How to manage variations and maintain profit Graeme Braybrooke, CCS business and systems analyst, examines how variations play a major role in the success or failure of a project Variations play a major role in the construction industry, and in many instances not having proper control of these variations leads to cost and budget over-runs. Variations not correctly managed and captured could spell certain gloom for any contractor, large or small, inevitably affect the contract, and could possibly have dire consequences on relations between contractor and consultant. Which in turn could lead to disputes, and in an industry that is already adversarial in nature, it’s a scenario we’re unfortunately accustomed to.
So how do leading global contractors deal with scope changes and variations? How do we keep the client and consultant updated with changes, and how do contractors prove the cost that has been incurred by completing these variations? What about extensions of time claims and proving indirect costs? Many questions and
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scenarios can be disputed, and invariably are. Being aware of any variations in real time allows the project team to take immediate action before the variations seriously affect both profit and delivery. The majority of construction companies have adopted software to manage most aspects of their business, including estimating, planning, link and forecasting, financial accounting, cost value reconciliation and earned value management. Unfortunately, the majority of these have not yet identified the power and importance of having all of these functions integrated, which in turn leads to variations and over-runs taking weeks or months to correctly identify and resolve. In many instances, the items mentioned above don’t correlate with each other in any way, leading to inconsistencies during monthly reporting. The ability to immediately identify
variances with the required accuracy and detail to take action hinges on 10 critical components: 1. Pricing new items that have not previously been priced or identified and having the ability to differentiate between original scope and variations. 2. Changing the status of the variation – is it approved, unapproved or awaiting approval? All these can be viewed by management to make the correct commercial call. Automated reports to validate the differences between original scope and change. 3. Allocating variation codes to identify new bill items which are possible scope changes or contract instructions. 4. Identifying new resources on the procurement list and updating the buying list accordingly. 5. Projecting cost integration with the planning schedule, to effectively reconcile consumption of resources in real time.
6. Organising the projected cost model to include cost and activity codes, to facilitate the required comparison. 7. Linking indirect or preliminary items directly related to the variations –very important when dealing with ‘extensions of time’ claims. 8. The projected cost model having the facility to action cost and time re-calculation based on actual rate and quantity performance, identify what is actually happening on-site and forecast revised final costs. 9. Making sure the information and data source related to actual cost is web-based, to enable input of real-time costs from wherever that cost information is captured. 10. Using matching coding structures between all software packages so that cost value reconciliation is possible. These ten components can be found in modern, state-of-the-art construction software applications
that are leading the way in increasing profitability and reducing cost and budgetary risks in the construction industry. These systems do come at a cost, but this pales in comparison to the true cost of over-runs, profit loss, disputes and possible damage to relationships. Accurate identification of cost variance in real time allows cost control to occur weeks before the normal reconciliation process. These are weeks to achieve vital cost savings, to deliver more profit to the bottom line, and to reduce the risk of losses sometimes only evident at the end of a project. When a construction team can control cost on each activity in a project as it happens, profit takes care of itself, and as a nice bonus, a financial director has the information needed to accurately project profit on multiple-year projects, in compliance with international accounting standards.