Section L
Variations/Changes/Claims
The loss of control of changes during design and execution is the secondary cause of project failure.
The U.S. Business Round Table
Nothing endures but change.
Heraclitus, 540–480 BC, or a modern interpretation: ‘The only constant is change.’
If you throw a stone (a change) into a pond (a smoothly running project), it causes a splash (the direct impact of a change) as well as a series of ripples (the difficult‐to‐detect indirect impacts). If you throw lots of stones, where the ripples intermingle, disturbances with peaks larger than the individual ripples are produced (the cumulative effect of changes).
Strictly speaking, all alterations to the contract are variations when made by the client and claims (an assertion of a right under the contract) when the contractor requests compensation. Some organizations use a variety of different words to express different types of alterations; typical terminology is as follows:
- Variations are alterations to the method of working from that originally defined in the control estimate that do not impact on the direct costs. They will only adjust the allocation of costs and are internal to the organization.
- An engineering change is extra work, an alteration to the scope or time schedule or method of working requested by the client.
- A design change can be defined as a modification in scope or time schedule that is the responsibility of the contractor.
- Claims are (for changes outside the contract) when the contractor holds out a begging bowl to the client and asks for more money. It is a request for an ex gratia payment where no legal obligation exists.
Whether a client or a contractor, the only justifiable variations or changes are:
- For safety reasons
- To make the technology work
- Due to legislation or regulation
- It is essential to facilitate construction
- The change really does make a huge saving
Changes or variations to a project originate because:
- The client's business needs may change as market conditions change
- A decision is made that 95 per cent project definition is good enough
- Fallacies and optimistic statements in the project justification/feasibility study
- The requirement to accelerate the project or other operational needs
- A client's desire for preferential engineering and the difference between what the head office client contracts for and what the local client wants
Ex‐gratia claims originate because of:
- Inequitable contracts created by clients using competitive tendering and awarding contracts to the lowest price, thus forcing contractors to tender artificially low to get work.
- A client's attitude that the contractor should absorb every extra cost.
- The attitude of some contractors (the civil engineering industry in particular acquired a bad reputation) to tender low and then recover money out of changes. This is exacerbated by a contractor's claims specialists and the vested interests of quantity surveyors.
- A contractor's policy about making claims in this context. Do they make claims? How do they intend to make claims, and how are the claims to be managed?
Claims can be reduced by:
- Eliminating uncertainties with precise scope definition
- Clarity concerning dates when information is required from others
- Risks should be allocated to those best able to take them or manage them
- Avoiding the use of stupidly low tenders.
Since projects go wrong half a day at a time, a process is needed in order to discover variations or changes so as to achieve good communications of changes and good project control. In addition, the regular search for trends promotes effective cost and schedule awareness in the project team. Further, client variations need to be established because they attract a fee that can be claimed from the client. Consequently, a system such as a trend programme must be instituted.
The objectives of a trend programme are to:
- Keep the clients and the contractor's management informed of any variance from the project budget and schedule.
- Keep the members of the project team informed about any changes, which could affect their work.
- Act as an ‘early warning system’ so that action can be taken to solve potential problems before they become real problems.
Before a trend programme can be started, the scope, budget, schedule, type and number of personnel and desired quality of work for the project must be established. In addition, the estimate must be reviewed for any missing items.
1 Trend Base Estimate
1.1
If the work has been awarded on a fixed‐price or lump‐sum basis, then the estimate will be a firm estimate that can only be altered if legitimate change orders (claims) can be raised for extra work items.
1.2
Where work has been awarded on a reimbursable or ‘time and materials’ basis, there will be less firm information upon which to base an estimate. This estimate is, therefore, not to be regarded as a fully accurate estimate and is known as the trend base estimate.
1.3
The estimate is not a static document but is a regularly updated list of the very latest assessment of the anticipated final cost of the project. This is achieved through the trend meeting.
2 Trend Meetings
2.1
The project manager should rigorously enforce the discipline of always holding a trend meeting. Trend meetings should ideally be held once a week. They should be attended by all the senior members of the team such as:
- Project manager
- Project design manager
- Lead discipline designers
- Senior project personnel responsible for specific areas
- Procurement manager
- Cost and scheduling manager
- Production/installation/construction manager or coordinator
- Testing/commissioning manager.
It is important that members of the project team are ready to admit to having a problem at this meeting.
2.1.1
Hold the trend meeting at 11:00 a.m. to prevent it running on unnecessarily.
2.2
With so many attending, the project manager must keep firm control of the meeting. Each person, in turn, reports any deviation from the project plan. They need to keep in mind the following five factors:
| Scope | Has some work been added or deducted from the original agreed scope of work? |
| Cost | Is the work being carried out within the cost identified in the current estimate? |
| Schedule | Is the work being completed on time according to the latest schedule? |
| Quality | Is the correct quality being maintained? Have the specifications been altered? |
| Personnel | Have the right number of people and resources been allocated to the project, and are the personnel of the right grade and calibre? |
2.3
In listing the deviations from the plan, each participant gives as good an estimate as possible of the effect in terms of cost and schedule. If they are held up because they have not received information from another group, they briefly list the information required. If they are holding up another group, they so advise.
2.3.1
It may be the case that although a group is responsible for a delay, there is no cost and schedule delay directly involved in that group's work. However, there could be a cost and schedule impact on another group.
2.3.2
In this case, the trend meeting should not be delayed while the effect on cost and schedule is calculated. It should be noted as a trend, and the department concerned should, after the meeting, advise the cost and schedule manager and the project manager of the extent of the impact.
2.4
The cost and schedule manager gives each of these trends (each specific deviation from the plan) a number and adds a description of the trend plus the effect on cost and schedule. If something affects delivery, it affects costs.
2.5
Naturally, if a major problem occurs, the relevant group would not wait until the trend meeting to inform the project manager. The project manager will clearly want to take immediate action to avoid a project delay or an increase in cost. However, all these occurrences are announced in the trend meeting so that all participants are kept fully aware of all developments.
3 Potential Trends
3.1
Because projects are normally run on such tight timeframes, it is important to have an ‘early warning system’ to alert the project manager to any potential problems, which may possibly occur. Each participant at the trend meeting will not only report each trend that has actually occurred but will also report potential trends.
3.2
Again, these potential trends are recorded by the cost and schedule manager, and their possible effect on cost and schedule are estimated. Armed with this knowledge, the project manager can take action to find a solution before the potential problem develops into a real problem.
4 Claims for Changes
4.1
Claims for changes are sometimes viewed as an opportunity for additional income. This may be possible for significant changes, but lots of small changes are disruptive to the project and impact productivity.
4.2
An early strategic decision needs to be made as to whether the direct impact of changes are to be costed, or are they to be sold for a price, as part of a single tender negotiation.
4.3
Small claims are likely to be within the authority of the client project team to sign. Large claims may be outside their authority, and the project may not have the budget available. If the project is financed, then additional funds may be required.
4.4
It is also usually the case that the cumulative effect of many changes is severely underestimated, particularly with regard to schedule impact. See Part V, Section N ‘S’ Curves, subsection 2 change orders.
4.5
The project's bottom line can be improved if claims are properly recorded and procedures in the contract are followed, particularly the time for submission. Consequently, there must be one person responsible for following up change orders and seeing them resolved; see subsection 5.
4.6
A prerequisite is that all alterations are highlighted in writing within ten days after instructions are received from the client or owner (whether orally or in writing) to do any of the following:
- Extra work not covered in the drawings or specifications.
- Work that is different to that detailed in the drawings or specifications. ‘It would help if you swapped them over ….’
- Work in a different manner or to a different method, which is not the same as that originally planned. ‘Wouldn’t it be nice if … ?'
- Work to drawings or specifications that have been changed. ‘Use issue 3 not issue 2’, or ‘There’s very little difference really.'
- Work to documentation that is lacking in information or is incomplete and requires time to be spent developing the detail.
- Work out of sequence or to a different method, which is not the same as that originally planned. “Could you deliver by air, not by sea?”
- Work to one particular method when two or more alternative methods are allowed by the contract or when the contractor should be free to develop their own methods.
- Do work when owner or client supplied information or equipment is late, in poor condition, or not suitable for the use intended.
- Work to a different schedule, accelerate work to regain schedule, or work to a compressed schedule. Add resources or materials, work overtime, or add extra shifts.
- Stop, disrupt, or interrupt work entirely or partially.
4.6.1
Inaction by a client must also be recorded and notified. This will cause you to employ constructive acceleration in order to catch up the schedule.
4.6.2
Since development of the design is the reason a reimbursable contract is awarded, it can be particularly difficult to persuade the client that design development constitutes change. Are they ‘must haves’ or ‘nice to haves?’ However, it is important to establish a change because of the associated fee.
4.7
No one should be able to approve additional work except the project manager. Starting work on a change before it has been agreed loses one's negotiating leverage.
5 Managing Claims
5.1
Use an assistant project manager as guardian of the contract and to administer the contract. They should pay for themselves. Strategies for consideration in managing claims are:
- Train the client with small claims so that they get accustomed to the process.
- For large claims, you need to persuade the client to ‘eat the elephant one bite at a time.’
- Use an independent work group for their execution. Use a separate cost code number.
- Rather than disrupt work, retrofit the variation at a later stage in the project.
- Provide an estimate of the variation, but reserve the right to adjust it for the actual cost.
- Get paid for doing the estimate of the variation.
- Place a percentage cap on the cumulative value of variations. See Part III, Section F Contracts, paragraphs 3.6 – 3.9 for suggested measures to be included in a contract in order to discourage the client from making variations.
5.2
Check that the liquidated damages effective date is adjusted for any schedule extensions.
5.3
Similarly, make sure that insurance policies are adjusted to reflect any changes to the scope.
5.4
There are a few fundamental rules for significant claims made against you by, say, a subcontractor:
- Do not try to manage the claim yourself. You will be too emotionally involved. Find the expert subcontract manager not involved with the project. Let them lead all activities, but you, the project manager, will need to be present for the sake of appearance.
- When dealing with each element of the claim in turn, the primary question to ask is: ‘Where does it say in the contract that we should pay you?’
- Analyse the data down to the lowest level of detail. For example, say a claim was made that the weather conditions had been worse than could have been foreseen by a reasonably competent contractor. The Meterological Office evidence provided supported this. However, when the details were analysed further, the data showed that it had only rained more at night, when there was no labour on site.
6 Resist Change
6.1
In project management, ‘the client is not always right.’ If possible, hand the stones back to the client. Resist alterations ruthlessly, but don't be inflexible. It is, however, the job of project management to tell the client the weight of the stones and size of the splash they will make. You must advise the client of the cost and schedule consequences of their perseverance for a variation.
6.1.1
As illustrated in Part I, (Section A Project Characteristics and Phases, paragraph 3.1 Cost Impact of Decisions), after 15 per cent of the project time has elapsed and when detailed design has started, changes in scope result in schedule extension and large cost increases that you may never recover from.