Variations in EPC contracts, their commercial implications, and how to manage them as a Contractor!!

1. Understanding Variations in EPC Contracts

Definition:

A variation refers to any change in the design, scope, specifications, quantities, sequencing, or timeframes of work compared to the original contract.

Causes of Variations in EPC Contracts:

Employer’s Changes – Design modifications, scope adjustments, or additional works requested by the employer.

Unforeseen Conditions – Geological, environmental, or site conditions differing from contract assumptions.

Regulatory Changes – Compliance with new laws, permits, or authority requirements.

Errors & Omissions – Inadequate design or missing details in the employer’s specifications.

Force Majeure & Other Events – Delays or cost impacts due to external, unforeseeable events.

2. Contractual Basis for Variations in FIDIC EPC

Key FIDIC Clauses:

Clause 13.1 – Right to Instruct Variations

Clause 13.2 – Value Engineering

Clause 13.3 – Variation Procedure

Clause 13.7 – Adjustments for Changes in Legislation

Clause 19 – Force Majeure

3. Commercial Considerations for Variations

(A) Cost & Pricing Adjustments

Variations should be properly priced and justified before execution.

Ensure rate build-ups cover direct & indirect costs, profit margins, and risks.

Use existing contract rates where applicable, or negotiate new rates for additional work.

(B) Time Impact (EOT - Extension of Time)

Analyze whether the variation affects the critical path of the project.

Submit a Time Impact Analysis (TIA) along with the cost claim.

Ensure the contractor’s entitlement to EOT & prolongation costs.

(C) Risk Management

Assess how variations affect project risks, liabilities, and warranties.

Protect the contractor from liquidated damages (LDs) due to variation-induced delays.

Negotiate contractual relief if variations increase execution risks.

(D) Payment & Cash Flow

Ensure interim payment applications reflect approved variations.

Avoid executing unapproved variations that jeopardize cash flow.

Include advance payments or milestone adjustments for major variations.

4. Managing Variations as a Contractor

(1) Early Identification & Documentation

Monitor all employer instructions, site conditions, and design changes.

Maintain detailed records (correspondence, drawings, RFIs, meeting minutes).

(2) Variation Submission & Approval Process

Step 1: Identify variation scope and contractual basis.

Step 2: Quantify costs, prepare a variation estimate, and impact analysis.

Step 3: Submit a Variation Proposal with time & cost implications.

Step 4: Negotiate terms and ensure formal approval before execution.

(3) Negotiation & Claims Strategy

Negotiate fair compensation using cost-plus, lump sum, or unit rates.

If disputed, escalate through FIDIC dispute resolution mechanisms (DAB, arbitration).

Ensure variations are documented in writing to avoid legal risks.