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How to deal with changes in construction contracts

Changes are inevitable in virtually every construction project given the number of variables involved, but they can also be a source of conflict. From uncharacteristic weather and unanticipated transport issues to material shortages, labour and recruitment problems and sudden changes in the client's brief, the range of factors that result in changes or variations is vast.

The challenge that all contractors and sub-contractors face is how to keep change under control. There is no automatic right to claim for extra work or materials. So, if change isn't controlled, you and your business could end up taking a financial hit for circumstances completely beyond your control, or find yourself in a messy dispute in an effort to recover your additional costs.

Hence why it is important to familiarise yourself with what 'change control' or 'change management' involves and implement effective processes to ensure you and your team can do this effectively.

Before we look at what a change control strategy or process could look like, it is important to think about what 'change' is. In short it is anything that results in a difference between what you quoted for and the work actually completed. This is particularly important if you have a design obligation.

Differences can arise for a wide variety of reasons. For example, they may result from an instructed change, where there is an amendment to the proposed design, an alternative approach or other materials are required. Or it could be that a contract has been under- priced or errors were made during the costing process. Design developments, scope creep and any excluded items or risks are other examples of change.

What type of agreement do you have?

The nature of the agreement you have signed determines how change is handled. You are likely to be working either on the basis of receiving a lump sum for work completed or one that allows for more flexibility, perhaps where the scope of work is uncertain at the outset and the work is re-measurable or there are provisional elements.

Changes will occur regardless of the type of contract agreed, but the process you will need to adopt to manage change will vary.

Keep a separate ledger known as a variation account as accurate record keeping is crucial. Records must be kept on when a change event 'became apparent' and what notice (or early warning) was given as required under the contract.

Establish what records are needed. Make sure they have integrity by being strong, clear and concise communications, and dedicate a resource for recording changes to be able to provide a credible analysis of their effects. Importantly, the time taken and any delay effect on the works as a whole must be incorporated into your records. The notion of isolating the cost and time effects from the unchanged elements of the work is crucial. How you do that can be down to developing your own systems on a job-by-job basis, or as a standard approach project wide. Either way, isolation of records is the key.

What is the value of the changes?

Valuing change is an extremely important part of the process. You should ensure you have clear procedures on who values the variation, what can be included, what information are you obliged to provide and if a price can be agreed, how to define if it is binding? You will need to think about rules of measurement, a schedule of rates or day works, whether the conditions for the work are the same as described in the quote and whether other remaining works are affected by the change.

The opportunities to enhance recovery of your costs will be increased where you differentiate from similar character and similar conditions and demonstrate a significant change in quantity. These present opportunities for including a 'fair allowance' for such difference.

But how do you know if rates for measured works apply or if a fair rate applies? There are three simple ways to think about this.

Where the varied work is the same 'character' as the works in the quote then the contract rates apply. If the varied work is the same character but carried out under different 'conditions' (or quantity) the rates will be used as a basis for the valuation and allowance must be made for the differing conditions. However, if the work is not the same character a fair rate will apply. Generally speaking, same character means exactly the same work.

Implementing processes that are right for your business

What we've covered in this article has only scratched the surface on the topic of handling change in construction contracts. There is no single strategy that will work for every business, but what you can do is consider what processes should be in place for reviewing your contractual obligations before signing, recording progress and any variations and valuing change accurately.

We touched on differences where you have a design obligation earlier - it is important to know the differences between quoted and carried out even if they are not to be claimed (or claimable) as extra, so that there is learning feedback for improvements that can be made to proposals and pricing similar work in future. Our Quantum CPM team of highly experienced quantity surveyors and contract management specialists are ideally placed to assist you with implementing the right processes.

However, even with the best laid plans it is inevitable that disputes will occur as a result of changes. Employers may adopt 'bully boy' tactics where they have not fully considered the financial implications of instructing changes, and other contractors in the project may be looking to deflect any liabilities, perhaps because they do not have their own robust change control procedures in place.

When disagreements and disputes do arise, the best course of action to maximise your chances of a positive outcome is to partner with Quantum Consult. Our team of legally trained construction professionals can take an objective look at your situation and recommend actions to help you bring the dispute to a close amicably, with minimal financial losses and avoiding court action wherever possible.

You can read more about our experience and the services we provide here.

If you would like to arrange an informal, no-obligation discussion to explore how Quantum Consult could help you, please contact us.