An Ounce of Prevention: Creative Solutions for Change Orders May Avoid Costly Litigation
Objective Is Prompt Resolution of Change Orders
A claim is an unresolved change order. Fortunately, a change order upon which all parties agree does not become a claim. Change orders that are resolved fairly and quickly benefit both the owner and the contractor by avoiding costly and time-consuming dispute resolution processes such as mediation, arbitration, and/or litigation. Prompt resolution of change orders is essential as this would typically minimize the total project cost to an owner, as well as minimize project delays and disruptions.
Change is a normal part of the construction process and typically increases project costs and delays completion. Frequently, contractors submit change orders and owners readily pay for the changes they desire. Other times, however, due to budgetary or other constraints, while the change can be made, additional compensation or more time to complete the work cannot be allowed. In these cases, creative solutions to change orders may allow the change to be made without increasing the project cost and without unnecessarily delaying and disrupting the construction process.
For example, let’s assume the contractor has provided timely notice of change to the owner and has submitted a well-documented change order outlining the change that occurred and its resulting impact on cost and schedule. Further, all parties agree that a change has taken place, that the contractor is contractually entitled to additional compensation and/or a schedule extension, that the owner wishes to proceed with the change, and that the owner and contractor agree on the amount of additional compensation due the contractor for the change. What happens in this scenario when the owner does not have sufficient project funding to pay for the change, is unwilling to use contingency funds, or is unwilling to request that upper management increase funding to pay for the change?
The old school of thought is that the contractor would not start to implement the change until the owner approves the change order or contract amendment formalizing the change into the contractual scope of work. This often leads to delay, which can only further disrupt the project and increase its costs. A change made early in the project is less costly and less disruptive to the project schedule than a change made later (see figure 1).
Shrinking Profit Margins Require Creative Solutions
Today’s competitive pressures and ever-shrinking profit margins in the construction industry require new ways of thinking and creative plans for working together. The savvy contractor is more flexible in helping the owner find ways to fund change orders. Likewise, the satisfied owner is more likely to give repeat business to the contractor in response to the contractor’s spirit of cooperation for the good of the project. Contractors and owners can work together to implement change orders creatively without cash changing hands.
Creative Solutions Require Trust
Creative solutions require trust and open communication between the contractor and the owner. The owner must recognize the contractor’s right to make a profit on the changed work while the contractor must not take advantage of the owner’s desire to make reasonable changes during construction.
The process of developing creative strategies to deal with change without incurring unnecessary delays and additional costs is similar to Value Engineering (see figure 2) whereby the parties scrutinize the design and look for items that can be deleted or modified to save money. The money the contractor saves in this process is then used to fund the change order. All proposed cost-saving measures are then compared against project requirements such as minimum acceptable product quality, plant safety and operability, and life cycle costs. The contractor then estimates the cost savings with each item less any costs already expended on that item, and the owner and contractor agree which items will be deleted or modified to fund the desired change order.
Examples of Creative Solutions
Provided below are a few examples of how a contractor and an owner can work together to fund change orders without increasing costs.
- The owner may furnish utilities to the contractor instead of the contractor having to rent diesel generators during construction.
- The contractor may use spare floor space in the owner’s warehouses instead of having to build and operate his own warehouse.
- The parties agree to a scope reduction in one area (e.g., deleting spare pumps that are in intermittent or in noncritical services).
- The parties agree to a scope change (e.g., designating spare pumps as “warehouse” spares, thus obviating the need to install foundations, pipe, and electric cables for the spare pump; this works best for noncritical pumps that can be changed out quickly if necessary).
- The parties relax a project specification (e.g., fabricating a vessel out of fiberglass-reinforced plastic instead of carbon steel).
- The parties agree to provide one 100% machine instead of two 50% machines, thus obviating the need to install two foundations, two piping systems, etc.
- The parties agree to delete control valve bypasses in noncritical services, thus saving piping and valves.
Open Book Cost Estimates
The next major hurdle is assessing the cost savings. The contractor must be willing to reveal pricing information so the owner is satisfied that the parties are discussing a fair price for the cost-savings idea. The contractor must be willing to share vendor invoice data and subcontractor unit rate information to substantiate the cost savings to be applied to the desired owner change.
Formalize the Agreement
The last step is to formalize the change in writing. The parties must verify and agree to all scope changes/modifications in writing to avoid confusion and misunderstandings. The preferred method is by contract amendment, although any written document signed by authorized representatives of each party will suffice, such as Notes of Meeting.
Creative solutions to change orders may not work in all situations. For example, projects with numerous or late changes may not be able to realize all of the benefits discussed above due to a finite amount of scope reductions/modifications a project can realize without impacting the facility’s performance.
There are myriad possibilities of funding change orders without incurring additional project costs, limited only by the imaginations of the parties involved. Most important, creative alternatives to unresolved change orders may eliminate delays, promote open communication, and facilitate project success while avoiding costly dispute resolution forums such as arbitration and litigation.
Source: Christopher J. Sullivan
Released: July 30th, 2007 11:00 AM
Phone: (713) 626-2525
Fax: (713) 626-2555
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