Wednesday, February 5, 2014

Deviation Requests

A deviation request is a document that is generated by a supplier (or more frequently a contractor) where they are looking to have a change to the required work. Most of the time they could be looking for a change in the materials specified, a change to the design or the substitution equipment to be provided. Since the supplier or contractor doesn’t have the legal right to change what is required by the contract, the buyer has the option of accepting or reject the proposed deviation.

The reasons for requesting a deviation can be many:
•The supplier may found an alternative that is cheaper (but in their mind equal), where they want to make more money by the substitution.
•The deviation request could cost the contractor more, and not provide the employer with any additional benefit or lesser benefit. It is made because of availability of material or equipment and the potential impact that could have on the schedule.
•As designed, the item may not be able to consistently be produced in the desired quality.

In determining whether to accept of reject a deviation request, the buyer should consider a number of factors:
1.Will it provide equal, lesser, or greater value to the Buyer?
2.Will the deviation cause the same, less or more life-cycle cost?
3.Is the change acceptable to the internal customer it terms of its aesthetics, quality, and operation?
4.Will not approving the deviation have negative impact on performance of the contract such as potential delay in the time for completion or additional quality problems?

It’s a simple decision to make if the deviation provides greater value, has the same or less life-cycle costs, is totally acceptable to the customer and will benefit performance. It’s usually also a simple decision to make if the change is not acceptable to the internal customer. For all other situations whether you would accept or reject it is mostly a financial decision. Is the supplier or contractor willing to provide appropriate credit to the contract price to offset your decreased value received and any additional costs you incur.

Here’s an example. You have contracted with a contractor to add a addition on to your current manufacturing facility. Your specification called for the contractor to install 4 additional Carrier air conditioning roof top units of a specific model. The contractor makes a deviation request an proposes the use of a Trane air conditioning models of the same capacity. In making your decision you would want to consider:
a). What is the cost of the Carrier versus the Trane models?
b). Is there any difference in energy consumption between the models?
c). Will there be a difference in your service and maintenance costs?
d). What impact will it have on the spare parts you inventory?

Add these additional facts:
1. The reasons why Carrier was specified was the original facility has those same units installed.
2. There is additional energy consumption with the Trane units.
3. With the two different company’s equipment, you will need two different suppliers to perform the service and maintenance.
4. You will need to stock both Carrier and Trane parts and that increases your inventory.

If I were negotiating this I would make it clear that to approve any deviation request as a minimum it needs to be “cost neutral”. My definition of cost neutral is any difference in the cost of the units plus any additional life cycle costs (operation, service & maintenance, and inventory carrying costs would need to be credited against the contract price.