It remains to be seen what the full impact of COVID-19 will be on the UK construction sector and an area that must change is our reliance on variations.
As the military says, no plan survives first contact and this is certainly the case in construction. Data by nPlan, a project delivery and risk consultancy, found that across its database of more than 250,000 projects, more than 90% of construction projects experience some level of delay greater than 10% beyond the planned schedule.
Surely if we are getting it right only 10% of the time, we have to admit there is something very wrong with the process? The ground truth here is that in a market that is so price driven, companies are forced to tender to win and it is often only through variations that profi t can be extracted.
So it is little wonder that notifi cations are pawed through by overzealous quantity surveyors motivated to squeeze something out of the job. This in turn leads to conflict and dispute as payment gets delayed and vital time and energy are wasted, business relationships break down and mental health suffers. Ultimately, getting paid for variations is one of the core skills required when running a successful 21st Century contracting business.
A recent report by the CBI highlights the stark ineffi ciency inherent in this adversarial approach to pricing work. Oxford Economics research commissioned for this report by the CBI established that the construction industry spends 1.6% of its total expenditure on services and goods from UK suppliers on legal services – around £1.27bn. That proportion of spend is close to two-thirds of the average margin made by the 100 largest contractors in 2018 and double the median for other UK industries.
Alex Wright, Estimator at Great Yarmouth Ceilings (GYC), said ‘last minute extras’ are often carried out quickly on site to maintain progress and good will but all too often there is no reward for this when a contract ends and the job is billed.
“The greatest challenge faced at GYC is obtaining approval as to the most appropriate valuation rule associated with a variation, and where it fails to be agreed using fair rates and prices,” he said. “Then the arbitrary crystal ball gazing by contractors is diffi cult to overcome without good records. Likewise, work undertaken in dissimilar conditions is never considered and fair allowance is seldom offered.”
Managing Director at RPN, Kevin Naughton, blamed aggressive tendering practices and time pressure for contractors not being as vigilant as they could be up front with variations, thereby leading to negative consequences further down the line.
“I think much of the challenge is the speed at which everything happens nowadays and the tender process encourages a lowest price approach,” he said. Main contractors also acknowledge that variation payments frequently lead to disputes.
Martin Adie, formerly of MAC Construction and Willmott Dixon, said contractors are frequently asked to price up without a full specifi cation and this is where the problems start.
“In construction, we often start on site without really knowing what we are doing. ‘Sort it out on site’ is one of the most common things you will hear said within construction,” he told FIS members at its annual conference.
If specialist contractors fail to properly consider and administer variations requests, they risk incurring costs they can’t recover and disputes over whether the work done was that they requested.
So what steps can contractors take in advance to help ensure a fair conclusion is reached? We spoke to consultants and contractors to obtain the following tips to help you get paid in full.
1. Check contracts carefully
Contracts such as JCT and NEC provide for variations but often amendments to the contract will be favourable to clients, so be sure you understand and raise concerns before signing.
Simon Lewis of Womble Bond Dickinson stressed that the clarity of the contract, combined with contractors’ own recordkeeping, will be key to any potential future dispute resolution. “It is important to check to make sure your contract has a clearly drafted variation clause. Unfortunately, even if it does, you could still face arguments later on over the valuation of your variation, so the more information you have from the outset, the better,” he said.
2. Obtain correct authorisation
When you are asked to make a change to work, it’s imperative you get an instruction by someone who is properly authorised before carrying this out. Try not to be intimidated if challenged and just explain that it’s necessary before you can legitimately carry out the work requested. Ideally, ask for this in writing or digital form and ensure the instructions are clear, not open to misinterpretation. If in doubt, ask for clarification.
Alex Wright said: “Surveyors are the industry’s worst nightmare to contractors as it seems their ultimate aim in life is to reduce any valuation by as much as possible despite the validity of the works being carried out in the first instance. Wherever possible, it’s best to seek agreement in writing from the QS for value expended.”
3. Verbal and written instructions
‘Word of mouth’, ie verbal instructions, cannot be proved and challenged if dispute arises further down the line, so avoid accepting these at all costs. There may even be a disclaimer about this in the contract. If you don’t obtain a written instruction immediately, be sure to request a Confirmation of Verbal Instruction (CVI) document that can convert, and get it signed.
4. Good record-keeping
Keeping detailed records of a variation, which can be tracked, is an important part of ensuring you get paid for the actual work done. Ensure all members of your team have access to this as the work progresses, and make sure everything relating to the variation is properly filed so it is easy to reference. Sometimes you may need to duplicate documents if they relate to more than one instruction, to ensure they are accessible wherever they are needed.
Scotwood’s Joint Managing Director, Doug Kerr, is a strong advocate of record-keeping. He said: “What Scotwood does to minimise final negotiations is not rocket science. As a project progresses, we keep an up-to-date spreadsheet of the starting point of the original purchase order and all the variations to date.”
Simon Lewis also stressed the importance of recording information in case legal action is ever required, pointing out that the valuation of a variation is a matter of assessment rather than strict legal ruling, therefore good record-keeping is key.
5. Schedule of Rates
The Schedule of Rates will be referred to in most contracts but may also include provisions for revision according to the conditions of specific jobs. You therefore need to check these can be adjusted to allow for changes in conditions.
To do this, gather together any drawings, schedules and other documents, pinpoint reasons why the work is now being carried out under different conditions and detail exactly why a price change is needed. Don’t forget to include the costs of administration, supervision, design etc.
Where work can’t be valued by measurement, use daywork sheets. Be sure each sheet includes details of setting up and clearing up and is signed by an authorised representative of the client company.
Alex Wright pointed out that signed daywork sheets are only ever classed as agreement to the hours / items of work carried out and not an agreement of cost therefore contractors need to be “extremely aware” that costs, wherever possible, for extra works should be agreed in advance of them being carried out and not after completion.
6. Submitting the valuation
When you are ready to submit your variation payment claim, be sure everything complies with the contract and follow any procedures outlined by the client in terms of submission, if possible. Try to keep the client updated on a regular basis, so that any final valuations are less likely to come as a shock.
Kevin Naughton, Managing Director at RPN, stressed that rushing the process results in mistakes, therefore you should take your time to do this properly, regardless of the client pushing. “We are put under pressure to get prices back in very tight timescales and don’t really get the time we need to discuss some of the problems that we may face and so they end as variations, which often then turn into a protracted and time-wasting process that seems to be more about finding ways to slow up and reduce final account settlement. For me, there needs to be more time and candour up front from all parties and we can streamline the whole process and improve relationships,” he said.
Many contractors don’t claim for variations until the later stages of the job, which is an obvious pitfall, with many potentially damaging consequences.
Doug Kerr said: “We try and cost variations as soon as possible and discuss them at weekly site meetings to get an agreement. This hopefully means no bun fight at the end of the day.”
At the end of the day, no contractor should underestimate their own work or be intimidated while working on a job. Martin Adie said specialist contractors are in the best position to get prices agreed up front and should not underestimate their bargaining power.
“You are pushing from the bottom, but you need to keep asking for that full specification, so I would urge you to ask for a very specific brief about what work is being proposed,” he concluded.
FIS CEO Iain McIlwee concluded: “There are some great tips in here to help companies through the minefield that variations create, but it can’t be right that when we talk to contractors they are not sure if and when they will make money on jobs that they are currently undertaking. We have started looking at this in more detail and are planning a detailed survey focussed on our community, but early anecdotal evidence suggests that the average value of variation is around 20% of the initial contract value.
“There is a better way. It means leading from the top with more realistic tendering, better engagement with the contractor at the design stage, quality, whole life-cost, focussed procurement and returning to standard, unamended contracts.
“The next 12 months is going to be about rebuilding construction and unrealistic tendering, unsustainable margins and risk avoidance through contract amendment cannot be part of this future.
FIND OUT MORE
Find out more about the FIS campaign, Rebuilding Construction, at www.thefis.org/call-to-arms