CHANGE ORDERS: CAUSES, PREVENTION, CONTROL, AND RESOLUTION

INTRODUCTION As the competition for projects among construction contractors becomes more intense, bids become tighter and profit margins decline. This factor, perhaps more than any other, is causing a growth in the submittal of change orders and claims by construction contractors to managers. Contractors are increasingly dependent on highly profitable change orders and claims to turn a profit on projects. Good client relations in consideration of future project awards becomes secondary to contractors where economic survival is concerned. A change order is an addition, deletion or revision to the scope of work as defined in contract drawings and construction or material specifications. The change order may impact the cbntract price, construction schedule, performance clauses such as liquidated damages orearly completion bonuses, or all of these items. On complex or fast-track projects, change orders are inevitable. Change orders can number into the thousands, particularly on megaprojects which span over a decade from the start of engineering to construction completion. Therefore, a change order procedure which expeditiously processes change orders while obtaining all necessary input from concerned parties is imperative. SELECTION OF CONTRACT TYPE The selection of a contract type during the planning stage shouldnot be taken lightly. A contracting strategy which matches the contract type with the completeness of engineering and schedule constraints is important. The selection of the wrong type of contract for a project will increase costs unnecessarily. Each contract type has its own inherent advantages and disadvantages and uses. A fixed-price contract which places all risk on contractors may be desirable for a project which has a complete set of drawings and specifications and a reasonable schedule. A cost-plus percentage fee contract may be required on a nuclear power plant which has a small percentage of engineering completed, or a fast-track project, such as a convention center. The owner assumes most

John H. DeFeis, Jr.

of the risk in this type of contract. Between these two contract extremes are cost-reimbursable plus fixed fee, target price, and guaranteed maximum price. These contracts can include incentive clauses which are sometimes called hybrid contracts. Incentive clauses can contain sliding scale fees based on performance-

FIGURE 1 -

STANDARD FIELD CHANGE REQUEST FORM ~

me,

2. AREAOFCHANGE

Technical Cost Schedule

i-J MaJor 0 Mqort i $100.0001 ,-J Ma]01 i:rlbcal Palh)

4. RECONhlENDEO OlSPOSlTlON rxubmlt &.a, tf.ppk.bk~ 0

Minor Change

[3 Major Change

Copyright
16

1986 by AACE, Inc.

COST ENGINEERING Vol. 28lNo. 10, OCTOBER 7986

related provisions, such as schedule milestones or cost or manhour targets. Bonus/penalty clauses also should be considered, not only for construction contracts, but for purchase orders for critical path material deliveries. Change orders often provide the greater problem on fixed price contracts where the contractors risk is maximized. CWAPdGEOFtDEB CAUSES Change orders are

typically

caused by one or more of the following factors: 1. Acts of God causing damage to completed work or equipment 2. Incomplete bid drawings or drawings which lack constructibility 3. Incomplete, vague, or incorrect specifications 4. Differing site or subsurface conditions 5. Schedule delays or interference with other contractors 6. Changes in federal, state, or local laws, procedures, permits, codes,

7.

8. 9.

10.

11. 12.

FIGURE 2 -

STANDARD

DESIGN

CHANGE

NOTlFlCATlON

FORM

13.
OF_

DESIGN

CHANGE

NOTIFICATION

PAGE_ DESITN C***CE NO DCN-

or zoning ordinances Late delivery of owner-furnished equipment, or shortages of construction materials or equipment Labor shortages, strikes, or jurisdictional disputes Schedule acceleration necessitated by an earlier plant completion requirement Work suspension caused by funding shortages (due to cost overruns, inadequate budget, or inflationary pressures) Payment schedules and incorrect invoicing Incorrect contract type; weaknesses in contract administration Defects in material, workmanship, performance; warrantee problems
OF CHANGE ORDERS/

PREVENTION CLAIMS

While it may never be possible to totally eliminate change orders, particularly on complex projects, change orders can be minimized with reasonable precautions. An experienced, high caliber construction management team is crucial to a projects success. A proven project management system should be implemented which includes procurement procedures; an integrated cost/schedule control system; cost estimating procedures; contract administration, including change order and formalized arprocedures; chitect/engineer, construction manager, and contractor interfacing procedures. The following trends are seen in industry firms: @ Standardizing the terms and conditions of contract documents Q Training of personnel in contract training sessions 0 Centralizing responsibility for contract formation and administration 0 Utilizing computer-based cost and schedule control systems Standardized specifications can also be utilized. Ebasco, for example, has over 400 standard engineering specifications and manuals of standard construction procedures for each project type. Standardized forms and procedures are helpful in preventing the costly redevelopment of these tasks on each project. Figure 1 is a standard field change request form, and Figure 2 is a standard design change notification form. Both forms indicate
(continued on next page)

COST ENGINEERING Vol. 28INo. IO, OCTOBER1986

17

CHANGE ORDERS: CAUSES, PREVENTION, CONTROL, AND RESOLUTION (continued) crucial information to process changes, standard distribution lists, and a numbering system which aids in tracking changes. A constructibility review of design drawings by knowledgeable construction personnel is good practice. Drawings and specifications should be reviewed for vague terms and conflicting information which are subject to interpretation. New work and existing work should be clearly shown on drawings using standard drawing symbols. Prebid and preaward conferences are held with contractors bidding the work with the engineer, construction manager, and owner in attendance to clarify scope of work and answer questions from contractors concerning the project. CHANGE ORDER CONTROL Procedures which process change order requests expediently and efficiently should be in place before ground is broken. A change order log (Figure-33 should be kept for each contract to track change orders. A flow chart which clearly identifies the path of processing, approvals, parties providing input, and distribu-, tion of copies istypically developed. The importance of the development and maintenance of project Words cannot be overstated. A complete record of past events will assist the owner in defending a dispute or claim later. It is desirable that the following information relating to a change order should be maintained: records of meetings, conversations, work performed, construction equipment on site, daily labor reports by craft, material and equipment deliveries, schedule, cost records, related contract provisions, lab tests, inspectors reports, drawings, correspondence, and photographs. Consideration should be given to cost and schedule impacts in evaluating a change order and implementation plan. Cost impacts which exceed a predetermined dollar amount should be accompanied by an engineers fair value estimate. A description of the change, reason for the change, initiating party, and recommended action to be taken are the initial information required in processing the change order. Figure 4 is an example of a contract modification form, Applicable sketches, specification changes, and
18

FIGURE 3 -

CHANGE

ORDER CONTROL

LOG

FIGURE 4 -

CONTRACT

MODIFICATION

FORM

.LIENT: CHANGE CONTROL PRO. NO. PAGE _ REV. NO. DATE OF ~

CONSTR"CT,ON PROCEOURE

POTENTiAL SCOPE WANGE

"FACSIMILE"

CLIENT: PROJECT: PSC NO. DATE

1.

DESCRIPTION:

(ldentlfy ali drawings, speciflcaTions, OCN's, RR's, CWO's, FJO's, Contract Documents, correspondence, etc., with appropriate date5 and revision numbers)

2.

ESTIMATED

IMPACT: (Identify impact to labor, materials, equipment, and schedule)

procurement,

~ 3. DISPLXIIION: APPROVED NOT APPROVED

CONTRACT ADRiiliSTRATOR (signature)

DATE

PROJECT SUPERINTENDENT 4. DETAILED IMPACT ANALYSIS (identify impact to labor, materials, procuremenr, and schedule)

(signature)

DATE

equipment,

PROJECT COSTiSCHEDULE 5. DISPOSITION: B COMMENTS

ENGlNlER (SlgIlatUre) APPROVED NO? APPROYEO 0 0 PROCEED WITH WORK 00 NOT PROCEED WIni WORK

DATE

PROJECT MANAGER (signature)

DATE

COST ENGINEERING

Vol. 28/No. 70, OCTOBER 7986

detailed schedule changes should be included with the change order package. A standard timeframe should be established to process a change order. Change orders which must be negotiated should have a formalized procedure and time schedule for negotiations. When a construction manager and contractor cannot agree on the cost impact, actual costs plus profit markup are sometimes agreed upon. Daily labor, material, and equipment timesheets should be monitored carefully. Change orders are sometimes backcharged to other contractors, where liability is readily allocated. Once, liability has been established, the extent of liability must be determined. Proof of these costs must be produced to the backcharged contractor in advance of performing the work. Often a contractor will agree to allow another contractor to repair defective work if he has already demobilized. No contract changes should be made until final authorization and a notice to proceed has been issued to the contractor. DISPUTE RESOLUTIOH Disputes can be resolved using negotiation, mediation, arbitration, and litigation. A change order often becomes a claim after negotiations between the contractor and construction manager break down. fvlediation occurs when both parties agree to bring in a third party to help them reach an agreement. Arbitration refers to the process by which a third party agreed to by both sides resolves the dispute. Litigation results when the disputing parties are unable or unwilling to resolve the dispute outside of court. Most disputes are resolved in negotiation which is usually the least expensive method of resolving disputes. The success of a negotiation depends on the size and complexity of the dispute, skill, and attitude of negotiators, case preparation by each side, and the extent to which the contract addresses the dispute. Settlements can be in the form of a lump sum amount, time and materials, and schedule relief. Preparation for all dispute resolution techniques requires a thorough knowledge of pertinent facts. A cost and schedule analysis of the change should be made independent of the contractor. The need for experts as consultants or legal support should be evaluated.

A negot.iating strategy should be established subsequent to the formation of the negotiating team. The objectives are established including which items can be traded off and which items cannot be compromised. The four steps of negotiating include determining the contractors position on important contract issues, establishing his own position, exploring alternatives in the event of disagreements, and reaching a final agreement on all contract items. COHCLUSlON Construction management procedures can assist in obtaining a cost-effective project which meets the successful project criteria: under budget and ahead of schedule. Good change order procedures will assist in negotiating prices with contractors for out-ofscopes and provide a *defense mechanism should claims be submitted at a later date. REFERENCES 1 Betz, Gordon M., General Condi-

Cleims, Analysis, Presentation, Defense, 1983, Van Nostrand Reinhold, New York, NY.
10. Stark, J. Norman, Construction Claims Investigation, July, 1983,

Highway and Weawy Construction, Technical Publishing, Barrington, IL. 11. Stark, J. Norman, Contract Litigation: Can You Avoid It? JU-

ly, 1983, Highway and Weawy Construction, Technical Publishing,

Barrington, IL. 12. Tompkins, Bill G., Waintaining Control of fvlega-Projects, Power September, 1978, Engineering, Technical Publishing, Barrington, IL.

2.

tions of Plant Construction Contracts, Part V - Changing and Accepting the Work, May 25, 1978, Plant Engineering, Technical Publishing, Barrington, II. Bork, Walter, Contract Activity Report, Contract Practices Surveyed, 1984, Construction Equipment, Cahners Publishing,
Boston, MA. Ebasco Services Change Controls New York, NY. Incorporated, Procedures,

3.

4.

5.

6.

7.

Engineering News-Record, Contract Ills Top Priority, 1983, McGraw Hill, New York, NY. Engineering HewsRecord, Contract Methods Compared, December 23, 1982, fvlcGraw Hill, New York, NY. Goodkind, Donald E., How to Reduce Construction Claims Through Mediation, Ciwil Engineering, ASCE, March, 1982. Hester, Weston T., Construction Managment and Construction Contractor Claims (Prevention, RAanagement, and Resolution), WDOE 81-3, Washington State Department of Ecology, RAarch,
1981. National Electrical Contractors More Efficient Association, Electrical Construction, 1983, Bethesda, WID. Rubin, Robert A., Sammie D. Guy, Alfred C. fvlaevis, and Virginia Construction Fairweather,

8.

9.

John H. DeFeis, Jr., is a supervising engineer for Ebascos project management services and the manager for a construction support services contract with the U.S. Coast Guard facilities design and construction center (west). He has been involved in estimating and negotiating change orders and claims for nuclear, hydroelectric and fossil-fueled power plants for more than 11 years. DeFeis has served as an expert cost witness for Montana Power Company at Federal Energy Regulatory Commission (FERC) hearings and has prepared documentation for litigation with contractors. He obtained a B.Sc.E. from Mew Jersey Institute of Technology in 1974 and is a member of AACEs Seattle Section. For more information contact John H. DeFeis, Jr., Ebasco Services, Inc., 400 112th Ave. NE, Bellevue, WA 98004.

COST ENGINEERING Vol. 28/No. 70,OCTOBER 1986

19