01-10-2012, 11:36 AM
RISK MANAGEMENT ON VARIATIONS – TWO CIVIL ENGINEERING CASE STUDIES
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Abstract
Traditionally changes on construction works have been valued based on rates within
the contract. If the contractor considered that the conditions under which the varied
work was carried out was not similar to the tender conditions the contract allowed
them to claim for new rates. In practice, these new rates would often be valued after
the work was executed based on the actual costs. Clearly, under this approach the
employer carried the major risks of the change.
Many new conditions of contract, for both building and civil engineering works, have
now introduced a new methodology for valuing variations requiring the contractor to
submit a quotation for the work before the instruction to proceed is given. This
approach shifts the risk to the contractor who has to include in the quotation for all
forecasted costs including delay, disruption and risk.
This paper reviews a typical methodology used for assessing the risks on a quotation
for a variation on a civil engineering project based on the FIDIC 4th edition (the Red
Book). The case study analysis demonstrates the difficulty of assessing risks when
pricing variations before the event and shows how this approach may in practice lead
to contractors incurring substantial financial losses, which are not recoverable.
Introduction
Variations are inevitable on building and civil engineering projects and may range
from small changes having little consequential effects to major revisions, which result
in considerable delay, and/or disruption to the project.
There are a number a reasons for the introduction of changes on construction works
including: inadequate briefing from the client, inconsistent and late instructions from
the client, incomplete design, lack of meticulous planning at the design stage, lack of
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co-ordination of specialist design work and late clarification of complex details (Gray
et al, 1994). Additionally on civil engineering works there are many cases where
changes and new rates are necessary because of the nature of the ground. Furthermore
changes may occur due to the client’s desire to incorporate the latest technology into
the project.
Valuing variations – two different approaches
Establishing a realistic valuation for variations on construction works is often not an
easy task and both parties will need considerable experience and sound judgment to
settle variations. The parties are required to have a sound appreciation of the methods
of construction, estimating practice, contractual and legal implications and
construction programming techniques including the use of computer planning
software. But most importantly the parties should keep comprehensive meticulous
records of the factors relevant to the variation.
If the varied works are complex the parties will need to be skilled negotiators and be
prepared to adopt a give-and-take attitude in order to bring about a satisfactory
settlement. Compromise is often required for there is seldom one correct solution.
Indeed the parties may consider several different approaches before selecting the
appropriate strategy (Potts, 1995).
Risk management – identifying the risk
Max Abrahamson the eminent construction lawyer considered risk management “the
most delicate and dangerous subject I could find” (Abrahamson, 1984). Everyone on
a construction project should be concerned with risk, because risk and uncertainty
have potential damaging consequences. For a client, it may mean a project finishing
late or over-budget. For a contractor, it may mean incurring losses that are not
recoverable.
The potential risks in construction projects are many and varied. Perry and Hayes
(1984) produced one of the most comprehensive lists of the primary sources of risk in
construction projects, under the headings: physical, environmental, design, logistics,
financial, legal, political, construction and operational. Perry and Hayes (1985)
expanded this list and also included the influences that the individual risks had on the
type of contract, bidding procedures and management decisions.
Details of the variation
Three months before the works were due to be handed over to the client a similar
jetty, in another part of the U.K., was damaged by an oil tanker when berthing. The
client instructed the engineer to request the contractor to strengthen the new berthing
dolphins on the North-East project.
Under the FIDIC 4th edition if the contract does not contain any rates or prices
applicable to the varied work, suitable rates or prices can be agreed between the
engineer and the contractor after due consultation by the engineer with the employer
and the contractor (Sawyer, 1990).
Initially the contractor was reluctant to give a lump sum quotation for this work as he
considered it should be valued on a daywork basis. i.e. payment based on the recorded
actual time of labour and construction equipment and actual cost of materials.
Dayworks, which are usually recognised as highly profitable to the contractor, are
customarily employed in England where no measurable work will result from an
instruction. (Duncan Wallace, 1974)