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Methods of Valuing Variations

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32 views12 pages

Methods of Valuing Variations

Uploaded by

eng.gishan.sanjeewa
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Methods of Valuing Variations

Valuing variations is a critical aspect of project management, particularly in construction and


engineering projects. Variations refer to changes in the scope of work, which can arise due
to unforeseen circumstances, client requests, or design modifications. This document outlines
various methods for valuing these variations, providing insights into how they can be
assessed and quantified effectively.
Measurement Method
Accurate for quantifiable
changes

How Cost Plus Method


should Flexible for unpredictable
project costs
variations
be valued? Fixed Price Method
Predictable for stable
projects

Time Impact Analysis


Detailed for schedule
changes
1. Measurement Method

The measurement method involves quantifying the work involved in the variation. This
approach typically includes:

• Detailed Quantities: Measuring the quantities of materials, labor, and overhead costs
associated with the variation.
• Unit Rates: Applying pre-established unit rates for labor and materials to calculate the
total cost of the variation.
• Bill of Quantities: Utilizing a bill of quantities to provide a structured approach to
measuring and valuing variations.
How to measure and value variations in a
project?

Detailed Unit Rates Bill of


Quantities Quantities
Offers a cost-effective
Provides a calculation using Ensures a structured
comprehensive established rates. and organized
measurement of all approach to valuation.
resources involved.
2. Cost Plus Method

The cost plus method is based on the actual costs incurred plus a percentage for profit and
overhead. This method includes:

• Direct Costs: Calculating the direct costs associated with the variation, including labor,
materials, and equipment.
• Indirect Costs: Adding a percentage to cover overhead and profit margins.
• Transparency: This method promotes transparency as it reflects the actual costs
incurred.
Cost Plus Valuation Process

Calculate Ensure
Direct Costs Transparency

Transparent
Variation Costs
Valuation

Add Indirect
Costs
3. Fixed Price Method

In the fixed price method, a predetermined price is agreed upon for the variation. This
approach includes:

• Negotiation: The contractor and client negotiate a fixed price for the variation before
work begins.
• Risk Management: This method transfers the risk of cost overruns to the contractor,
incentivizing efficiency.
• Clarity: It provides clarity for budgeting and financial planning for both parties.
How to approach fixed price variations?

Negotiation
Risk
Management
Clarity
4. Time Impact Analysis

Time impact analysis assesses the effect of a variation on the project schedule. This method
involves:

• Schedule Updates: Updating the project schedule to reflect the impact of the
variation.
• Critical Path Method: Analyzing how the variation affects the critical path and overall
project duration.
• Delay Costs: Estimating the costs associated with delays caused by the variation.

Schedule Critical Path


Delay Costs
Updates Method
5. Expert Judgment

Expert judgment relies on the experience and expertise of professionals to value variations.
This method includes:

• Consultation: Engaging industry experts to provide insights on the value of the


variation.
• Benchmarking: Comparing similar projects to determine reasonable costs for the
variation.
• Subjectivity: While this method can provide valuable insights, it may also introduce
subjectivity into the valuation process.
Expert Judgment in Variation Valuation

High Expertise

Benchmarking Consultation

Low Objectivity High Objectivity

Subjectivity

Low Expertise
Conclusion

Valuing variations is essential for maintaining project budgets and schedules. Each method
outlined has its advantages and disadvantages, and the choice of method may depend on
the specific circumstances of the project. By understanding these methods, project managers
can make informed decisions that align with their project's goals and stakeholder
expectations.

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