Maximising cash flow: variation scope, sequence, and valuation

The subject of last week’s article was controlling change, and if that is all about spotting issues early, then mastering the variation process is all about proving them in a way that gets you paid.

The most successful contractors and subcontractors don’t just identify changes; they follow a disciplined process to define the scope, assess the impact, and put a robust value on the table. They successfully use the monthly payment process to make progress each month towards a successful commercial outcome by forcing their account to be valued.

Done right, this approach keeps you contractually protected, speeds up agreement of issues and improves your cash flow.

Start with scope (and go beyond the obvious)

When a variation arises and you are required to perform scope that is outside the agreed scope in the contract and/or outside your contractual risk profile, the temptation (and the easy thing to do) is to focus only on the visible or obvious work.

For example, a variation that adds a new door to a building looks fairly simple on the face of it. However, you need to consider the full impact of this variation on the scope to be performed because it may be that you need to:

• Cancel and reorder materials already procured.
• Adjust systems associated with the door (e.g. access control, fire protection, acoustics, etc.).
• Redesign.
• Remove or alter construction works already completed (e.g. form openings in walls already built).
• There will be people time needed to manage the change

When assessing a variation, you need to understand the entire impact of the change, rather than just the headline of the change, so that you recover your full time and cost entitlement.

Understand the sequence impact

The performance of an activity rarely occurs in isolation and is normally dependent upon something else happening or something is dependent on the activity occurring. In the ‘add a new door’ example, the activity is likely to be dependent on redesign, procurement or materials and trades, and the forming of an opening.

So, you need to ask yourself and work with the construction, engineering and planning/programming teams to understand this sequence and what, if anything, it is impacting.

The change could have a non-critical impact on the programme in that the sequencing requires some work to stop and/orbe performed unproductively. This comes at a cost, and the cost should be recovered with the variation.

The change could have a critical path on the programme and cause the forecast of a contractual completion date to go beyond the date agreed in the contract. If this is the case, then you need to notify the event through the extension of time provisions in the contract and administer those provisions to protect yourself from delay damages and recover any time-related and/or other costs caused to you.

Variation valuation: prospective v retrospective

The form of contract you are working under will have an impact on your approach to valuing variations:

• NEC

  typically uses

  prospective valuation

  — you price the impact

  before

  the work is done, often based on forecasted costs and risk allowances.

• JCT

  often involves

  retrospective valuation

  — you price based on what

  actually

  happened after the work is complete.

The principle of your approach should always be prospective, in my opinion. You should always be ahead of the issues, advising on the impact and firming this up progressively as required. The only difference will be that, under a JCT contract, the contract administrator is likely to wait until the actual impact is known before finally agreeing to the value of a variation.

Evidence and justification

It is often not enough to show that you’ve done the extra work or to describe any consequential work you have performed.

Following basic civil law principles, you are the ‘claiming party’, so the onus is on you to prove that the amount you are claiming is correct. Now that doesn’t mean that you must prove everything to the last penny, but you should do enough to show that your valuation is correct.

As a starting point, if you do not have a written instruction, then you need to justify why the change falls outside your contractual risk profile and/or that it was caused by an event that is not your responsibility under the contract.

Then when it comes to the valuation of the additional scope and the impact, then you need to supply as much information as you possibly can. You may need a mini programme showing the sequence and the impact, photos of the site condition prior to performing the change and photos whilst the work is being completed, contemporaneous timesheet records showing the resources and hours, etc.

Each situation will be different, so having a general idea as to the records you need to provide is helpful, but think about this on a case-by-case basis, and ensure the information you submit with your valuation is relevant to what you are trying to achieve.

Final reflections

By defining the full scope, mapping sequence impacts, and valuing changes in line with your contract, you move from reactive to proactive variation management.

The result? Faster agreement, stronger cash flow, improved profit, and far fewer disputes at the final account stage.

In the final article of this series, we’ll look at how to turn payment applications into a live, month-long tool for both cash and revenue certainty.

Back to articles