FIDIC Variation Orders: How to Manage Them and Protect Your Financial Rights
Variation Orders in FIDIC Contracts: Managing Them and Protecting Your Financial Rights
A Variation Order in FIDIC contracts is any formal instruction issued by the "Engineer" that alters the project's original scope of work—whether by increasing or decreasing quantities, changing technical specifications, or modifying the execution sequence. Rigorous contractual management of these orders ensures the contractor receives fair financial valuation and any due time extensions, while protecting the owner against unsubstantiated claims or budget overruns.
What Constitutes a Variation Under FIDIC Contracts?
In the realm of major construction and complex engineering projects, it is virtually impossible for a project to be completed exactly as planned on day one. Variations are inevitable, and FIDIC contracts establish a governing framework to handle them, ensuring work continues without interruption.
Definition Box (PMA Definition):
Under the FIDIC Red Book, no modification is considered a "Variation Order" unless explicitly instructed by the Engineer. Contractual variations include the following:
Changes to the quantities of any item of work (whether an increase or decrease).
Changes to the quality or characteristics of any part of the Works.
Changes to the levels, dimensions, or positions of any part of the project.
Omission of any part of the work (provided it is not carried out by another party).
Execution of additional work, tests, or services necessary for the completion of the Permanent Works.
Changes to the sequence or timing of the execution of the Works. The Engineer’s Authority to Issue Variation Orders
Under FIDIC forms of contract (particularly the Red and Yellow Books), the Engineer has the authority to issue variation orders at any time prior to the issuance of the "Taking-Over Certificate." The Contractor is legally bound to execute these variations and has no right to refuse them, except in very rare and contractually defined circumstances. However, the Engineer may not issue a variation order to omit part of the work for the purpose of assigning it to another contractor.
Procedural Process (Step-by-Step): How to Manage and Price Variation Orders to Protect Your Rights
To ensure that engineering variations do not result in commercial losses, the contract management team must follow these systematic steps to evaluate and price variation orders:
Step One: Explicit Written Instruction
The Contractor must receive written instructions regarding the variation from the Engineer. If instructions are given verbally, FIDIC requires the Contractor to confirm them in writing to the Engineer within a specified timeframe (often two working days). Proceeding with work without written authorization constitutes a major commercial risk.
Step Two: Submission of Cost and Time Proposal (Preliminary Assessment)
Before commencing execution (or as requested by the Engineer), the Contractor submits details of the anticipated costs for the variation, along with any potential impact on the project schedule (an Extension of Time—EOT—claim associated with the variation). Step Three: Applying Valuation Rules
FIDIC establishes a hierarchy for pricing variations:
Using rates for similar items found in the Bill of Quantities (BOQ) if the additional work is of the same nature and executed under similar conditions.
If conditions or the nature of the work differ, contract rates serve as the basis for establishing new, appropriate rates.
If no similar item exists at all, the cost is calculated based on actual costs (Daywork) plus the contractor's agreed-upon profit margin.
Step Four: The Engineer's Determination
If direct agreement on pricing is not reached, the Engineer makes a "Determination"—fairly and impartially—to establish the value due to the contractor, which is then included in monthly payment certificates.
Expert Note from PMA (Eng. Fady El Khatib):
"The costliest mistake contracting companies in the region make is executing 'verbal variations' based on mutual trust at the site while deferring paperwork until the project's end. In institutional contracts, undocumented work is unpaid work. Commercial risk management requires the contractor to be firm in requesting a 'written variation order' before supplying materials or mobilizing equipment, in order to protect the company's cash flow."
Common Mistakes in Variation Order Management
Beware of these errors that erode project profits:
Confusing a Variation with a Claim: A Variation Order is issued by the Engineer, whereas a Claim is submitted by the contractor to assert a right regarding work they consider a variation but which the Engineer does not acknowledge as such. Failure to link cost with time: Pricing materials and labor for a change without analyzing the impact on the project's critical path, thereby exposing the contractor to delay penalties for work not included in the original plan.
Ignoring overheads: Pricing new items based solely on direct costs while failing to allocate a fair share of project and head-office overhead expenses.
Frequently Asked Questions (FAQ) Regarding Change Orders
Can the contractor refuse to execute a change order?
Generally, the contractor is obliged to proceed with the work. However, FIDIC grants the contractor the right to object (provided the Engineer is notified immediately) in specific instances, such as an inability to procure the materials required for the change or if the change poses a threat to the safety and security of the works.
What is meant by "Value Engineering" in this context?
Under FIDIC, the contractor is entitled at any time to submit a written proposal (at their own expense) for a change in design or execution that would accelerate completion, reduce execution costs for the Employer, or improve project efficiency. If the Employer approves, the contractor typically receives a share of the savings generated for the Employer.
Is the contractor entitled to claim for "loss of profit" if the Engineer omits a portion of the works?
If work is permanently omitted because it is no longer required, its value is deducted, and the contractor is not compensated for the loss of future profit. However, if the work is omitted with the intention of assigning it to another contractor for execution This constitutes a clear breach of contract, entitling the contractor to claim compensation for lost profits.
Are you struggling to recover payments for accumulated change orders?
Handling outstanding changes requires a robust contractual strategy and meticulous commercial risk management. At PMA, we provide major corporate clients with comprehensive commercial management services to analyze, evaluate, and negotiate change orders and claims.
[Contact our contract consultants] to develop a contractual strategy that safeguards your rights, or join [PMA Academy training programs] to equip your engineering team with the latest contract management practices.