Key takeaways
- A variation order must be assessed for price, time and cash impact before work starts. Work done before approval is the starting point of disputes and ballooning costs.
- Forecast at Completion is cumulative actual cost plus Estimate to Complete, not the budget minus the money already spent.
- In the example, an EAC of THB 516 million exceeds the THB 500 million budget by THB 16 million, or 3.2%. With THB 25 million of contingency able to absorb it, a buffer of THB 9 million remains.
- Contingency is a budget, not an account, and abnormal defective work should not be recorded as a project cost.
What is a variation order
A variation order (VO) is an instruction that changes the scope, price or time of the contract. It can arise from a design change, unforeseen site conditions, the owner's requirements or new regulations. The categories to watch most closely are structure, architecture and MEP, because together they make up most of the hard cost.
Control steps
- Register the request. Record its source, reason and requester.
- The QS prices it against the unit rates in the BOQ.
- The PM assesses the time impact on the critical path and long-lead items.
- Finance assesses the impact on budget and cash, including the effect on the retention cap and loan drawdowns.
- Approve under the delegated authority before work starts, except urgent safety work, which needs a retrospective confirmation step.
- Amend the contract and record it in the cost log. Update committed cost and EAC immediately.
Budget, committed, actual, ETC and EAC
| Term | Meaning |
|---|---|
| Budget | The approved budget. Always keep the original baseline. |
| Committed Cost | Contract value plus approved VOs, even if the work has not yet been done. |
| Actual to Date | Costs incurred and certified. |
| Estimate to Complete (ETC) | Costs still required from today until completion. |
| Estimate at Completion (EAC) | The cost expected at completion. |
| Variance at Completion | Budget minus EAC. A negative figure means over budget. |
EAC = Actual to Date + Estimate to Complete
Example: month 18 cost report for a THB 500 million hard cost budget (THB million)
| Work group | Budget | Committed | Actual | ETC | EAC | Difference | % |
|---|---|---|---|---|---|---|---|
| Piling and structure | 190 | 195 | 180 | 18 | 198 | (8) | (4.2) |
| Architecture | 135 | 138 | 60 | 82 | 142 | (7) | (5.2) |
| MEP | 100 | 103 | 45 | 57 | 102 | (2) | (2.0) |
| Lifts | 20 | 20 | 10 | 10 | 20 | 0 | 0.0 |
| Preliminaries and external works | 55 | 56 | 30 | 24 | 54 | 1 | 1.8 |
| Total | 500 | 512 | 325 | 191 | 516 | (16) | (3.2) |
Using the example's internal thresholds, −2% is WATCH and −5% is OVER. Architecture is OVER, while structure and MEP are WATCH. Contingency of THB 25 million is therefore left with THB 9 million after absorbing the expected overrun of THB 16 million.
Check EAC against cost performance
An item-by-item EAC should be compared with the cost performance trend. In the example, assume the work has a planned Earned Value of THB 300 million and an actual cost of THB 325 million, giving a CPI of 0.92.
Trend-based EAC = Actual + (Budget − Earned Value) ÷ CPI = 325 + (500 − 300) ÷ 0.923 = THB 541.7 million
The figure of THB 541.7 million is not necessarily the final answer, but it differs from the item-by-item EAC by THB 25.7 million. The PM should therefore explain what will make the remaining work more efficient than the work to date.
How to read a cost overrun
- Over budget but within the buffer: reduce contingency, adjust EAC and still find the cause.
- Beyond the buffer: additional funding is needed, such as equity, an increased facility or a reduction in scope.
- Over because of delay: include the effect of interest, preliminaries and penalties, which often do not appear in VOs.
- Over in the late periods: check retention and the final progress payment refund, as these should not be treated as surplus in the budget.
Accounting entries
VO costs actually incurred that make the product ready for sale go into inventory, while rework beyond normal levels is a period expense. Do not record contingency in advance.
Effect on inventory value
When costs rise, review the NRV of unsold units, especially if selling prices fall or sales speed slows.
Retention and VOs
If the contract sets the retention cap by reference to the contract value after additions and omissions, a VO changes the cap too. For example, an original contract of THB 10 million with a 5% cap gives THB 500,000. Adding THB 1 million of work raises the new cap to THB 550,000. If work is reduced so that accumulated retention exceeds the cap, the excess must be returned in the next progress payment.
Monthly report the MD and lenders should see
- Baseline, Revised Budget, Committed, Actual, ETC and EAC by work group
- VOs that are approved, pending approval and expected to arise
- Contingency: initial, used, allocated and remaining
- Monthly cash impact and effect on the loan facility
- Effect on margin or Equity IRR if EAC changes significantly
- Risk items not yet in EAC, with the responsible person and decision date