September 20, 2005
Change orders are modifications to construction contracts arising out of necessity in the ordinary course of contract completion. Because there are so many factors that can cause contract changes, contractors must be proficient in dealing with these modifications to minimize their impact on project profitability. This can be accomplished through complete and accurate project planning, identification and authorization of contract changes, and effective communication to all involved parties.
Scheduling & Planning
Minimizing and preventing contract changes can be accomplished through scheduling and planning ahead of construction. An accurate and realistic construction schedule is imperative to complete a job on time and within budget. The coordination of material deliveries and approval of the schedule by sub-contractors and other involved parties can help to minimize project delays. Most importantly, the project schedule is necessary for assessing the total impact change orders have on job profitability. Incorporating change orders into the schedule at the time they occur allows the impact of the change to be accurately tracked, in addition to the documentation it provides. Change orders frequently become claims, not as a result of their direct cost but as a cumulative impact on the project.
Identification
The contract itself should contain explicit terms for dealing with change orders. The contract should address the required parties for review, approval and payment of change orders, including an accurate and realistic timeline. It may also provide for expedited meetings to facilitate timely resolution of disputes. All members of the project team are responsible for reporting problems and should have an intimate knowledge of the contract to be able to identify when change orders are warranted. Once identified, the project team and other involved parties should work to accurately cost the change order. Consideration should also be given to the overall impact, time extension and possible extended duration damages as a result. Sufficient project teams and estimators are necessary to accomplish this in an efficient and accurate manner. Attempting to save money in project administration may result in spending it on future litigation.
Authorization & Communication
Once potential contract changes are identified, the original contract steps for addressing change orders should be followed. This includes communicating the potential changes to the owner and other parties required for approval. Work should not be started until proper approval has been received and documented, including cost. Owners may agree on the necessity of the change order, but disagree on the cost. Addressing this issue prior to the commencement of work will enable the owner to consider a less expensive alternative if desired, and will protect you from absorbing unnecessary costs. Also, whether submitting or receiving a change order, pay close attention to the language therein. Be aware of terminology which prevents future claims for impact and don’t agree to change orders that are silent on the subject. Finally, effective communication can be maintained through frequent invoicing. This keeps the owner informed of the progress made, as well as alerts contractor’s to the presence of potential disputes more quickly.