A variation on a donor-funded contract has to satisfy two audiences. The contract requires that the change be instructed, valued and paid properly. The financier, and later the auditor, will want to see that public money was spent under the rules attached to it. This note sets out the audit trail a variation needs and where financier no-objection may come in. It is general information, not legal advice, and your financing agreement and contract govern.
What a variation is
Under the FIDIC conditions the Engineer may instruct changes to the works, and the Contractor is paid for them under the variation provisions of Clause 13, including the Variation Procedure in Sub-Clause 13.3. A variation may add, omit or change work. Valuation follows the rates and rules of the contract, or new rates agreed or determined where the contract rates do not fit.
Not every extra cost is a variation. If the Employer or Engineer does not accept that an instruction is a variation, the Contractor may need to treat the matter as a claim and give a notice within the contract's time limit. See our note on notices and time bars.
Why donor-funded projects are different
Public funds are subject to scrutiny, audit and financier procedures, and approvals often pass through several layers. A variation can be valid under the contract and still be questioned later if the record is incomplete. The same documents that help a contractor get paid also answer the auditor.
The audit trail: one file per variation
- The instruction or request. Who gave it, when, in what form and under which clause. Confirm verbal instructions in writing the same day.
- Scope. A description of the change with revised drawings or specifications.
- The Contractor's proposal. Description, programme effect and price, with the build-up.
- Valuation basis. Contract rates, adjusted rates, daywork or new rates, with the reason for the choice and the source records.
- Measurement and site records. Quantities, photographs, diaries and delivery notes.
- Approvals. The Engineer's and Employer's decisions with dates, and the financier's clearance where required.
- Payment treatment. The payment certificate in which the variation was included, the amount and the status.
- Links. Cross-references to any related notice, claim or time extension.
Keep a single register with one line per variation, each line leading to its file. A variation and change register typically records the instruction reference, scope, valuation basis, cost build-up, programme effect, status, approval route and payment treatment.
Where financier no-objection may apply
Financiers set their own rules. As one published example, the World Bank Procurement Regulations for IPF Borrowers (September 2023 edition), Annex II, paragraph 10, say that for contracts subject to prior review the Borrower shall seek the Bank's no objection before agreeing to:
- an extension of the time for execution that has an impact on the planned completion of the project;
- a material modification of the scope of the works, or other significant changes to the terms and conditions of the contract;
- a variation order or contract amendment (except in cases of extreme urgency) that, alone or combined with earlier ones, increases the original contract amount by more than 15 percent; and
- the proposed termination of the contract, among other listed cases.
Other financiers (for example AFD, KfW, the European Union and the African Development Bank) have their own thresholds and procedures, and the edition in force can change. The financing agreement, the procurement guidelines named in it and the contract's Particular Conditions will say what applies. Usually it is the Employer that approaches the financier, but the consequences reach the Contractor.
What this means for a contractor
- Ask early. Before significant cost is incurred, ask in writing whether the instruction needs financier clearance and whether it has been obtained.
- Track the running total. Keep the approved and pending variations as a percentage of the original contract amount, so that any threshold in the financing rules can be seen coming.
- Allow for lead time. Clearance takes time. Programme and cashflow forecasts should show it.
- Record urgency. Where a change is urgent, record the reason and the date, because exceptions for urgency usually have to be justified afterwards.
- Keep the paper together. Auditors ask for the instruction, the valuation and the approvals as a set.
Common weak points
- Verbal instructions never confirmed in writing.
- Rates agreed informally and not recorded.
- No statement of the effect on the programme.
- Approvals without dates, or missing altogether.
- Variations and claims mixed in one document, so that neither can be assessed.
- A disputed variation with no notice given in time.
Questions about a specific contract can be sent to info@ceacm.co.ke. This page gives general information about contract and commercial management. It is not legal advice. Where a matter needs legal advice, we recommend you consult an advocate.
Sources: World Bank, Procurement Regulations for IPF Borrowers (September 2023), Annex II, paragraph 10; FIDIC 1999 and 2017 Conditions of Contract for Construction, Clause 13 (Variations and Adjustments).