CHANGE ORDER MANAGEMENT
Every owner cringes when they hear the words“change order” in reference to their construction program because they know there will be unanticipated costs, possible delays and the potential of disputes with some or all of the parties involved in the project. Additionally, the design team, project management consultants and contractors also see a warning flag when they are advised of a change order request and dread both the process and the probable conflict that is likely to follow.
Perhaps it would be good to provide a definition of a change order. A change order is an alteration to a contract that may have additive, deductive or no cost impacts associated with the modifications to the original contract and may also have, or not have, schedule impacts. Sometimes the scope of the change may provide dollar savings, but may actually add enough additional time to the schedule, because of the need to perform work out of sequence or work that creates an impact to the critical path schedule of the project, that the net result is a cost increase because of the extension of contractor general conditions.
While successful projects are often judged by the number of change orders issued during a project, or by the total cost amount of the change orders, it is always in the best interest of all the parties to act concurrently to keep a project on schedule, within budget and to minimize unnecessary change orders. Since there is no such thing as a perfect set of design drawings and specifications, conflicts on interpretation and/or omissions are likely to arise on almost all construction projects when a contractor and their subcontractors try to fit all the parts and pieces together in today’s complex buildings.
Change orders come in many forms and usually can be categorized into six major causes or sources comprised of:
• Design Errors and/or Omissions,
• Unforeseen Conditions,
• Review Agency Design Comments,
• Delays in the Project,
• Nonperformance of a Team Member and
• Owner Directed Changes.
Design Errors and/or Omissions
Design errors and omissions (E&O) change orders result from many factors: inexperience or incompetence of design staff; negligence and mistakes of design staff; lack of coordination between the various design disciplines; incomplete design effort; improper staffing of the design team; lack of a quality control plan from the design firms; the absence of an in-house or an outside review, or other miscellaneous reasons. When change orders eventually result from any of these reasons, the most likely outcome is a change order during the construction phase. The conflict and the costs resulting from design errors and omissions are a frustrating experience for all parties and can leave lasting relationship problems that continue for the remainder of the project.
A good approach to design errors and omissions change orders is to first determine that, in fact, the design team made a mistake, what the fair value of correcting that mistake should be, what portion of the change order amount represents an increase in construction costs to the owner, what portion of the change the design team should be financially responsible for and minimizing the costs charged by the contractor by effectively negotiating the change order amount. It is essential to review all change orders prior to issuance for potential design E&O cause.
The steps taken to mitigate E&O change orders are weekly design meetings, proper coordination of design phase input from the owner and other stakeholders, document directions, value engineering reviews, constructability reviews and design phase estimates. All of these steps contribute to improved quality of the drawings, and this helps to reduce or eliminate design mistakes.
Unforeseen Conditions
Unforeseen conditions change orders are generally the responsibility of the owner, as frustrating as that may be. The best practice actions of the team and owner can often mitigate these change orders. First of all, most unforeseen conditions revolve around site and underground issues, as well as land title easements. One way to mitigate these type of change orders is to budget adequate site investigation that includes site surveys, an A.L.T.A. survey (easements), geo-tech investigations (soils conditions and stability), utilities locations both above and below ground (including in some cases aerial survey), archaeological studies, environmental studies, 404 drainage permit reviews, botanical surveys and other investigations that may accurately determine the conditions surrounding the project site. Accurate determination of site conditions will lead to more accurate budgeting on true construction costs and minimize resulting change orders. When a soil problem or underground utility is discovered in the construction phase of the project, a change order will likely result, and everyone will eventually concur that it was an unknown condition, with the owner having the responsibility to fund the correction of the unforeseen issue.
Review Agency Design Reviews and Comments
Review of the project by the proper governmental agency is sometimes considered a necessary evil in the project. Almost 100 percent of the agency reviews will result in design comments that need to be incorporated into the project design prior to receiving a permit or after a conditional permit is issued. In the case of agency comments before bidding the work, change orders will not be incurred in a competitively bid project because the comments are incorporated by the designer prior to bid. If the design does not include the agency comments, then the designer would be responsible to some extent for the resulting change order, categorizing it as a design error and/or omission.
In many cases, however, the owner’s schedule dictates that the best interest is served by proceeding with the project bidding or even the start of construction with only a conditional permit due as a result of the need to open a facility on a certain date. When this occurs, the owner needs to accurately budget for the cost of incorporating agency review comments in the form of a change order or contract allowance.
Delays in Project
Delays in the project result from many factors, however, most are nonperformance of team members — the owner, the owner’s representative or project manager, the architect, survey teams or the general contractor (or other vendors or contractors working on the project). Additionally, review agencies, weather, material suppliers or other acts of God may delay construction. Most of these change orders can be avoided by applying the proper amount of management hours to the project, developing reasonable schedules for the project with anticipated delay days incorporated, proper communication of team member responsibilities, and good planning and accurate documentation of the project. Weather is a prime reason for delays in the project, and this should be reasonably contemplated in the contract documents, with allowances included for rain, snow, mud and other weather-related disruptions in the construction schedule. When events occur that result in claims for delay by the contractor, they need to be quickly and accurately evaluated for fairness and cost impact by the owner. This is accomplished through inclusion of proper language in the contract specifications and required contractor submittals, including detailed schedules. Thorough review of actual events when compared to the project plan and schedule are essential. Change order costs are often avoided and always mitigated by proper review of delay claims for costs. Contractor delays may result in the potential for liquidated damages to be assessed.
Nonperformance of a Team Member
Nonperformance of a team member generally results in a delay to the project causing potential change order exposure identified above. It is important that all team members understand their responsibilities and monitor the progress of the project team.
Communications and open, frank discussions between the team members is essential, and weekly meetings help keep all team members on task and contributing to the project through the design, construction and close-out phases of the project. Proper attention to communications, written minutes and follow-up help in mitigating the potential for this type of change order. Agency reviews represent the most difficult part of the project team management. Early inclusion of the design review agency in the project will help bring the agency onto the project team. The agency will better understand the goals of the project both from a use standpoint and project schedule basis. Once on the team, the agency risk of serious delay is mitigated.
Owner-Directed Change Orders
Owner-directed change orders are a process where the owner enters changes into the project. These may become necessary for better operation of the facility; to enhance building or operation characteristics; to facilitate new ideas as new owner staff are allowed input into the ultimate design and use of the facility; for desired upgrades as additional monies become available to the project; because adequate owner input was not obtained during the design process; or many other owner dictated circumstances. Owner directed changes are normal and often necessary to a successful project, although all owners should be aware that they pay price premiums for the luxury of changing things after the construction phase of the project commences. All projects should be budgeted to facilitate a certain level of owner-directed change orders. Nothing can be more frustrating than not having the adequate budget to make changes that occur near the end of a project that are obviously needed to solve operational problems.
Owners should budget approximately three percent of the project construction amount for this purpose. If this budget is not used, the funding can be eliminated or allocated for fixtures, furniture or equipment, or some other usage deemed in the best interest of the owner.
Several types of change orders could be beneficial and be in the best interest of the owner to issue. These types of change orders add value and often make the facility more functional and operate better. The key to change orders is accurately budgeting for the owner’s exposure and mitigating unnecessary change order expense. Efficient and economic resolution to each owner’s additional cost exposure is essential.
All of the above situations will probably require a change order to the contract. While owners should take a realistic view of change orders and budget money to cover the reasonable costs of unforeseen conditions and conflicts, all efforts should be made to minimize the number of change orders. The following are five ways to reduce the number of change orders on a project.
• Give the design team adequate time to complete, coordinate and review documents. Owners, especially school districts, need to occupy buildings on the school calendar, so when a project’s timeline gets squeezed for one reason or another, the design process seems to take the brunt of the delay.
• Spend time with the reviewing agencies to examine the documents for compliance with the building and fire codes. A number of states are currently adopting different codes that have subtle differences with old familiar codes where changes can cost a lot of money if not caught in the design phase.
• Perform a constructability review near the end of the design phase of the project. A professional, third-party review of the documents can save far more in change order claims than the cost of the review, and the time delay is minimal to perform this function. Several leading project management firms state that this review will reduce between 30 and 45 percent of all construction requests for information (RFIs) and will substantially reduce the number and cost of change orders.
• Provide proactive responses to questions asked by contractors during the construction phase. Too often, it is easier to ignore answering a request for information from the contractor because of the exposure to risk of one or more of the team members. Again, communication is paramount to success.
• Provide dedicated owner construction staff. If the owner’s management team does not have the full time expertise on staff, then hire construction project management professionals. The added value of the PM firm has been demonstrated to often save more than the fee charged.
In summary, effectively managing the change order process will save the owner both time and money, and will lead to a smoother, more successful project, and one where all parties will benefit by working cooperatively toward a common goal.