Variation Orders: Importance and Procedures for Nepalese Construction Industry

 What is Variation order?

While carrying out any works under contract, addition, omission, or alteration of original contracts are inevitable. The reasons are vague Employers' requirements, faults, and omissions in design and specification changed work circumstances, and many more. These types of orders are sometimes also referred to as Change orders since they change the original scope of the contract.

Legal Provisions Prevalent in Nepal

Public Procurement Regulations 2007(Rule: 118) and its amendments thereof have provided some basic guidelines for the preparation of Variation orders for the projects administered by Public entities. There are basically two types of variation orders taken into consideration, first being unchanging of the Contractual drawings, specification, and design, which are not dealt with so much seriously, however, if there is a change in the above-mentioned parameters, the evaluation, and assessment of Variation Orders are stringent. Nevertheless, the variation orders in development projects in Nepal are taken very seriously and some of the projects are not moving smoothly due to the unavailability of a timely decision to such variation orders.
During the construction, especially in Re-measurement type contract, all the items listed in the Bill of Quantities are not appropriate to be used, instead, some of the new construction items need to be introduced which may lead to another type of variation order. However, the same rule has barred the project management from providing new rates other than stipulated in the Original Contract.

FIDIC provisions for Variation Order

The major construction projects in Nepal, either funded by Multinational banks or having a great degree of scope in Nepal are generally administered using FIDIC Conditions. FIDIC in its clause 13 (Variations and Adjustments) has clearly depicted the standard set of procedures for providing variation orders to the Contractors. There are 3 standard approaches described under its sub-clauses 13.1, 13.2, and 13.3, as below:
        i.           Instruction from the Engineer (Employer)
       ii.           Requesting the Quotations from Contractor
     iii.           Value Engineering exercise by the Contractor
The procedure (i) shall generally be provided in emergency situations only since collaborative work practices in the Construction industry are most for smooth site operation. The formal way of providing variation order complying with procedure (ii) will be elaborated in the next heading. The contractor, either re-measurement or Lumpsum Turnkey, may have a specific right to provide Value Engineering Proposals to the Employer contractually. However, it will be fruitful only if the benefits are shared using the proper modality.

Why are they practicing?

According to the independent study conducted by the Journal of Civil Engineering, the top ten most important factors include lack of materials and equipment spare parts due to closure, change in design by the consultant, lack of consultant's knowledge of available materials, errors, and omission in design, conflicts between contract documents, owner's financial problems, lack of coordination among project parties, using the inadequate specification for local markets by international consultant, internal politics, and change is a specification by owners.
In Nepal, apart from the above-mentioned reasons sometimes debatable variation order proposals like Scope variation of Upper Trishuli-3A have also been tried in past but were not materialized. Tunnel Squeezing repair works is another big variation order being practiced for the Chameliya Hydropower project, which may have been generated by providing inappropriate concern to the gravity of Sub-surface explorations prior to the Construction.

Method of providing new rates

Nevertheless, providing new rates to the contractor is always risky and debatable, a standard procedure for evaluating the new rates is advisable for Nepalese Practice. The Contract Manager shall always try to use the price for the same rates, despite that being used for other circumstances. If that is not practical enough, the necessary adjustment can be made to that rate by adding or deducting for difficulty factors associated with the particular item of work.  The frequent use and interpretation of regression analysis of similar natured rates also provide meaningful answers in some cases. If the abovementioned pricing strategies are not paying well, rate analysis for the item using accepted Norms and price quotation of Materials, Equipment, and Labours from at least 3 independent sources will help reach the conclusion.

Variation order procedures

Variation Order assessment is not merely a science, it is an art with a high degree of precision. Each Variation order is different from its predecessor, hence different strategies and rounds of negotiations may be necessary to come up with solutions. However, in generalization the following approach may be suitable for the engineer to come up with a practical solution:
        i.           Need identification and Authorization
Although the variation order may be needed during the normal contractual operation, it shall never be initiated without proper scoping, estimating, and getting necessary authorization from the funding sources (ie. Employer). The Employer may have a differing opinion to the particular problem or may want to carry in the alternative way, hence good communication between the Employer and the Engineer is a must to initiate any Variation orders.
       ii.           Variation Order Requests
After the Employer provides the required authorization to carry a particular variation order, it is the responsibility of the Engineer to ask for the proposal from the Contractor to carry out the Variation order, in the specific format. The preliminary assessment from the Engineer, with the basis, can also be provided to the Contractor for its needful assessment of the problem.
     iii.           Quotation from the Contractor
As soon as the Contractor receives the Engineers’ request, the Contractor needs to assess the Variation order and provide their formal opinion to the Engineer.
     iv.           Assessment of the Contractor’s proposal
       v.           Application to the Employer
After necessary assessment of the application and negotiation to the practically possible condition, the Engineer shall request approval of the Variation Order to the Employer. In the meantime, the Engineer shall provide as much facilitation needed by the Employer to assess and approve the particular variation order.
     vi.           Approval from the Employer
    vii.           Provide the Formal Variation order
As discussed earlier, the Variation Order Procedure seems to be a lengthy process, hence careful documentation of the pertaining documents, careful understanding of the Contractual process, and protocols are very necessary to assess each particular case. Furthermore, the Contract Manager shall give due attention to providing his knowledge, experience, and training bases to his engineers particularly in Management of Contracts, Negotiation, Facilitation, contemporary record keeping, and coordination skills.

Problems and malpractices in Nepal

The Variation Order terminology is understood in a negative sense in Nepal. But it is universal that any Contract cannot be implemented the same way that it is perceived at the beginning. Hence, every Project Managers and Employers shall expect some form of Variations in their work.
Notwithstanding the above fact, Variation orders are also used against its purpose by some crucial projects of Nepal. Unnecessary variation orders are provided only to extend the Contract duration, by providing an Extension of Time to the Contractor which leads to unnecessary prolongation costs to the project. Furthermore, variation orders to costly items and buried items are also provided in order to have mutual financial gains.
Hence, I recommend the Project Managers clearly revise their project sub-surface investigations, designs, selection of experienced Engineers and Contractors, and right interface management between the stakeholders in the project management to avoid time-consuming and expensive procedures of Variation Orders.

Bibliography

        i.           Journal of Civil Engineering (Online available) http://www.tandfonline.com/doi/pdf/10.3846/jcem.2010.60
       ii.           Public Procurement Regulation 2007 of Nepal
     iii.           FIDIC Contracts Guide 2000
     iv.           FIDIC, a guide for Practitioners-Springer 2009