Managing Variations to maintain project profits

 

As the old saying goes, “The only certainties in life are death and taxes”. In the building industry that should read, “The only certainties in life are death and taxes AND VARIATIONS”.

 

There is seldom a project completed without some change to the original plan or scope and this can lead to work being done that is not well documented or billed to the client on a timely basis. Variations are therefor a major potential cause of profit leak from a business, and also disputes with a client. It is essential that you, your client and your build team clearly understand what variations are and you have a reliable system to capture and process them through the job management and billing areas of your business.

 

Variation lesson 101 is identifying what is a variation. Seems obvious perhaps, but variations come in different flavours:

 

Lump sum variation.

This is where a specific amount of work is either added or deducted from the project scope and it can be exactly quantified in dollar terms. The variation should define the scope and the cost of the change.

 

Charge-up variation.

This is where additional work is either requested by the client or becomes necessary due to unforseen circumstances, but the exact cost cannot be determined before the additional work starts. For example rot is uncovered in framing during demolition and additional time and material is needed to fix the problem, but just how much is difficult to know at the start.

 

Zero cost variation

This is a change to the scope of the project that will have no cost implications, but should still be documented. For example, a change to a colour scheme by the owner after they had already provided this on a selections list.

 

Now that the definition of what is a variation is clear, attention needs to be directed to how best to manage variations so the interests of the builder and the client are protected. Here are five tips that you should consider:

 

1. Educate your client.

While you may have a clear idea on what is or isn’t a variation, your client may be doing their first build and have absolutely no idea of the term and the implications of variations on the ultimate cost of the project. It is on YOU to spend time to show your client what the term means, give examples and then tell them how your will document, seek approval and then bill them for changes to the project scope.

 

This education process should be done BEFORE the project starts, not after you issue your third invoice and the client asks, “What are these extra costs on your latest invoice?” You risk loosing the client’s trust and them becoming adversarial to every invoice you issue then issue.

 

2. Develop standard templates.

To make the process as simple and consistent as possible it is recommended that you develop a standard format for presenting a variation to the client for approval and then a standard format for billing the client. Variations can be complicated and so using a standardised way will help to speed up the process, make it easier for field staff to follow and allow your client to become familiar with the process.

 

3. Treat charge-up jobs as if they fixed price.

Just because a job is on charge-up does not mean you do not need to capture, seek approval for and track variations to the project scope and cost. I see many instances of charge-up jobs ending in tears due to the budget blowing out and the client feeling they have been shafted by the builder.

 

In reality most of these situations are created by the client themselves by adding to or changing the project scope and not tracking the budget implications. To avoid this the builder should have the same basic procedures around variations as if the project was being done on fixed price. The client has a figure in mind as to what this charge-up job is going to cost, so changes to the project scope should be reported separately to the client during progress meetings, even if that does not flow through separately in the billing process.

 

4. Take lots of photos.

A picture speaks a thousand words. A video, ten thousand. In the building process conditions change quickly and time is money. If a quick video or photo is taken and then sent to the client, decisions can be made faster and the project kept on timeline better. Photos are also good back-up evidence to support a variation claim and is less likely to lead to a client questioning the extra cost.

 

5. Get all variations approved in writing.

There is a lot happening on a building site and is often a classic example of organised chaos! Because so much is going on; multiple sub-trades are coming and going, lots of decisions are needed, problems need solving, the likelihood of things being missed is high. You are dealing with humans after all.

 

The best policy is to get the request for the variation in writing, even if that is email. Any approval of the proposed work should be documented. If the variation order cannot be documented, it is important to note the time and date of the request in your diary.

 

The ethics of variations.

There are some builders out there who will low-ball the sales price on a project and then make up the initial shortage of profit by pushing through multiple variations. Often these variations are for work that should have been included in the original scope.

 

Please don’t be one of these builders and if you are reading this article, you probably aren’t. Variations are a necessary part of the building process, but they should be used ethically and so the builder receives fair compensation for the work required and the client receives the best value. You want a happy client at the end who will refer you more work, even if the project costs more than they originally had hoped. It’s all in the way you handle it.