Managing Cost Variations and Change Orders in JCT Lump Sum contracts

Introduction

JCT Lump Sum Contracts, namely the Standard Building Contract (SBC/XQ) and Intermediate Building Contract (IC 2016), have long been pivotal in the UK construction landscape. Serving as comprehensive frameworks for defining contractual relationships and allocating risks, they underpin many successful construction projects.

In these contracts, and indeed in any construction project, changes are inevitable. Whether due to modifications in the project scope, unforeseen site conditions, or legal changes, cost variations and change orders are commonplace. They refer to the alterations in the original contract that affect the project’s cost, time, or scope. These changes, while sometimes necessary, can disrupt project plans and inflate budgets if not appropriately managed.

Our article focuses on this crucial aspect of construction project management—how to manage cost variations and change orders effectively. Our discussion aligns with the best practice guidelines provided by the RICS Change Control and Management, 1st edition. Above all, we emphasise proactive communication, meticulous documentation, and swift dispute resolution. Also, we firmly believe in the power of prevention and control as key strategies to mitigate variations and keep your project on track.

Exploring Variations and Change Orders in the JCT Contract Framework

Defining ‘Variation’ within JCT Contracts

In the context of JCT contracts, a ‘variation’ refers to changes to the contract’s original scope of work. These alterations can involve additions, omissions, or other modifications to the design, quality, quantity, or execution of the works. Alongside ‘variations,’ the term ‘change orders’ or ‘instructions’ is often used interchangeably. These denote formal directives from the client or their representative, instructing the contractor to implement a variation.

JCT SBC/XQ and IC 2016 contracts, which are our focus in this discussion, have clear provisions outlining the process for issuing, implementing, and valuing variations. They stipulate conditions under which the contract administrator can issue instructions for variations and the mechanisms for pricing these changes.

Common Causes for Variations

Variations can originate from numerous sources in construction projects. Design changes, whether due to new client requirements, adjustments to accommodate site conditions, or enhancements suggested by the project team, are a typical cause. Unforeseen conditions, such as unexpected ground conditions or previously unidentified existing structures, can also necessitate variations.

Changes in scope, often brought about by new regulatory requirements, client preferences, or technical advancements, can drive variations. Finally, non-compliance with specifications, resulting in rework or changes to the originally planned works, can lead to change orders/instructions.

Potential Impacts of Variations

If not well-managed, variations can cause substantial disruption to a construction project. Cost overruns are a frequent result, as the extra work or changes to planned work often increase the overall project cost. In terms of project scheduling, variations can cause delays due to the need to replan or reorder work sequences, or because of the time required to carry out additional or changed works.

Moreover, variations can also instigate disputes if there are disagreements over the validity, necessity, or cost of the changes. For instance, a contractor might dispute a variation they consider to be outside the contract’s original scope, while a client might question the costs submitted for a variation.

To illustrate, consider a scenario where unforeseen ground conditions require the redesign of the building’s foundation. This variation can lead to additional costs for the redesign and the new foundation works, an extension of the project schedule, and potentially a dispute if the client and contractor disagree on who should bear these extra costs.

In the subsequent sections, we will discuss how effective management can mitigate the risks and impacts of variations.

Preventing Variations: Proactive Planning and Control

The Importance of Proactive Planning and Control

Proactive planning and control play a vital role in preventing variations in construction projects. By engaging all project stakeholders early, thoroughly assessing potential risks, and practising sound project management, you can effectively identify potential triggers for variations. It’s about foreseeing issues before they arise and having mitigation plans in place to tackle them effectively.

Strategies for Variation Prevention

The key to successful variation prevention lies in a combination of well-planned strategies. These include:

• Thorough Contract Review: Before the project starts, ensure that all involved parties fully understand their roles, responsibilities, and the contract’s terms. This reduces ambiguities, misunderstandings, and potential disputes that might lead to variations.
• Clear Scope Definition: Define the project scope explicitly at the outset to avoid ambiguities that could lead to variations later on. Make sure all stakeholders understand the project objectives, deliverables, and expected outcomes.
• Rigorous Design Management: Careful coordination and review of designs are essential. This helps to minimise changes after construction has started, one of the common triggers for variations. Early design freeze should be your aim.
• Comprehensive Site Investigations: Before starting construction, conduct thorough site investigations to uncover potential unforeseen conditions that may lead to variations. This could include geotechnical surveys, ecological surveys, or investigations into existing structures.
• Regular Project Monitoring: Keep a close eye on the project’s progress to spot any deviations from the planned works early. Early identification of these issues allows them to be addressed before they escalate into variations.

Implementing RICS Guidance on Change Control

The RICS Change Control and Management document provides invaluable guidance for managing variations effectively. Key recommendations include:

• Establish a Robust Change Control Process: A well-structured process helps to manage potential variations systematically. It also ensures that changes are only made when necessary and are appropriately authorised.
• Clear Procedures for Authorising Changes: Every change should go through an approval process, and this should be well-documented and transparent. It helps ensure accountability and allows for traceability of changes.
• Record All Changes: Keep a detailed record of all changes, including when they were made, who authorised them, and their impact on cost and schedule. This documentation provides a reference point for any future discussions or disputes related to variations.

Incorporating these proactive measures as recommended by RICS can significantly help manage variations effectively and minimise their impacts on the project. It not only helps in keeping the project within budget and schedule but also minimises potential disputes.

Resolving Disputes Over Variations

Common Causes for Disputes

Variations and change orders in construction contracts often lead to disputes, with common disagreements stemming from a variety of causes including:

• Disagreements over the necessity of a change
• Differences in understanding the scope of the project
• Ambiguities in the contract
• Poorly conducted tender processes
• Disputes over additional costs

Change orders, particularly when not properly documented or communicated, often play a significant role in these disputes. Therefore, effective management of change orders is a critical preventative measure.

Dispute Resolution Mechanisms in JCT Contracts

In circumstances where disputes do arise, the JCT SBC/XQ and IC 2016 contracts provide mechanisms for their resolution. These include processes for adjudication, arbitration, and mediation. These procedures are available to navigate and resolve disputes over variations and change orders, we will new covering them in detail in future articles.

The Importance of Communication and Negotiation

A common theme throughout the process of variations management is the necessity of open and transparent communication amongst all involved parties. This, along with the prompt and clear documentation of all change orders, can serve to prevent disputes before they escalate. When disputes do surface, negotiation often proves to be an effective route to amicable resolution. This involves focusing on interests rather than positions and exploring options for mutual gain.

The Role of a Quantity Surveyor in Dispute Resolution

In the sphere of dispute resolution, a Quantity Surveyor (QS) can play a pivotal role. The QS’s expertise in contract terms, cost management, and understanding of construction processes can be leveraged to facilitate discussion and find resolution. In one instance, Multiproject was called upon to settle a £500k variations dispute following project completion. Our QS team conducted a thorough analysis of all events, changes, and instructions relating to the works and variations. This was consolidated into a comprehensive report with a timeline of events and our assessment of the changes and their cost based on the contract rates. After three rounds of meetings with the client and contractor, we successfully agreed upon £100k for variations, demonstrating the effectiveness of proper variation and change order management.

Conclusion

In closing, effectively managing cost variations and change orders in JCT Lump Sum contracts requires a proactive, strategic approach. Clear communication, rigorous documentation, and judicious decision-making form the backbone of successful change management. This, along with the preventative measures outlined, can help avert disputes and ensure the smooth progress of the project.

The RICS Change Control and Management guidance serves as a valuable resource in managing and preventing changes, and the JCT contracts provide robust dispute resolution mechanisms when disagreements do arise. However, it is always in the best interest of all parties to mitigate disputes before they escalate.

A competent Quantity Surveyor proves indispensable in this regard. Their in-depth understanding of contract terms, cost management, and construction processes can be utilised to avoid variations, manage change orders, and facilitate dispute resolution, all of which contribute to the successful completion of construction projects.

As demonstrated in our experience at Multiproject, with the right strategies, expertise, and dedication, challenges relating to cost variations and change orders can be successfully managed, leading to satisfactory outcomes for all parties involved.

The goal, after all, is not just the completion of a project, but the successful delivery of a project that meets the client’s objectives, stays within budget, and is delivered on time. The effective management of cost variations and change orders plays a critical role in achieving this objective, reinforcing the fact that a well-managed project is the cornerstone of success in the construction industry.