What's Wrong With Change Orders?

A recent issue of ENR Risk Review (20JUN12) was epublished with the subject line of “Low Bid Then Blizzard of Change Orders.” 

How can an owner avoid such a situation? How can a contractor avoid being branded as possibly less than reputable? There are several contractual and practical steps to moderate these issues.

Let’s start with the contract between the owner and design team.

Do we have one or two levels of review for each drawing? How many minutes is the owner willing to fund for a seasoned upper level Professional Engineer to perform that second review? Is there a CPM logic plan for the production of drawings (and specifications) so that a reviewer can check if a change was made to a predecessor drawing (say of structural) that may have an impact on the latest revision (say of mechanical)?

Done properly, a less-than-most-senior PE may review that each drawing was reviewed against all pertinent drawing revisions for unintended conflicts. This will not solve all conflict problems, but will help.

 Has a mock CPM logic plan been prepared as a tool to assure constructability? Once again, this will help reduce conflicts and the internal RFI’s generated may even help the design team reduce the final cost for the owner. 

(Note this document must not be provided or even shown to the contractor, unless the engineer and owner wish to accept responsibility that “it can be built this way”).

 Next let’s switch to the implementation of the design in the field.

Let’s start with the question “what is wrong with change orders?” A complex construction project specification should be designed to accommodate necessary change orders. Some design elements cannot be fully appreciated, even with 3D, BIM, or even full scale mock-ups until they are being installed.

(Example: My wife walks into our being-remodeled kitchen as the cabinets are being installed and notes she cannot comfortably reach where the handles are to be placed. We move the handle location before drilling a lot of holes.)

 Even on virgin greenfield sites, and with extensive geotechnical testing, we may encounter unforeseen conditions. The educated owner (or her Engineer) understands all of this, and has hopefully prepared with a properly determined contingency fund (again, to be kept locked in the safe of the engineer and neither divulged to the contractor nor lower level employees of the owner).

What is the fear of the owner relating to change orders? What is the fear of the contractor relating to change orders?

The typical owner fears being taken advantage of by the contractor, as the subject line of the ePublished article suggests. The typical contractor fears being taken advantage of by an owner, who has skimped on proper design, or who has some difficult and risky “additional work” already on hold. And then there are owners and contractors who trust each other, often based on repeat business and a long term relationship.

A few suggestions for the fearful parties:

·      Do a formal risk analysis before preparing or reviewing risk shifting language in the specification. Understand that Civil Law judges do not enjoy being used to enforce predatory language or outright fraud. So an additional risk is whether such clauses will be faithfully enforced or not.

·      Understand the terms and enforceability of Change Order pricing clauses. Negotiated means just that, one party cannot put words in another’s mouth. Negotiated lump sum means no details or backup or limits on markup, overheads, risk premium, contingencies or profits (or losses). T&M (Time and Material) or Force Account does mean such limits apply, but best be explained carefully. (Does a non-union, non-required benefit typically provided for base contract work also apply as an included overhead for change order work?)

·      Implementation of a T&M regimen will have a cost to both parties. But it may be a necessary cost if there is a lack of trust. My recommendation is to track (or require tracking) of T&M for all work from Day One. When it comes to the point where the parties cannot negotiate an acceptable lump sum cost for an alleged change, a process for recording costs is already in place.

·      A side benefit of total project T&M tracking is to utilize such towards a robust EVM (earned value management) system. And now we can compare our productivity on base contract work to that on change order work. If large, questions of padding change order work may be raised and addressed; if small such charges are quickly debunked.

 The premise of the article is distrust between an owner and potential bidder, leading to higher bids from the most honest and risk adverse contractor. Better engineering, contract documents and trust encouraging protocols can help mitigate these issues.