Construction Change Order
As soon as the term change order is mentioned, both the contractor and the client tend to shudder. For the client, typically the first thing that will come to mind is increased costs, but for the contractor, he will typically view it as increased administrative work and project delays. In reality, this does not have to be a painful process for either.
First off, it would be best to mention that the best way to deal with potential changes is to avoid the potential of them from the start and this boils down to proper design, estimating and contract procedures. If the drawings are detailed, the estimating done accurately and the contract spells out what is included and what is excluded, their is very little room for misunderstanding between contractor and client from the start. Typically this will avoid the vast majority of changes required during construction because the contractor was under the assumption that he would be providing something and the client believed he was getting something else.
So what are the main reasons for a change order?
- Misunderstandings – As stated above, this can and should be avoided through proper design, estimating and contracting, however even in the best case scenario, things can be missed. In this case, avoiding a development of bad blood between the contractor and client will boil down to some give and take between both parties. Neither party will benefit from an antagonistic relationship and both should look at the situation with an open mind and make an effort towards compromise.
- Client wants to make a change – Sometimes, as the construction of the structure begins to develop, he or she notices something that they want done differently. If it is clear on the drawings that it was to be one way, and the client wants something else, the contractor is well within his rights to adjust his contract value, up or down, depending on the scope of the change
- Contractor wants to make a change – Just as #2 above, the contractor may notice something along the way that should be changed. The reasons may vary, such as a positive impact on quality, efficiency or scheduling. As this type of change is initiated by the contractor, in all likelihood he could not charge for it unless he can present a really good case to the client for doing so.
- Site Conditions – On every job, certain site conditions may present themselves which are far beyond what the client could reasonably expect the contractor to expect. A perfect example of this is during excavation, some buried surprised is found. When considering whether an extra charge is valid, the contractor is obligated to prove that the surprising site condition is not something he could or should have expected
- Errors and Omissions – This is where things can get tricky. Cases arise where what is drawn on the plans, simply won’t work on the practical level. The contractor may argue that the client had been given the plans so should be obligated to pay an extra charge, however the clients position, which in most cases is a valid one, is that the contractor is the expert and that it was reasonably assumed that he should have known ahead of time if what was on the plans was not practical to do. In all likelihood, this is an argument the contractor would lose.
When is a Change Order Required?
The simple and straightforward is ” Whenever, for whatever reason, a change is made from what was detailed in the drawings and contract”. A change order is not something only submitted if there is a price change. The change order prcess is meant to protect both sides. The client and contractor have entered into a contract where one party agrees to provide something based on a scope of work and drawings. If that scope of work or drawings changes “as built”, it needs to be documented as clearly as the original contract. Many times contractors have made the mistake of making some changes which he feels were verbally agreed to by the client, only to find out later the client either did not understand fully, or simply changes his mind. If their is no documentation and approval of the change from the client, the contractor is legally bound to have provided the building exactly as outlined in the original design and contract
What Should Be Included in The Change Order?
- drawing which clearly show the initial plan and the revised changes
- price change from the contract value
- scheduling impact
What Charges Can Be Included in a Change Order?
- Direct Costs – This includes all labor and material need to complete the change order
- Indirect Costs a- This includes such things as mobilization, trucking and anything else directly related to the change order but hard to put an exact paid out cost for
- Mark-up – This includes overhead expenses such as supervision, design work, office expense and of course profit. Typically the acceptable charge for this can be anywhere from 10 to 30% and should be spelled out in the contract ahead of time
- Administration Charges(for unapproved change order only) – This too is a tricky one, and I personally experienced a situation recently which taught me that the contractor should always reserve the right to charge an administrative fee. If the client is reasonable when there are changes, it is assumed that he will act in good faith, however sometimes clients overburden a contractor with proposed changes for a variety of reasons. Whenever a change order is processed, the contractor will need to make new drawings and an estimate so there are some overhead costs he will spend that can be quantified. What is more difficult to quantify is the loss of momentum on the job site awaiting the change order and approval process, which of course adds to the contractors direct labor costs. Where this becomes a huge problem is when the client rarely, if ever, approves the change order proposed. In most cases, if the client is approving a reasonable number of the change orders he initiates, then the contractor can and should waive the administrative fee on the ones he does not approve. In the instance where a client rarely approves them, the contractor should be re-reimbursed for continually wasting the contractor’s time and money. The least that an administrative charge will accomplish is make the client think very carefully before initiating changes he is very unlikely to go ahead with.
In conclusion, I would like to state that rarely does any job go start to finish without changes. When changes are required both contractor and client should be reasonable and understand that they have to work together.
The contractors need to realized that most clients proceed with a project based on the budget they worked out before they even walked in your doors, and if you go over that budget, not only will the client be unhappy, you just might not get paid. NEVER think you client is made of money !
For the client, remember also that your contractor works hard for his money and if it is a valid extra, be fair with him. If you nickel and dime him or try and bleed him dry, odds are good either that he will cut corners or in worst case scenario if he is overcapitalized, he simply may not be able to finish your job.