Variation Order In Contract Management

 Variation order

 Execution of additional works through order which are not incorporated in the initial contract due to out of imagination from same contractor without competition by making revised contract price. 

Variation is a compensation event and hence shall be very careful while issuing variation order.

 Causes of Variation 

• Employer related 

• Consultant related 

• Contractor related 

• Weather conditions 

• Safety consideration 

• Changes in laws 

• Socio-cultural factors 

• Unforeseen problems – force majeure

Steps to Issue Variation Order 

• Identify the following facts:

 ✓ Identify whether it is compulsory to issue variation order or not; as far as possible avoid variation by closing contract and perform the needed job according as new procurement process. 

✓ If VO is utmost necessary, identify whether new items are to be accommodated or not.

 ✓ Identify whether the item to be varied is major item or not. Ensure sufficient justification for each varied items. 

✓ Final quantity of the work done differs from the quantity in the Bill of Quantities for the particular item by more than 25 percent, 

 ✓ The change exceeds 2 percent of the Initial Contract Price.

Steps to Fix a New Rates 

• Demand a rates from contractor 

 • Make departmental rate analysis for those items 

• Negotiate with contractor for the new rates with appropriate minutes (record keeping)

 Note: Departmental rate is normally taken as the base for rate negotiation. Approve the variation order with appropriate authority. Give information to the contractor.

Example of Variation Order:

Initial contract price = 10,00,00,000 

Let for Item A Original quantity = 1,000 

 Item B Original quantity = 5,000 

A Rate = 10,000 ; B Rate = 500 

Increased quantity A = 300;  B = 2000 

For Item A Quantity increased = 30 % > 25 % Change in price = 300×10000 = 30,00,000→ 3% > 2% of initial contract price. Item A is required to adjust for new rates.

For Item B Quantity increased = 40 % > 25 % Change in price = 2000×500 = 10,00,000→ 1% < 2% of initial contract price. Item B is not required to adjust for new rates.

Issues in variation order

 • Intention to make variation from the stage of project preparation.

 • Intention to avoid low rate items and to increase high rate items or addition of new items. 

• Intention to expend the budget.

• Not making rate adjustment (new rates) if new rate is lower than initial rate in contract.

 • No sufficient justification Issues in variation order. 

• No negotiation for new rates or only formality for rate negotiation. 

 • No issuance of variation order for decreased quantity. 

• Main event when chances of corruptions are high.