Managing extra and variation work in construction: four steps that protect your margin

Extra work does not eat the margin, an unclear process does

During demolition a moisture damage appears in the intermediate floor that was not visible in the source data. At the same time the customer asks for a new socket and swaps the agreed tile for a more expensive model. The site manager wants to keep the site moving, so the crew carries on. The price is promised later.

This is an ordinary moment on a construction site. It is also the moment where profitable extra work can turn into work done for free.

The purpose of managing extra and variation work is not to slow the site down or turn every small deviation into a contract negotiation. The purpose is to make sure that, before the work is done, the parties understand what changes, what it costs and how the change affects the schedule.

When the process is clear, extra work can be handled quickly. The observation is documented, the impact is calculated, the customer approves the quote and the work moves into production. The same information follows later into the project's cost tracking and onto the invoice.

What is the difference between extra work and variation work?

In everyday talk extra work and variation work are often mixed up. For managing a project the distinction is still useful.

Extra work is a new item that does not belong to the originally agreed content. During a renovation the customer may, for example, order the painting of another room or new fittings that were not agreed at the start.

In variation work the original item changes. An agreed material is swapped, the method changes, or the scope grows because of new source information. A change can raise or lower the price and also affect the schedule.

In software both are best handled with the same basic process, but it is worth marking the type of work. That way, at the end of the project, estimation deviations in the original work can be separated from changes ordered by the customer.

Step 1: record the observation before the details are forgotten

Extra work often starts from a spoken request or an observation made on site. At this stage a complete quote is not needed yet, but a trace is.

A good first entry contains:

• what was observed or what the customer asked for
• in which room or work phase it came up
• when the observation was made
• who raised it
• photos or other documentation
• whether the work has to be paused while a decision is made
• the preliminary impact on work and schedule.

The entry is best made directly on the project. If the photo stays in a phone and the change is discussed in two message groups, it is hard to show later what the pricing was based on.

Speed matters more than precision here. The site manager can fill in the costs later, but the situation on site, the condition of the structure and the customer's original request are worth saving immediately.

In Fisas documentation an observation can carry the project details, a description, photos, a category and a status. That way the source data for an extra work quote is found in the same place as the rest of the site documentation.

Step 2: calculate the impact as whole work, not just material

The price of extra work is often underestimated because the most visible cost is the easiest to calculate. A new tap costs a certain amount, extra boards a certain amount, and a rental machine has a daily rate. The real impact of the work, however, consists of several parts.

Pricing should take into account at least:

• own labour and the related indirect personnel costs
• materials, freight and possible waste
• subcontracting
• equipment, protection and cleaning
• design and site management
• interruption of other work or a change in the work order
• schedule impact
• the company's overheads and target margin.

Take a simple example. The customer wants to move a partition wall that has already been built. The additional material cost is only 180 euros. The change, however, requires partial demolition of the finished frame, a new measurement, moving an electrical installation, boarding, filling and protecting the work area again. If the quote is based only on the extra material and a few visible working hours, the company pays for coordinating the change out of its own margin.

In the Fisas extra and variation work calculation, costs can be split into materials, own labour and subcontracting. Overheads and margin can be added to the calculation, so the price presented to the customer is based on the whole impact rather than a single purchase.

Step 3: get the content, price and impact approved in an understandable form

Approval is not just a yes. The customer has to be able to understand what they are approving.

An extra work quote should describe at least the content of the work, the boundaries, the price, VAT, the effect on the schedule and any effect on other work phases. If the exact quantity cannot be known in advance, the quote can agree on a unit price or an hourly basis and on how the actuals are reported.

The description is best written in the language of the site. "Opening structures to the extent required" leaves more room for interpretation than "opening the boarding of the bathroom's north wall over roughly two square metres in order to inspect the damaged frame". A precise description protects both parties and makes the invoice easier to check.

Electronic approval speeds up the decision, because the customer does not have to print, sign and return a document. At the same time the date, the approver and the approved content stay in the project data.

In Fisas an extra work quote can be sent to the customer by email. The customer opens the link in a browser, reviews the quote and approves it electronically. The approved version and the signature remain in the project's contract history.

What if the work has to be done immediately?

Situations arise on site where waiting would cause damage, a safety risk or an unreasonable delay. Even then it is worth separating the necessary protective measure from the actual extra work.

For example, a leak can be contained, the structures protected and the situation documented right away. The scope and price of the actual repair are approved afterwards. The entry records why the immediate action was taken, what was done and who was informed.

Situations like this underline the importance of photos, timestamps and message history. The system does not settle a contractual question on the company's behalf, but it makes sure the information behind the decision is preserved.

Step 4: connect approved work to the budget, the actuals and invoicing

The extra work process is unfinished if the approval stays in a separate PDF file. Approved work should change the financial situation of the project.

When the content of the work grows, the agreed value of the project, the planned costs and the workload change as well. If cost tracking still compares actuals only with the original quote, the project looks like it is over budget even though part of the overrun is extra work the customer approved.

Likewise, extra work has to reach an invoice at the right time. The work may belong to the next instalment, a separate invoice or hourly invoicing. What matters is that the approval and the invoiceable amount do not depend on the site manager's memory.

In Fisas approved extra or variation work can be brought into the project's planned costs and moved to invoicing. When the status of the work runs from draft to quoted, approved and invoiced, the owner sees from one place what is still waiting for action.

The most common ways to lose the margin on extra work

1. The work starts before the price is agreed

Once the work is done, the negotiating position changes. It is easier for the customer to question the quantity or the price, and the company can no longer limit the execution to an agreed budget.

2. The quote covers materials but not the disruption

A small change can require demolition, protection, another visit or moving other work. These effects are easily left out of the calculation.

3. A spoken approval does not reach the project data

The site manager knows the customer approved the work, but the person invoicing does not. The work is completed, the rush continues and the invoice is never made.

4. All extra work is collected at the end of the site

Quantities, discussions and photos from months-old changes are hard to assemble afterwards. The customer receives one long list that is laborious to check and easy to contest.

5. Approved extra work does not update the cost comparison

The project report shows red even though the scope has grown as agreed. Management then cannot separate a real cost overrun from extra work that was sold.

6. Small jobs are left uninvoiced

One fixing, a short move or extra protection can feel insignificant. Repeated, they add up to a significant amount of labour and material. A company should agree clearly which small changes are included in the service and which become extra work.

A practical extra work routine for the site

The process does not have to be heavy. A workable model in a small construction company can be the following:

1. An employee or the site manager records an observation on the project and adds a photo.
2. The site manager marks whether work can continue or a decision is needed.
3. The person responsible for estimation fills in quantities, costs, overheads and margin.
4. The quote is sent to the customer electronically.
5. Work starts after approval, unless it is a necessary protective measure.
6. Approved work is added to the project plan and schedule.
7. Hours, materials and subcontracting are allocated to the extra work or at least to the project.
8. The work is moved to invoicing at the agreed stage.
9. The weekly review checks quoted, pending and uninvoiced extra work.

When the routine is the same on every site, managing extra work does not depend on one person's memory.

How does extra work improve future cost estimation?

Not all extra work reflects a changed customer wish. Some of it reveals a gap in the original estimation or in checking the source data.

Once a project is finished, extra and variation work is worth grouping by cause:

• an extension ordered by the customer
• a design change
• a hidden structure or incomplete source data
• work missing from the estimate
• a change in the site's working method
• fixing a mistake.

The first three can be justified additional sales. Work missing from the estimate or a mistake of your own calls for a change in how the company works. When the cause is stored, the quote for the next job of the same type is more accurate.

This is where the value of an ERP shows over the long run. It does not only preserve the approval of a single piece of extra work; it builds the company a memory of what kinds of jobs produce changes and what those changes actually cost.

Frequently asked questions about extra and variation work

When should extra work be quoted in writing?

A written description and approval are worth making whenever the content, price or schedule of the work changes materially. Even for small jobs it is good to have an agreed practice in the company, so that invoicing is not decided case by case afterwards.

What should an extra work quote contain?

The quote should describe the content and boundaries of the work, the quantity or pricing basis, the price and taxes, the effect on the schedule and the way of approving it. When needed, attach the photos or drawing the change relates to.

Can extra work start before approval?

As a rule it makes sense to have the content and price approved before the work starts. If an immediate measure is needed to limit damage or a safety risk, document the situation, the protective work done and the notifications carefully. For contract-specific uncertainties, use an expert.

How does extra work show in cost tracking?

Approved extra work should increase the agreed value of the project and update the planned costs. Actual hours, materials and subcontracting are allocated to the project as usual. That way the report separates extra work that was sold from an overrun of the original budget.

Why is electronic approval useful?

It speeds up the decision and keeps the approved content, price, time and approver in the same place. The information is later easy for site management, invoicing and the customer to check.

A good process makes extra work visible work

On a construction site changes always happen. The profitability of a company does not depend on being able to remove changes, but on being able to handle them in a controlled way.

When the observation is documented immediately, the whole impact is priced, the customer approves the work in an understandable form and the approved work moves into cost tracking and invoicing, extra work does not stay a side plot of the site. It is part of the project and part of what the company earns.