Change Orders in the Face of Recession
In Revay's experience, changes and extras are a constant source of friction between the owner and contractor. Customarily, the owner sees itself as being gouged while the Contractor views the compensation as insufficient. Coupled with the almost inevitable battles over the changes' impact on schedule and our current economic climate the resulting mix is potentially explosive.
Clearly, the solution lies in having a complete design package available prior
to the start of construction and refraining from post award scope changes. But
this solution is rarely seen. An incomplete design invariably leads to frequent
changes that commonly impact the contractor's productivity on contract work. This
topic has been the subject of considerable research over many years, some of which
has been discussed in earlier Revay Reports. Readers interested in learning more
will find our reports on our website at www.revay.com.
All of these studies have shown that numerous changes adversely affect the cost of completing contract work but no consensus has been reached on the magnitude of the effect. This lack of consensus serves to agitate the existing friction. In our current economic climate, contractors will be less inclined to proceed on changes without some assurance of sensible compensation. A change in attitude on both sides will be necessary to effect this.
Before commenting further, Revay would like to warn the readers that its comments must be applied in conjunction with the specific contract language or the particulars of the project. Equally, notice provisions and their significant potential impact on the ability to pursue a claim for additional cost must be taken into account.
Of course, the contractor needs to address the potential impact of changes on its productivity. The owner must understand that it is often impossible for a contractor to quantify this productivity impact on an ongoing basis for each change. That is why contractors qualify their change orders i.e. they reserve their rights to negotiate the productivity impact when it becomes quantifiable and also to create the right to compensation for the cumulative impact of changes on productivity, should it occur.
An example of such a qualifier is:
"The price quoted is only for the direct cost of the change. We reserve the right to seek compensation for the impact on contract work and/or the cumulative effect of changes when these costs (if any) can be quantified."
Some owners take exception to such a qualifier, apparently assuming that it is possible to ascertain the full price of the change at the time of issue. Contract provisions that actually preclude the contractor from reserving its rights are not uncommon. In fact, many professional advisors seem to endorse this particular prohibition. In so doing, they intensify the friction that already exists in the change management process.
The owner can be assured that merely adding a qualifier to the change order does not promise the contractor payment for the productivity impact. The contractor still must demonstrate its entitlement to additional compensation in addition to quantifying the impact. Practically, owners have several options. They can:
- Control the frequency and magnitude of change by ensuring that the engineering is near completion before construction starts;
- Accept the qualification and be prepared to discuss the cumulative impact of changes at the end of the project or at interim stages of the project; and/or
- Pay for the impact of changes on each individual change - in which case, the contractor is left no option but to inflate the amount to cover.
Because the owner ultimately controls the amount of front-end work it undertakes prior to the start of construction, logically, it should also bear the consequences of the choices it makes in this regard. If owners can bring themselves to accept this reality, friction on construction projects will be greatly reduced. In this same vein, contractors can considerably help their cause by providing proper detailed pricing submissions for review, as opposed to inflated lump sum amounts with little or no detail, which seems to be the norm.
As a postscript, Revay would like to bring the reader's attention to a US case wherein the court recognized a contractor's claim for cumulative impact of changes despite seemingly unequivocal release language in the contract. A synopsis of the case may be found in the Volume 25 of Construction Law Letter.
2. Our most recent report on this topic is: McEniry, G., The Cumulative Effect of Change Orders on Labor Productivity - the Leonard Study "Reloaded", 26-1 Revay Report (May 2007) www.revay.com/English/Reports/vol26no1en.pdf.
3. Madigan, T., U.S. Court Recognizes Contractor's Claim, 25-4 Construction Law Letter (March/April 2009).