of liability for liquidated damages).

Multiple variations can be successfully incorporated into a project, but only if the parties are able to accommodate the varied works into the schedule (to ensure planned works are not disrupted or delayed) and if the parties are able to agree on the additional compensation/time required.

“1 + 1 = 3”

On large and complex projects, one plus one can sometimes equal more than two, and there has been a rise in the number of disputes related to the cumulative impact of variations.

When pricing for variations, the contractor will likely use the rates and prices from the contract document as the basis of the valuation, and the costs will be prepared on a forward pricing basis. These rates and prices reflect the work being designed in advance, procured in advance, and being carried out at a pre-planned point in the execution of the works.

However, the reality on most projects is that when multiple variations are issued throughout the execution of the works the variables that underpin the pricing change, e.g. the varied works are designed and procured in a compressed time period and/or executed out of sequence.

There is a point in time when the magnitude of variations will start to have a compounding effect, negatively impacting the contractor’s planned works, resulting in additional costs not recovered in the valuation of the variation by the engineer. The additional costs can arise due to many different reasons, such as re-sequencing of activities, undertaking them in a different manner to what was originally planned, and subsequently reducing labor and plant productivity.

This point in time is difficult for a contractor to identify, and the cumulative impact of variations will generally go unnoticed until the later stages of a project. At that time, it becomes reality that the contractor’s cost and/or schedule targets are unable to be achieved.

For this reason, contractors rarely make an allowance when pricing variations and are often limited to later submitting a claim to recover such costs, on a backward pricing basis.

Therefore, it is crucial that contractors maintain detailed contemporaneous records which they may later rely upon, adhere to their contractual obligations such as notification provisions, and that they are aware of potentially waiving their rights to later claim costs associated with a variation already agreed.

Challenges

More often than not, contractors are reluctant to pursue their entitlement for the cumulative impact of variations due to the following reasons:

  • Knowing that management is optimistic that the variation can be implemented without affecting planned works
  • Anticipating that the employer will fail to recognize, and reject, such impact
  • Fearing they will jeopardize their relationship with the employer
  • Uncertainty on how to calculate such impact

Contractors do have the right to receive a fair and reasonable amount of compensation for the impact employer variations have on works, including the cumulative impact of multiple variations.

However, a large number of variations alone will not give a contractor the right to claim. In order to be compensated for loss of productivity and/or other unrecovered costs, the following principles, as with any claim, would need to be demonstrated:

  • Liability
  • Contractual entitlement to claim
  • The extent by which the number of variations has affected productivity and/or caused loss and expense (cause and effect)
  • Quantification of the impact, making allowances for inefficiencies, ensuring costs have not already been recovered within each individual variation

Where to look for impacts

While it is true that the cumulative impact and loss of productivity is difficult to quantify, the contractor’s chosen method of assessment will be determined by the availability and quality of records and expertise to carry out such analyses.

Generally, those calculations relating specifically to the project and supported by factual, contemporaneous data are more likely to be accepted by the employer.

A contractor who has been impacted by the cumulative effect of multiple variations should consider the following areas for potential recovery of additional incurred cost/loss:

  • Reduced productivity of manpower and task related equipment
  • Changes in method of working (condensing and re-sequencing activities, etc.)
  • Overtime work where none was anticipated
  • Changes in procurement methods
  • Introduction of additional resources
  • Additional on-site supervision
  • Thickening of indirect resources (not allowed for within the priced variation)

When demonstrating achievable outputs, the “measured mile” approach is widely regarded as the most advanced and credible method of assessment and provides a differential analysis between the unimpacted and impacted periods of work. If adopted, the measured mile would set out to establish a causal link between the increased number or magnitude of variations and the loss of productivity.

In the event a measured mile cannot be identified, other ‘project based’ methods, such as a baseline productivity or earned value analysis, could be assessed. If the quality of contemporaneous records does not allow for any of the above project specific methods, the contractor would be limited to using either an “industry based” or “cost based” method of assessing productivity losses; however, these are less robust and more likely subject to criticism.

Conclusion

The lesson to be learned by contractors is that multiple variations do have an impact on the contractor’s costs, many of which often remain unrecovered in the valuation of the variations themselves. The prepared contractor will anticipate this under recovery, issue appropriate notices, and maintain contemporary records to substantiate a claim for “unrecovered costs arising as a consequence of the impact of multiple variations.”

Interested in learning more?

Contact resources@jsheld.com and we will connect you with a member of our team. You can also reach our main office at 516-621-2900.

 
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