Variation orders, delay damages and deductions
You will be able to: Describe the variation order ladder and its effect on contract value; Compute delay damages with an extension of time and a cap; Place deductions on a bill with the right VAT.
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A variation order (VO) changes the scope or price after the contract is signed. In Zeyto Construction & Contracting a VO moves up a ladder with a button for each step: instructed, priced, submitted, consultant approved and client approved. It can be rejected at any step before the client approves, and an addition or an omission can be recorded.
- Instructed and priced variations are exposure, not contract value. The exposure screen shows what is waiting for approval.
- Sending a priced variation to the client may first ask an internal approval, depending on your rules.
- Only when the client approves does the VO become its own linked sales order, add new items to the breakdown and raise the contract value.
- A VO line can be billed only after the client approved it.
Delay damages
If the contract has a daily rate and a cap, you can assess delay damages from the date completion was due. The assessment counts the days late less any extension of time, multiplies by the daily rate and the current contract value, and stops at the cap.
The rate is 0.05% per day on AED 1,000,000, which is AED 500 a day. The works are 24 days late and the client granted 4 days of extension of time, so 20 days count: 20 x 500 = 10,000. A 10% cap would limit damages to 100,000. If the damages are applied to a bill, they reduce the net receivable by 10,000 and carry no VAT in the base treatment.
Other deductions
Other deductions, such as a back-charge from the client, are added to the bill before the tax invoice is issued. Each deduction has a kind, an amount, an optional VAT amount, an optional client invoice reference and a note. A deduction with VAT needs the tax code of the client's own tax invoice; if you name none, the contract's tax code is used. A deduction without VAT carries none.
| Deduction | VAT |
|---|---|
| Delay damages, outside the scope of VAT (the default) | None |
| Delay damages treated as a price reduction | Treated as a reduction of the price; confirm with your accountant |
| Deduction supported by the client's tax invoice | Type its VAT and the invoice reference |
Walk it through
- Compute delay damages for 35 days late, 5 days EOT, rate 0.04%, contract 2,500,000, cap 5%.
- Write which VO status each of your open variations is in and what value is only exposure.
- In the demo, open Variation Orders on the Billing tab and see the buttons for each step.
Public demo company, sign in as admin / demoAdmin123. Data refreshes nightly.
- A VO is exposure until the client approves it.
- Delay damages = (days late - EOT) x rate x contract value, up to the cap.
- VAT on deductions depends on whether there is a tax invoice or a price reduction.
Check yourself
3 questions on this lesson. Not timed, not the exam, and you can try again. Score 60% or more, and read the lesson, to complete it.