A change order can be a blessing or an albatross. We’ve all heard the joke about the contractor that bids a project at a loss, hoping to make it up on change orders. Astute businesspeople can verify that change orders are only beneficial if all costs are accounted for and included in the net cost of the change.
Change orders all have some common points. The percentage of the final estimated price has been quoted at anywhere from 2 to 7 percent of the contract. When architects and engineers pronounce in pre-construction meetings that no change orders will be accepted, you’d best alert your company’s project supervision. Next, call your attorney.
Contract change orders are usually executed early in the project, though increasingly, they are made during construction as the scope changes. Technological changes in modern buildings can result in design and contract changes. Field orders, on the other hand, are originated at the project site and often result from changed conditions.
Some changes are self evident, while others are traps. Practices by architects and consulting engineers have brought disclaimer clauses, which are hidden in the general section of the specifications. The language usually abdicates any designers’ responsibility and places it solely on the contractor. Depending on state or province licensing, it would seem ludicrous to hold the contractor responsible for the consulting engineers’ or the architects’ errors. Yet, many contractors readily accept such clauses.
There is widespread agreement that the quality of plans has not kept pace with technology. One factor is ambiguous specifications. Someone other than designers trained in the field of expertise may write the specifications using canned verbiage. Despite proof to the contrary, many owners feel their consultants don’t make mistakes and that the contractor must be unethical for requesting a change order.
When change orders originate because of shortened or extended schedules, the contractors’ best protection is that the bid is prepared based on the contract’s allotted construction time. Including a rough schedule with the bid file indicating the basis for crew size can prove the intent at the time of the bid. Any deviation from the expected timetable should trigger a request for a change. A contractor’s entitlement to a change requires proving the point conclusively.
Changes fall into two legal classifications. The directed change is probably the easiest to get signed off. It results from obvious work required or changed. They can be charges for added work as well as credits for work not done or reduced in scope.
The constructive change is usually very subtle and hard to identify. For example, the issuance of the “Final Bid Set” of plans some year and a half after the contractor received a contract based on an earlier set of plans, and actually got a notice to proceed. Any added work on the later set of plans is added work, irrespective of the stamp on the plans.
A typical constructive change is schedule acceleration, or a delay not reasonably anticipated by the contractor in the estimate. Defective plans fall into the constructive change, especially if the information is latent—a legal term indicating that it may be difficult to detect errors or impossible requests in the plans and specifications.
The patent change comes about because the contractor should have known what was required, or may have omitted the work from the estimate. Those reviewing changes often claim that the contractor should have anticipated the change because of custom and industry practice.
The contract documents should be reviewed prior to completing any bid, especially the change clause. Often contractors feel that reimbursement is not worth taking the time to prepare the change or the delays. Just as often, contractors will find that, by signing the contract, they have agreed to complete any changes. The change order clause will also include a method for compensation.
Unit prices may be part of the change order clause, and usually causes the most disputes. They should be based on expected costs of installation under adverse conditions that will be covered in greater detail, but take care that your customer doesn’t expect your unit costs to meet the price of a portion of a job.
A deductive change for work omitted should also not involve deducting the additive change amount. In deductive changes, the contractor is entitled to recover the applicable part of the overhead, because much of the preliminary work may have been done prior to the deduction. Not deducting the net profit can also be defensible if considering the quantity of work including the items to be now omitted arrived at the overall profit for the contract.
DAVID is a professor of electrical technology at Long Beach City College, Calif., a consultant, and an expert witness. He can be reached at (562) 597-1877 or by e-mail at firstname.lastname@example.org.