The inevitability of change and how to manage it

As first published in Rail Professional Magazine, page 29, June 21 edition.

Is it possible to develop a project from inception to completion without change?

Whilst there may be every intention to get all relevant parties engaged, for example, whilst feasibility studies are undertaken, again as concept designs are developed and once more prior to tender, this is not always realistic or achievable. Indeed, even with the input from a wide array of parties early into a project’s life cycle, the speed at which new technologies, processes and systems develop mean change can still readily occur.

It could be suggested, therefore, that there is a need for flexibility; inherently though, that means there will need to be an acceptance of change. By turn, the impact on design and manufacture of such change will inevitably have to be managed by the contract.

Within the contract, a variety of terms can be used to identify such changes: ‘compensation event’; ‘modifications’; ‘changes’; ‘variations’; ‘variation order’. The list goes on. It all usually depends on the contract form and the defined terms or simply the industry.

Over time, contracts have evolved to include a set of procedures to manage change without the need for the parties to enter lengthy negotiations. So, what are the basic functions of the variation procedures, and how do they impact a project?

What types of clauses exist? And what should you look out for in a variation clause?Typically, three types of variation clauses exist in a contract:

• deemed;
• consensual; and
• unilateral.

It is unlikely the contract will state which type of clause it is, but the language used could indicate which of the three types it falls within. Provisions which use words such as ‘shall’, ‘must’ or ‘will’ are normally mandatory and are typically seen in unilateral clauses and words such as ‘may’, ‘can’ or ‘choose’ are typically found in consensual clauses.

What is a deemed variation?
Provisions on deemed variations are generally quite rigid and specific in nature providing a pre-agreed allocation of risk. Disputes rarely arise from these types of variation. That is, deemed variations are usually triggered by an event which is out of the control of both parties. The event will require an adjustment to the work that will need to be completed under the terms of the contract. Rather than this change being instructed by the customer, the variation is deemed to have been instructed, because of an event or arising from an inconsistency between documents. A typical example could arise as a result of a material price fluctuation.

What is a consensual variation?
Consensual variation procedures are merely amendments to the existing contract. They usually prescribe a method to reach an agreement and maintain a framework for agreeing the variation, which speeds up the entire change process.

Some consensual clauses adopt a quotation and acceptance method to reach agreement. This method is prevalent in Maritime engineering contracts. Ultimately, neither party can insist on a variation for this type of clause.

What is a unilateral variation?
Unilateral variations are some of the most powerful clauses in any contract. They allow one party to instruct a change, to the product or even method, without the approval of the other party. Exercising this power should also lead to an automatic entitlement to be paid and an extension of time.

Extensions of time are usually covered by different clauses in a contract as they apply to broader events than just variations.

If there are methods of valuation specified in the contract these must be followed irrespective of actual cost for the additional work.

How should I read and interpret these clauses?
When interpreting a variation clause, the following questions need to be raised:

1. What changes can be made?
2. Can it affect method of manufacture?
3. Can it influence the sequence of the works / delivery?
4. When can the clause be used? During manufacture or only in design stage?
5. How does the clause specify price and payment of the variation work?
6. Does the variation clause allow the client to remove unwanted scope or reduce the works (omission)?
7. Who can initiate the variation process?

In addition to the above queries, the next two sections cover typical risks borne by each party.

Manufacturer and supplier risk
The following points highlight the main risks that the manufacturer faces when complying with a variation:

1. The additional work can strain tightly run production lines. Even small variations can have a major impact on a project programme, which might not be fully understood when the variation is instructed;
2. The variation work may have to be undertaken out of sequence for some units, making the work uneconomical;
3. Variations, if great enough in number, can cause ‘death by a thousand’ cuts where time impacts are not correctly assessed across the manufacture programme and extra time is not awarded with the variations;
4. The manufacturer assumes the risk of their supply chain delivery and must replicate any clauses in the main contract back to back with the customer and the supply chain;
5. The manufacturer maintains the same design and quality obligations for the variation works as they do for the contracted works. Indeed they are expected to warrant a product as well as components inclusively;
6. Although, in practice, the manufacturer will be instructed to carry out the variation, it is not to say they have a right to conduct instructed variation work. This is the same way that any scope of work won in the main contract cannot be retendered, as the manufacturer has the right to complete the work; and
7. Customers can end up using a variation process to ‘optioneer’ the project. The cost to put these proposals forward may not be recoverable unless the variation is concluded.

Customer risk
The following points highlight the risks that the customer faces if they instruct a variation:

1. The customer will have little choice when it comes to asking other parties to carry extra work out, which means they may pay higher prices for additional works;
2. The extra time allowed for the change works may impact the programme disproportionately, dependent on when it is instructed;
3. Any instructed change by the customer should include an assessment of time impact, as failure to grant additional time could lead to a loss of right to claim liquidated damages; and
4. The customer may adjust the basic specification, rather than instruct a discrete change. This could produce other side effects in the performance of the change that may not be apparent to the customer when the initial instruction was given.

Summary
Where does this leave us? A carefully drafted variation clause means changes can be administered without protracted negotiation and provide a level of cost and time certainty for both parties. Ultimately, the end customer gets a much more tailored product and the manufacturer or supplier gets paid a fair amount for implementing the change.

As a manufacturer, make sure that when quantifying a variation, you encapsulate all time and costs associated with the change. It is highly unlikely that time and cost impacts will be reviewed after the implementation of a change has taken place if you have incorrectly quoted for the works.

Carl Simms is a Director and claims management specialist at HKA with over 18 years’ experience in the rail, construction, and engineering industries. He has worked on a range of projects in the rail, rolling stock and signalling sector for a variety of clients providing support with contentious issues (dispute resolution and avoidance), drawing on skills in adjudication, arbitration and litigation, as well as, preparing and defending claims.

Chris Jackson is a Senior Consultant at HKA, who, having trained as a quantity surveyor, has built significant experience by working across a broad range of industries and sectors including rolling stock manufacture, infrastructure such as rail and road building. His experience also extends to oil and gas facilities, pipelines, specialist critical infrastructure, data centres and commercial and residential building. He has worked at various levels of the supply chain from specialist subcontractor to global EPCM corporation in the UK and internationally.

If you require any further information, please contact Carl Simms or Chris Jackson at carlsimms@hka.com or chrisjackson@hka.com