Change Order Management
A claim is an unresolved change order. Conversely, a change order that is agreed upon and processed does not become a claim. Change order situations that are resolved knowledgeably, fairly, and promptly will benefit both the owner and the contractor. Federal government studies have shown that early settlement of change order problems minimizes cost to owners. Likewise, contractors benefit by avoiding disruption to their project schedule and cash flow.
Know and Use the Contract
In a change order situation, the contractor’s rights arise from the contract. A contractor’s request must be consistent with the contract, or it will likely be denied. Courts can circumvent or overturn contract language, “exculpatory” clauses in particular, but such cases are the exception rather than the rule. Successful management of change orders is based upon knowledge of the contract.
Project representatives of the owner, contractor, sub-contractor, and construction managers must be familiar with the contract. This familiarity must include all general or special conditions, specifications, and drawings that establish the scope of work, obligations of all parties, and the determination of the amount of payments. Representatives must pay particular attention to express conditions covering changes and extras, completion and time extensions, liabilities and warranties, and procedures for claims and disputes. Contract notice provisions and other time limits applicable to change orders and claims can be of critical importance to dispute resolution.
A majority of construction contracts are written by owners or their representatives; therefore, on first consideration, an owner may derive a sense of security from the powers provided by the contract. But the owner should be aware of the many actions or inactions on the part of the owner or owner’s representatives that may give rise to a claim. These include:
- Failure to make the site available at the time and in the condition required by the contract
- Ordered extra work
- Ordered delays or suspensions
- Delayed approval of contractor submissions
- Defects or delays in owner-furnished items
- Errors or inadequacy of the contract documents
- Failure to coordinate work of third parties
- Failure to grant, or delay in granting, legitimate time extensions
- Unreasonable or mistaken inspection
- Interference with the contractor’s method or sequence of work
The owner must work diligently and take positive action to avoid or minimize these causes of claims to achieve a successful project.
The contractor’s duties and responsibilities are quite specifically outlined in most construction contracts. In fact, they may appear to be overwhelming initially. A contractor must develop a construction plan and a schedule for carrying out the work and make the owner aware of these plans even if not required to do so by contract. Then, in addition to completing the work, the contractor must assure that contractual requirements for submittals, reports, and other supporting documentation are met in a timely fashion as the work progresses. Meeting these responsibilities will facilitate the change order process when delays and/or extra costs arise.
Construction is carried out in an environment of change. To the extent possible, change is brought about deliberately and in accordance with the schedule and the contract documents. This environment is particularly sensitive to disruption. Matters disrupting the project, or threatening to do so, must be resolved quickly, or additional cost in time and money may result. There are obvious economic benefits to the contractor from a smooth running project and from prompt compensation for extras. Likewise, early resolution of change order situations generally minimizes the owner’s costs. Both parties face the potential for excessive construction costs and costly disputes when inaction on a claim leads to “constructive acceleration” or “constructive change.”
Prompt action is the contractor’s duty in the case of a change, delay, or differing site condition. The contractor must notify the owner of these matters as soon as possible, and request any instructions or clarifications required from the owner. If a situation is serious, preliminary notice should be given in person or by telephone while the written confirmation is being prepared.
A contractor should not delay written notice to wait for final figures, or to avoid “offending” the client, or for any other reason. Delayed notice can reduce or eliminate a contractor’s entitlement to additional time and compensation, and in some cases, delay can increase costs. If there is any question about the amount of time extension or payment applicable to a change order situation, the contractor should submit daily accounts of extra cost to the owner and ask that they be agreed on a current basis. If the owner questions the contractor’s entitlement, the owner can still agree that the daily accounts are an accurate statement of fact “without prejudice” to the question of owner liability.
Prompt action is the owner’s duty when a request for instruction or clarification, or a notice of change, delay, or differing site condition is received. First, given the nature of construction, an owner should anticipate such requests and notices and be prepared to handle them. Then, when such matters do arise, the owner should concentrate on addressing and resolving them. An owner should not automatically adopt a defensive posture, but instead should work toward a reasonable and equitable solution that minimizes damages to both parties. If the contractor is entitled to time or compensation, failure to act may result in larger claims for such things as acceleration.
If the designer of the work is also the construction manager, the owner must be particularly alert to a potential conflict of interest. If the contractor has encountered a mistake or omission that was made by the persons now dealing with its request for an extra, the owner must be prepared to step in with an objective viewpoint. In an extended dispute between the contractor and the engineer or architect, the owner may end up the loser.
Determine Entitlement and Quantification
Guidelines for preparation of a change order request by the contractor, and its review by the owner, are similar to each other. Both parties are concerned about entitlement and quantification.
Entitlement is based upon contractual rights. The contractor must first establish from applicable contract provisions that a legitimate claim exists. The contractor should verify that the matter in question is outside of its scope of responsibility under the contract, that it is covered by clauses dealing with changes and time extensions, and that no contract language denies recovery of time and/or money. Having established this, the contractor should clearly communicate this entitlement to the owner via the change order request.
Quantification is the determination and substantiation of extra time and compensation for the change order. The contract may address quantification through applicable unit rates, force account provisions, requirements for submission and updating of schedules, and the like. Within the context of any such contract requirements, the contractor should establish and document the amount of additional time and money that is due, and the contractor needs to show that this time and cost are linked to and flow from the subject matter of the change order. Documentation may include CPM schedule analysis, cost records, and other relevant information. This is no time for an abbreviated effort. A complete, documented request, submitted in timely fashion, yields maximum potential for an early, favorable outcome.
The owner must carefully review the contractor’s request for change order to determine whether or not it is justified, and whether the amount of time and/or compensation requested is appropriate. The owner is looking for the same entitlement and quantification that the contractor required in order to put the request together. If the contractor has properly prepared its request, the owner’s review is expedited, and approval can be swift. If the owner does not believe that the contractor has entitlement, or that the quantification is flawed, the owner should promptly give the contractor a written explanation of the owner’s position. Differences of opinion must be acknowledged as early as possible in order to minimize their damaging effects. If the owner requires further particulars or an alternative evaluation of schedule or cost, the owner should request these promptly, while all information is readily at hand. The objective of both parties should be to resolve change order situations, if at all possible, before they become claims.
Professionalism Helps the Process
Senior management of owners, contractors, and other firms should be sensitive to the tone of relationships on site. Written communications should be polite and direct at all times. Personal criticism, sarcasm, and innuendo have no place in business correspondence or in internal written records. Personal diaries are “discoverable” in a lawsuit if they cover business matters. A good test for diaries, reports, and communications is to read the draft carefully, and then consider how it would sound if read in court. Writers should stick to a straightforward, direct style. If, for example, a contractor must take issue with a statement of fact made by the owner’s representative, the contractor should do so with a simple, firm statement of the disagreement and the contractor’s version of the fact.
Know When You Need Help and Get It
Even if the parties do not have all of the expertise needed to present or evaluate a change order request properly, the parties should not delay and should not take action without the change order. This advice is based upon a now familiar construction principle: present a thorough and proper position in timely fashion to enhance the probability of an early and favorable settlement. Either side may need help with a geotechnical problem, schedule analysis, preparation of entitlement and quantification of damages, or a legal question. Whatever the need, the most cost-effective time to get help is when the problem first arises.
One goal of all parties on a construction project is to avoid problems or to minimize their impact when they do arise. Proper documentation and efficient management of change order situations will minimize cost and disruption to the project. The purpose of change order management is to resolve matters at the change order level. In the event this initial resolution attempt is not successful, proper management of a change order situation provides essential documentation for dispute procedures or litigation that may follow.
Source: Interface Consulting International, Inc.
Released: July 30th, 2007 11:00 AM
Phone: (713) 626-2525
Fax: (713) 626-2555