Variation Order management tips to realise your profit margin

A project variation order that is poorly executed can spell disaster for any project!

The client may ask for changes to the build. The builder must first agree to the client’s change request.  Once agreed the builder will present the client with a variation order and ask them to sign it.  The variation document will be any items, costs, and time delays which make up the varied work request. Once the client and the builder have both signed, the variation order becomes a legally binding document.

Variation order works can be worth tens or even hundreds of thousands of dollars. When one or more variations do not meet the legal requirements, clients are within their rights to refuse to pay. And often do not!

As a result, liquidation of the builder business may become the only alternative.

5 Variation order tips to avoid financial ruin

1. Variation order with no signature…. No commencement

Undertaking the varied building works prior to having the variation order signed places the builder at risk. If the work is completed without a signed document the customer has no legal obligation to pay for the varied works. Successful builders minimise the risk of financial loss by operating under a detailed procedure. The clear message in the documented procedure will be “Do not commence site works or order materials for any variation order until the customer has agreed in writing to changes to the scope of works”.

2. Never trust a handshake

Correctly completed paperwork is vital to the profit of any building project (and to avoid nasty surprises). Incomplete documents place the builder at risk of being out of pocket by tens or, hundreds of thousands of dollars. Basically, the entire cost of the variation order is at risk.

It is almost impossible to recover through the court, any money lost on a “handshake agreement”. Therefore, regardless of your relationship with the client, always treat the client and the signed contract as a business deal. Negate any opportunity for family and friends to let you down. Neither the strength of the friendship nor the fact that they are a family member, are relevant to the contract. To avoid out of pocket expenses, never trust handshake agreements! And never commence any variation order until the documentation is signed.

3. Manage all costs for the variation order

Job cost management of the variation order is one key to success when running large or multiple projects. Invoicing the correct amount to the client upon completion of the work is also important. Having more variations to invoice for than there are scheduled payments on the contract is commonplace in project work. Variation invoicing can become a nightmare to manage as the volume of work increases. Fully integrated (construction industry specific) software now becomes even more critical for the builder to effectively manage the variation order costs.

4. Keep a variation list for every project.

Cost management is streamlined when the builder keeps a well-maintained schedule of all customer requested variations. Critical information such as start date, end date, the calculated budget and the charge out need to be maintained within the schedule. Fully integrated construction industry specific software saves time through automating variation order management against the original contract.

5. Don’t forget the contract with your sub-contractor

Subcontractors may also require a variation order. This will advise them, in writing, of changes to the original scope of works. Furthermore, the document can eliminate the “no one told me” and/or “I didn’t agree to that” type of response if things don’t go according to plan. More importantly, the variation order can prevent legal disputes between the builder and the subcontractor.

Financial Success of any project is vital

Variation orders can be expensive and the builder may undertake multiple variations at any one time.

Quality processes provide the ability to realise the proposed profit margin, with the least amount of legal risk to the business. In addition, a good financial management procedure minimises profit leakage while maximising the capacity to track every variation.

Fulfilment of contractual conditions provides the builder and the client with a degree of legal protection. In addition, project managers are able to closely monitor all varied works. Timely invoicing of the variation works will reduce financial stress, as the initial costs are usually borne by the builder.

The magnitude of some projects may result in quite large changes to the scope of works.   Consider using multiple variation orders to break up such work. Having a systematic approach allows the builder to incrementally invoice the customer upon completion of each stage of works. Timely invoicing, therefore, results in better cash flow within the business together with a reduction of the builders “out of pocket” expenses.

Make sure variation orders maintain profitability

Maintaining a solid profit margin on any variation order can be as simple as:

  1. Implementing a solid business process for managing variation orders.
  2. Communicating with key staff the need for processes to be followed and clearly, outline the legal and financial implications of not following the process.
  3. Tracking variation orders from quote stage to completion through automation when using fully integrated construction industry specific software.
  4. Using construction management software to ensure Job costing automatically reflects actual cost against the budgeted cost.
  5. Efficiently invoicing the varied work invoice using software automation through construction management software Australia.
  6. Automatically tracking approved, cost and time variations against the original contractual agreement, with software automation.

A clearly defined and well-documented process, when used in conjunction with the correct building industry specific software, can be the difference between having a successful building business or going bust.