Jacob Austin 00:00:00 Hi All! Jacob Austin here from QS.Zone. And welcome to episode 130 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow and grow their business. Today's episode, number 130 is continuing our JCT 2024 mini series, and it's focusing in on the change processes, how variations are instructed, what schedule two actually means in practice, and how to value changes properly in line with the contract requirements without donating your margin. So let's dig in. Let's quickly start with why this topic matters. On most light jobs, you won't lose margin because of big dramatic disasters. You'll lose it in small changes that happen every week. The detail moves and other subcontractors work is late. So you're re sequenced as a minor spec change. You're asked to do an extra little bit of save fire stopping alongside your work. Some coordination issue happens and now you need to relocate a run. Because all of these are small issues. It gets treated casually. You get on with the work, you have a chat about it.
Jacob Austin 00:01:34 You think, well, we'll sort the money later and before you know it, you've forgotten about the change and your funding parts of the project. The change process is, of course, admin. But it's not just admin. It's where your leverage lies. It's where your extra margin lies. It's where your protection lies for what you need to walk away from the job with. And if you don't understand the procedures around changes, then you could end up doing work with no contractual entitlement for being paid for it. Completing a variation and finding the contractor is completely devaluing the change, and you can't understand why. And the worst one is a direction that you didn't comply with because you said you were waiting for agreement, and now you find yourself in hot water and potentially in breach of contract. So after today's episode, you should understand the contractual framework behind the change process and behind the valuation of that change to help you maintain your margin, maintain cash flow, and maintain all important control of the change process. So within the subcontract itself, there are three relevant sections to changes.
Jacob Austin 00:02:48 And I'm going to do a job here of trying to keep this close specific but practical. So I'm not reading out verbatim what the contract says. The change process starts with contractors, directions that come out of section three of the contract, and that starts with clause 3.4. The contractors power to issue directions. And correspondingly, you have under clause 3.5 and obligation to comply with those directions. So if you are given an instruction and that says crack on with this change, you are expected under the contract to do exactly that, not wait for two weeks for a price to be accepted. You're expected to get on with it as soon as you can reasonably do it. There's a bit of protection around instructions not given in writing, and that comes from clause 3.7. Verbal instructions happen all the time. Somebody told me to get on with this, but your entitlement to time and money becomes as blurry as somebody's memory. After two weeks and a copious amount of beer drunk at a football game at the weekend. So hopefully I don't need to explain the problem with verbal instructions, but what I will explain is that you can back them up with simple emails, simple correspondence that firm up your requirements, that put a marker in the sand so that you can get paid.
Jacob Austin 00:04:13 That means sending to your contractor a simple confirmation saying site manager A told me to do X on this date at this time, and you're treating it as a change under your subcontract, and you want to give the specific details of that instruction, whatever those may be, using the electronic communication procedures under the subcontract. You can send that email to the nominated person, and they will either confirm that that's acceptable, confirm that it isn't, or if they don't confirm it all, then two weeks later that is dealt with as if it was a proper instruction. You can set up a simple template capturing those details so that you can populate it on a case by case basis, but please do. This is the simplest way to protect yourself from non-payment for things you've been told to do, just not in writing. Moving on from how the instruction is actually issued to the next most important part, which is valuing that variation that sits under section five of the subcontract. So first you have a definition of some variations. And in now a simple example we've been instructed.
Jacob Austin 00:05:28 So we've got a clear change. The scope is different. And we're going to value that change. Now the contractor can specify that they're requesting a variation quotation, in which case a schedule two quotation is prepared by you the subcontractor, and submitted for agreement. Or you crack on with the change and you measure and value it in accordance with clause 5.8. The general rules for valuing variations. There are also separate procedures for day works outlined under 5.9, but typically your change will be valued by either the schedule two or a quotation in line with the general rules. Day works only will apply if it's agreed between you and the contractor that that will be the case. So let's talk about schedule two. This is not a nice to have, but a defined commercial procedure for pricing change before it's confirmed. This is like an option quotation. So if the contractor issues a direction and effectively says price this is a schedule two quotation. You're being pushed to quote for something that they may or may not instruct. You only carry out the work if you're actually instructed.
Jacob Austin 00:06:43 After you submitted that quotation, this is your chance to properly respond. Anchoring the valuation to the number that you think the work is worth. If you ignore it, then you lose the chance to set the price and to set any reasonable assumptions early. You protect yourself in this instance by locking in your quotation, so clarify whether the instruction is requesting a quote in advance, and if so, lock down your price and your valuation route. A mistake a lot of subcontractors make is trying to treat all changes as if the schedule two applies, because acting like a price agreement is a prerequisite for action is going to get you in trouble. It might feel safer to you, it might feel like you've got more leverage. But you have to understand that the contract is written to keep the project moving, to sort valuation out later through valid mechanisms. So if the contractor issues you an instruction, as long as it's within your remit and it's not illegal, then you need to crack on with it. Because what can follow from that is one of the biggest problems that you could create yourself under a JCT subcontract, refusing to act instantly gives the contractor grounds to.
Jacob Austin 00:07:59 Record your delay. You fail to comply with a valid direction. You've effectively delayed yourself, and you've now opened the door to downstream damages or contra charges that are now your fault for delaying all of the follow on activities. Now, that's not me being dramatic. This is how you lose the leverage that you think you're trying to gain. So what are some other common issues or sticking points with the variation process? Or for me, the first of those is not getting things clarified in writing. It's the classic somebody says just do it. There's a bit of a handshake and we'll sort it later. Then later becomes prove we instructed it. The site manager noses instructed something, but he doesn't quite know what it was. So he just sits there in the meeting looking stupid into her. He said she said argument that didn't need to be there. The response to verbal instructions is what I mentioned before you respond. You confirm the details, you define the scope of the change, and you let the contractor either confirm or deny that they want you to do it.
Jacob Austin 00:09:07 That gets you back the control of the story, the control over the risk of non-payment because you're putting a marker down that says this is a change. Jim told me to do it. And even if nobody comes back to you to acknowledge it, the fact that you've submitted it entitles you to a variation. Another common issue is not understanding the price hierarchy set out by the subcontractor. This is where good subcontractors become very cheap subcontractors. JCT valuation rules are structured to start with what's already in the contract, and only move to a fair valuation when it's appropriate. So that means if there's similar work to work that was in your original package, then you value the extra work at the same rate. The next thing to remember is that if that work is similar but different, and you can demonstrate what the change is, you can do a really powerful calculation to pro-rata your existing rate to make it suit the new situation. So what does that mean? It means breaking down your original price and adding in the difference.
Jacob Austin 00:10:14 So if access sequencing, productivity, plant standing time, the amount of supervision, if any of these things are changed and anything else you can imagine, you adjust your calculation accordingly so that your rate now reflects the change in circumstances. Sometimes the change is obvious. You're deepening an excavation, so you need to expand on the bits that change whilst keeping the bits that are unchanged the same. So a simple example of a pro-rata would be a drainage trench that is double the depth. Now let's avoid any argument about making it wider for protection or for working method. Let's say it was already over wide. Now we've doubled the depth. What we aren't doing is doubling the pipe or the bed, and surround all the work you're doing to the bottom of the trench. So the rate isn't just double the original price. So when you adjust your calculation, you're keeping the number of pipes in that trench the same, but you're increasing the bits that have changed. So you're increasing the depth of the dig, the disposal off site and the backfill.
Jacob Austin 00:11:24 So your new rate might be more. It might be less than double the original price. What you know is the contractor is going to work that out. So propose it first. Guide them as to the valuation of those bits that have changed, so that you can get your hands on the proper amount of money for it. One final frequent omission from changes is prelims. This one is so common it's painful. Regularly, I would get subcontractors prices for changes with only materials and labor without a mention of extra management time, extra supervision, additional visits, re mobilization, extended welfare, additional Q&A, additional time spent pulling the O&M together. Standing. Time now not to go back and cover loss and expense like we did last week. But if there is a genuine reason why prelims associated with a particular change should be chargeable, then put a bill in for them. Price it into your variation. You might need new or different or taller access equipment. It might be prolonged higher of things that you've already got there.
Jacob Austin 00:12:38 If your critical path is extended by you being on site for that variation, the best time to charge for it is there. And then whilst you're putting your costs together for that change, prelims within a variation isn't automatically loss and expense. If the variation changes the work content and the method, the time, the resource requirements to deliver it, then all you're doing is making sure your valuation reflects reality. Otherwise, however long you're on site for doing that variation, if you don't, then pick up loss and expense for it. You're doing it for free, and it is much easier to build it into your variation than it is to argue about later. Now let's have a look at some examples. The first one is the just a little bit more approach. Let's say you're a dry liner and as you're going through first fixing, the site manager decides to change the deflection head where there's a certain interface and he adds in a bit of Patricio. So being helpful and as the site manager said, just crack on and do that and we'll sort it later.
Jacob Austin 00:13:44 You do exactly that. As you approach the second fix, he's added in a little bit of fire, stopping on top of what you you're originally doing. Again, you're trying to be helpful. So you crack on and eventually maybe six weeks in, you submit a variation. Now the contractors show is saying, well, hold on, where's your written instruction? And we've got no record of quantities that you've now said you've installed and your rates already included. Patterson and fire stopping that was part of his scope at the start. So now, rather than getting paid, you're arguing on scope items. You're struggling to get paid for additional quantities of work you've genuinely done. How do you stop that situation from happening? The approach here would have been to confirm back that instruction in writing it had been most effective. If you get the site manager to mark on a drawing. This is where I want these extra mattresses. This is where the deflection head's going to change. Then you can scan that in, send it to the SHS and say, here's what so-and-so, the site managers, instructed me to do.
Jacob Austin 00:14:50 Can you confirm authority to proceed or it will cost you more money to complete later? You can ask them whether they want a schedule two quotation for it, but note that you're working in that area at the moment, and if you don't do it straight away, it will cost them more money to rip out work and do it again later. Now you're having a completely different conversation. You're on the front foot. You're requesting an instruction. You haven't done anything yet, so it's not cost you any more money yet. And you're even pointing out to them if they don't give you an instruction ASAP. It's going to mean some rework and it's going to mean more time. Now here's a more subtle example. Let's say you're an M.A specialist. Some of the preceding trades are late. You're instructed to work in a different zone and come back later. The work content hasn't changed, but what you have got is a change in sequence and a change in access. You've got smaller working areas. You've got more work in and around other people, rather than bringing in big hits of materials and installing them uninterrupted.
Jacob Austin 00:15:59 You've got more hand to mouth style deliveries just in time. Unable to stockpile large quantities of ducting and containment. You've got to bring in sections and a lot smaller delivery batch. Now, on the one hand, you're still doing the exact same scope of work that you're doing before, but what you've got alongside that is a completely different process when it comes to the install operation. Your actual deliveries become stop start. Your outputs are lower. Your supervision is going to be there longer to complete the same work, and you've got more interfaces with other trades. The main contractor is going to point at it and say, look, the drawings haven't changed. It's the same work. And your response to this needs to be along the lines of yes, the components are the same, but the operation is completely different and under the valuation rules change conditions and method matter. A change of method is equally as much a change as a change in scope. Where this will often go to is that time will continue to be lost.
Jacob Austin 00:17:05 The program slips. The next thing you're asked to do is to help out by bringing extra labor and working on a Saturday. And that's hidden trap number three for acceleration not to be treated formally. It's just quietly requested and implied that you need to do your bit to help out, because you're part of the reason that we're behind. And if you're not careful about how this happens, you're soon doing premium time work on standard time money. It's not teamwork, it's you paying extra to make up for somebody else's program loss. So moving this forward, how do we protect ourselves as subcontractors and put some controllable process in place that can help you run your JCT, subcontract, and make a success of the change process. There's a few different tools to use here, so we're going to start with a change or a variation register. This can form part of your application for payment, or you can copy and paste bits of it to it so that you're not duplicating effort. But start by treating every change like it needs a reference number.
Jacob Austin 00:18:10 The moment you smell a change, you log it on your variation register and populate some basic details. Date raised. Who's instructed? What was said? Did he confirm it back in writing the location, the status requested, instructed, price degreed, valued, paid, and whether it's a variation quotation route or a valuation rules route, that register becomes your change memory. It stops you having to think back in time as to why costs have gone up, and it stops you scrambling for details. Point two lock the instruction down in writing as fast as you can. If you receive an instruction in writing. Perfect. But don't stop there. Confirm. Is this a request for a quotation, or is this something you need doing tomorrow and will value it later? If it's a verbal instruction, you need to get that written record created. Use clause logic, not emotion, further to your direction. Today we understand you've instructed X in this location. Please confirm this direction in writing. If you've got a markup, attach it and say we consider this a variation under section five.
Jacob Austin 00:19:22 You're not being awkward. You're using what JCT mechanisms exist to support clear written instruction and avoiding disputes. Next step three, which I've already mentioned, is variation quotation routes under schedule two. By asking this question, you're already getting sharper than most subcontractors. It does slightly change how you're going to build your quotation up because you're not waiting until it's done to see how long it takes your labor to complete it, you're having to guess. You're having to work up the estimate from scratch. You probably have a good idea anyway, but it probably rests on some assumptions. So state those assumptions. State the inclusions and exclusions, the program impact, price the prelims associated, and come up with a priced proposal which is going to lead into the next item. When you're submitting a quotation, don't just throw in a number. Make it a professional proposal, a professional quotation, a properly strong quotation will define exactly what the contract is going to get from it, what's included, what's excluded, how the scope has changed, the measurement basis, or where the quantities are coming from the right basis? Are you using existing rates where they apply? Have you got pro-rata rates? Have you got new altogether rates that you now need to give a build up for.
Jacob Austin 00:20:49 Give a description of how long it's going to take to justify prelim and supervision allowances that are tied in to that change. Describe any long leading items and procurement constraints, because what you're doing here isn't just pricing. You're setting your stall out to say, this is why my prices as much as it is, this is what you're not getting and you need to provide. So there's no doubt about that missing piece of access equipment that the contractor thought you were going to provide and you're not. The detail you put into this quote protects you, and it helps you to justify the price that you're charging. Sell the story of why it's costing the amount that it is. Next, you need to understand the valuation hierarchy and how to use it to your advantage. The valuation rules are there to put some structure in place, to put some commonality there, to stop valuations from being random. You want to map your pricing to that hierarchy. The bits that match existing rates will reuse them. This part is similar but different.
Jacob Austin 00:21:54 The conditions are different, so we'll apply a slightly different rate and justify what that adjustment is. This part isn't in the rate. It's different from everything else. So we'll build up a rate from scratch. And this part was a small bit of day work required to enable everything for that bit. Let's get a day worksheet, get it signed off. And we all know where we are with that pattern, that hierarchy, you can maintain margin and look reasonable. And finally put prelims and supervision in if they belong there. Inside the valuation logic, if the change increases, the number of visits, the setup, the supervision or time on site, then your valuation of the change needs to reflect that reality. It's not a whinge, it's a logical consequence of changes to the conditions of the work, not just the work. And if the contractor tries to say, well, that's included, then pull him out on it, ask him where, in what rate, where did he communicate these conditions at tender stage? Where are the conditions stated in the order when we discussed this at the pre start meeting? This was how the job was going to unfold and now it's completely different.
Jacob Austin 00:23:08 That planned sequence and access is different. So I need more money for it. There's endless scenarios, but those are the kinds of conversations where you're justifying why your price is changing. And this changes you from a subcontractor who gets patted on the back to one that gets paid and reimbursed, rightly, for what they've been asked to do. Now, I know, as I said, that was the final step. But there's a final, final step, and that is not to leave it until the end. The leverage that you get by starting the process early, just by being able to remember everything that comprised a particular change, that's the biggest reason to do things promptly. But as well as that, if you leave it to final account, you lose the urgency that you lose visibility of certain aspects. You lose some of the leverage that you've got at the start, particularly if you're verbally asked to do something. A quick confirmation email that says, I confirmed our conversation of earlier where you instructed X and Y.
Jacob Austin 00:24:05 Additional work in this section, we consider this to be a change. It's such an easy email to send, but by sending it, you get leverage on your side. You've now got a written record. You've hopefully now got the site manager responding to that and saying, yes, that was an extra and I needed to start it tomorrow. Or maybe the contractor's QZ comes back and says, no, you shouldn't be doing that. I can see why you've been asked, but it's part of somebody else's package. That way you're avoiding the cost altogether, and at worst nobody replies. But in two weeks time, you've got your instruction by default, so you're protected all round. There's absolutely no reason not to administer confirmation of verbal instructions. It's easy and it does away with all manner of unpaid changes. And that is the biggest takeaway from today's episode. Some other important points we've covered are. Stop waiting for agreement before acting. If you've been instructed and you've got a valid direction. Record the point and crack on with the work.
Jacob Austin 00:25:07 Or you risk delays and you risk contre charges. Know the difference between a variation quotation and evaluation of a completed change. This all gets captured at instruction stage. Schedule two is your chance to price the work early. Clarify whether that route has been used first. Price changes using the contract's valuation structure. Not just a gut feeling. The valuation rules exist to create a hierarchy that you can use to your advantage. It's there to maintain a semblance of fairness for both parties. Prelims aren't just a nice to have. This is a place where profit regularly leaks, because the extra time to do X and Y wasn't part of the original job. If conditions change as well, make sure it's reflected in your evaluation and remember the simple variation register we discussed. Use it to track everything. Use it in your valuation. Use it to demonstrate when x and y was agreed. Who's instructed what? What the nature of the changes. Whatever you want, just capture details, useful details so that you can refer back to them.
Jacob Austin 00:26:17 You can make it as simple or as complex as you need it to be. Obviously, the simpler it is, the more likely you're going to use it. So I would on the side of basic and there we have it, the JCT change processes in a nutshell. So I'm going to wrap up this week's episode there. And we'll be continuing our JCT mini series next week. But hopefully that's been an informative and a user friendly session for you. And you've got a clear understanding of the change process without being too bogged down with terminology. But let me know your thoughts. If you're taking some value away from today's show, then I really need your help to share the show and pass that value on to somebody else who'd benefit from hearing it, so that I can help as many of the million SME subcontractors working out there in our industry. And of course, thanks for tuning in. If you like what you've heard and you want to learn more, then please do find us at www.QS.Zone For more information or we're also on all your favourite socials again at @QS.Zone.
Jacob Austin 00:27:19 And remember and remember, miss the contract detail and the commercial risk falls on you. Thanks all. I've been Jacob Austin and you've been awesome.
