How much money are you losing on unclaimed variations?

I once heard a story about a building company that after an employee left the business, they found about $120,000 of customer signed variations in the back of his car for projects that had been handed over up to 2 years earlier. These unclaimed variations had completed almost every hurdle required, yet as they were never returned to the office, they were never claimed from the client.

Whilst the story represents a failure in the process, there are many points in the lifecycle of a Variation that can cause the business to lose out.

Variations can occur during all project phases; some are small and some more complex. Those that occur after the contract is signed but before any construction commences can be easier to manage as orders have typically not been issued. Variations during the construction phase can impact schedules and involve rework to facilitate them, adding significant costs.

Variations can generate good margins when managed correctly; however, they can also hurt a business reputation with customers frustrated that what they were sold was not what they were after. 

Communication is critical internally and externally with variations; many a good builder has been burnt by not carefully following the variations process.

Variations should be:

• Specific – They should clearly explain the details of what is changing
• Documented – From the outset, all information about the potential change should be captured and work-flowed through the business.
• Detail any impact of the change, such as Schedule impacts and any design changes applicable.

Having a good process will help you stay on top of your variations throughout their lifecycle:

Step 1: Identifying the Variation

Understand your contract; be clear on the inclusions/exclusions and terms of the agreement you have entered. The customer may request a change, or there may be changes due to site conditions that are either excluded or had an allowance value exceeded. Variations can also be subtractions from the contract if the owner reduces the spec of elects to complete part of the construction externally.

Step 2: Documenting the Variation

You have a legally binding contract in place for the construction, and all variations are an amendment of the contract in some way. The documentation of the potential variation should start as soon as it occurs. Capturing all of the requirements, informing other impacted stakeholders (Estimating, Procurement, Sales) and capturing other vital items such as pricing and construction impact.

Step 3: Creating a Variation

Now you have collated the information; you should prepare it for the customer to read, consider and sign. The potential variation should be specific, documented and detailed and meet all legal requirements for your state.

Step 4: Getting the Variation Signed

It is a good business process not to commence any works, order any materials, or proceed with a variation until the customer has signed and returned. All works proceeding under a “handshake” agreement are done at significant risk and likely at your cost. The impact of delays waiting for the variation to be signed should be captured within the variation document. The signed variation should be added to the project folder, and the accounts team informed to ensure that it is ready to be billed at the appropriate time.

Step 5: Completing the works

Schedule in the works, order the required material and complete the work. Often variations cannot be billed until the work contained is completed; this can mean that many variations are not completed until handover. It is best to bill Variations as early as possible and avoid having multiple variations signed off in the handover period.  

Step 6: Claiming the Variation

Variations can be issued as separate invoices; they do not need to be included on your stage/progress claim unless specified in the contract that they will be. With significant variations, you could consider stage claims to reduce your financial risk and ensure the cash flow to cover the costs.

Step 7: Analysis of the Variation

Once the works are completed and paid for, it is valuable to review each variation against its planned costs and actual revenues. Avoid mixing your variation Cost/Revenue with your main project. Taking time to review these will help provide meaningful insights into future variations and ensure that you are capturing all of the associated costs to maintain strong margins throughout your build.  

If you would like to talk to the construction industry experts about ways to ensure you are capturing all your variations, give the team at Thrive a call right now on 1300 868 474 or info@thrivetech.com.au.