This article discusses factors resulting from Change Orders that influence project performance and costs, calculation methods for estimating the cost of a potential Change Order, procedures for initiating a Change Order, Successful negotiation and finalization of a Change Order, and more.
ABSTRACT: The preparation, estimation, and resolution of Change Orders can present challenges to any engineering and construction project. The all-too-common practice of ignoring, delaying, or taking a prejudicial approach to the processing and resolution of Change Orders can potentially lead to distrust between the parties while the issues remain unresolved. This inappropriate practice often results in an interruption in the flow of the work, an increase in the costs of the project, delays to contract milestones, and possibly an extended date for project completion.
Change Orders can also become unmanageable if the process is not sufficiently defined, or if the individuals involved in the preparation and administration of the Change Orders on a project are inexperienced. As is often the case, claims and disputes occur when the Change Orders on a project are not properly addressed. Therefore, the proper management of Change Order issues is key to a project’s success.
The following topics are discussed:
A Change Order is a document that contractually alters an original agreement between the signed parties. Relative to construction, a Change Order is the result of an owner-approved revision to terms and conditions (e.g., scope of work, timeframe for performance, price, etc.) that are defined in a contract for a project.
Comparatively, Field Work Orders (FWO) are directives from an engineer or construction manager that either clarify or request minor changes to the contract documents. FWOs are typically minor revisions that usually do not have a significant impact the contract budget or schedule.
Change Orders can be either directed by the owner or requested by the contractor. Depending upon its specific requirements, a change may or may not impact a project’s contractual cost and schedule. In the circumstances that the cost is affected, a change may be represented as either an increase or a credit. Similarly, the durations of activities in a project schedule that are identified with a change may be extended or reduced. If these activities are on the schedule’s critical path, the date for the completion of a project may be impacted.
It is important that the scope of the work for the project be completely defined in the contract so that disagreements over scope changes can be minimized. However, it is common on projects that the parties find disagreement over what scope or factors may comprise a change order and/or its impact. This disagreement is not unusual because the nature of each change will predictably affect each party in different ways.
The resolution and management of Change Orders can also become the source of disputed issues between the owner and the contractor on projects. The disputed issues become further intensified if the change order management process is inadequately handled. The owner’s and the contractor’s diverging and competing interests relative to the changes on a project may also become a factor in judiciously resolving the differences.
The owner’s priorities are focused on predicting and controlling the costs so that the funding, which is budgeted for a project, does not become jeopardized. Also, the owner usually places a high priority on achieving a certain completion date for the project, and often will include contractual liquidated damages to be paid by the contractor if the contractual completion date is not achieved, absent any delays for which the contractor may be entitled to a time extension.
For the contractor, Change Orders entail several factors, which can be potentially complicated. First, Change Orders are often viewed as a means of increasing the scope of a project and offer a source of additional revenue. However, this supplemental work can also present the contractor with the problem of having to proceed with the completion of change-related scope of work prior to negotiating and finalizing the entitlement and payment for a change. The contract may require the contractor to proceed with the extra work pending the resolution of the valuation of a Change Order, which may also require the contractor to finance the cost of the alleged additional work until resolution occurs. The contractor will normally proceed with scope changes if it is confident that it will be fairly compensated for the alleged extra work at a later date. The contractor also has an incentive to complete the contract work in a timely manner because “time equals money,” i.e., the contractor’s field staff and other time-related costs continue to rise if the contract work is delayed beyond its planned completion date.
Construction contracts often include conflicting clauses regarding changed work. On one hand, a contract may state that the contractor cannot proceed with the work for a change in the absence of a written and approved construction Change Order. On the other hand, language in a contract may also state that the owner has the right to order the contractor to perform extra work without an agreement for compensation. These conflicting clauses place the contractor in a position of having to make a choice between performing the extra work at the risk of having to later possibly accept a reduced payment, no payment, or making the decision to refuse to proceed with completing the work. The later choice, however, may place the contractor in a position of default, which could possibly result in the contractor being terminated on a project by the owner.
A number of different factors can influence the development of Change Orders on projects. These elements can result from either foreseen or unforeseen conditions and include, but are not limited to the following:
It is advantageous to both the owner and the contractor that potential Change Orders on a project are processed in a fair, equitable, and timely manner. The failure to do so most often results in an increased probability of extended disputes and claims between the owner and the contractor.
A significant amount of Change Order backlog, in terms of quantity and value, is indicative of a project that is in trouble. The backlog is typically attributed to the above-average submission of Change Order Requests by the contractor and/or the owner’s inability or reluctance to promptly process the potential Change Orders.
A large backlog of unresolved potential Change Orders generally falls into one of the following categories:
There are numerous elements that can influence the cost of a Change Order. The work for Change Orders can necessitate that the contractor redirect the labor, material, and equipment resources that were originally budgeted, scheduled, and designated to be used to support the completion of the tasks identified for the contract scope of work. As a result, the contractor’s plan for completing the project may be impacted. The factors from Change Orders that may affect the planned performance of a project include the following:
The pricing for potential Change Orders can be developed using one of several methods. The choice of method can be established by the contract, from a post contract agreement between the owner and the contractor, or at the contractor’s discretion. Each of the methods has distinct advantages and disadvantages that are dependent upon the nature of a project and the requirements specific to the given change. The pricing is typically based on one of the following practices:
The contract typically provides that either the owner or the contractor is entitled to introduce a Change Order. The procedures for initiating a Change Order have a tendency to differ between projects, as owners and construction managers each have their own established requirements and preferences. Although there may be some variances, the following items address the practices that are normally expected on a project.
An important step in the initiation process is for the originator to classify whether the change is required or elective, and for the owner to confirm and approve this designation. The determination of whether a change is required or elective will influence the justification for the change and how the change will be evaluated. The differences between the two classifications include the following:
The owner’s authorization of the Change Order initiation communicates to all parties that the justification and documentation that is required in advance of implementing the Change Order have been met.
The owner must have confidence that the contractor’s assessment of the costs to complete the extra work for a potential Change Order is fair and reasonable. There are several actions that the owner can undertake to avoid being overcharged. The owner’s approach toward the review and analysis of a Change Order’s proposed cost is dependent upon the method of calculation that was used by the contractor and agreed to by the owner in preparing the estimate. How the costs are reviewed and verified is determined by whether the costs were based on a unit price, lump sum, or a T&M type of estimate. The requirements for evaluating estimates that are based on one of these three methods are discussed below:
In many construction bid forms, the owner includes a listing of unit price items that the contractor completes by filling in the rates for each item as part of its bid proposal submittal. These unit price rates are typically inclusive of the total estimate of direct and indirect costs, including the contractor’s overhead, profit, contingency, etc. Therefore, the construction contract between the owner and the contractor will include the unit prices that were proposed by the awarded contractor. For validating the costs of a proposed Change Order, the owner needs to verify the material quantities that the contractor is reporting for the extra work and compare the unit prices that the contractor has applied to the material quantities with those unit prices that are identified in the contract. The proposed change order unit prices should be the same as the unit prices that are included in the contract.
The owner should prepare an independent cost estimate of the scope of work for each potential Change Order. This cost estimate should be detailed and comprehensive in format because it is used as the basis for comparing and validating the material quantities, labor production rates, and pricing that are proposed in the contractor’s submittal for the potential Change Order.
If possible, the independent cost estimate should be completed in advance of receiving the potential Change Order pricing from the contractor so that a review can be completed without delay.
The owner’s independent cost estimate should be based on current market rates and costs as well as those rates and costs that may be specifically established in the contract documents. It is important that the component rates and costs be fair, representative of the work on a project, and defensible. The direct and indirect costs should take into account the following:
For extra work that is completed on a T&M basis, the contractor’s unit rates and markups for overhead and profit that are applied to the contractor’s actual costs for Change Orders are based on either 1) the rates that were solicited during the bidding phase of a project and included as part of the project’s construction contract between the owner and the contractor, or 2) the unit pricing and markups that were negotiated between the owner and the contractor following the award of a construction contract.
At the completion of the work for a Change Order, the contractor will submit the copies of the daily work reports for the extra work to the owner as part of the contractor’s monthly payment request submittal. These reports document the actual labor, material, and equipment resources that were expended by the contractor on an hourly or daily basis 6 to complete the extra work scope that is defined by the Change Order.
In addition to the daily work reports, the owner can request that the contractor submit as backup, copies of the invoices from its subcontractors, material vendors, and suppliers that were involved in supporting the work for the Change Order.
The contract schedule for a project may be impacted or delayed by the work involved in completing a Change Order. If the extra work is determined to be non-critical as a result of the absorption of the total float on the affected activities, the completion date of the contract schedule will remain unchanged. However, if the changed work is found to extend or delay the completion of activities that are on the critical path of the schedule, the completion date of a project will slip from the planned date. When evaluating the potential time impact for Change Orders, consideration should be given to the following:
The method by which the Change Order was priced usually dictates the level of negotiation that may be required to resolve the additional costs and time. If the work for the proposed Change Order proceeded on a Unit Cost basis, it is characteristic that the unit rates that are used were established on the project and agreed to prior to the start of the work for the Change. The negotiations for this type of change are then focused on the quantities reported to be used by the contractor and whether the change warranted an extension of time to the project schedule.
Similarly, for Change Order work to be completed on a Time and Materials basis, it is expected that the unit hourly rates for labor and equipment for the project have been ascertained in advance of the start of work for the Change Order. Therefore, the owner’s approval of the costs for the Change Order is based on a review of the time card records and copies of material invoices presented by the contractor, and potentially, the subcontractor invoices. The schedule for the project is also evaluated to determine whether the work for the proposed Change Order may have affected the completion of critical milestone dates or the overall project completion date.
If the proposed Change Order was priced on a Lump Sum basis, the contractor’s estimate proposal is inclusive of the risk that is relative to completing the scope of work for the change. The contractor may also consider that the estimate details for the cost of the proposed Change Order are proprietary. For this method of Change Order cost analysis, the elements for negotiations and resolution include the following considerations:
Following the negotiation and resolution of the cost and time elements of a potential Change Order, the scope that is defined by the Change Order management process needs to be fully documented and reported. Typically, the Change Order documentation is captured in the following formats:
(Please download the article PDF to view Form 04.) Following the conclusion of the negotiations and the attainment of an equitable settlement, a formal Change Order document is prepared by the owner in conjunction with the contractor. This document contains the complete and final language that defines the total cost or credit impact, in addition to any schedule revisions that are related to the change in the contract scope of the work. The endorsement of the Change Order contractually binds all the involved parties.
(Please download the article PDF to view Form 05.) This document is often prepared and updated by the owner, but the contractor could be responsible for the preparing and updating the Change Order Log with review and approval by the owner. The purpose of the log is to provide a current summary of the Change Order activity for a project.
Typically on projects, the construction contract requires the contractor to prepare and update the contract schedule on a monthly basis. In addition to updating the status of activities that are in-progress or completed during the reporting period, the contractor addresses in the contract schedule the details of the logic revisions and impacts that were agreed as part of the Change Order negotiations between the owner and the contractor. It is important that the owner review the contractor’s monthly schedule update submittal to ensure that the revisions that were agreed to in the Change Order have been correctly identified and implemented.
As a part of its contract obligations, the contractor is typically compelled to mark up the contract drawings with the as-built details for a project. This task also includes the revisions that were addressed and approved in the Change Order documents. The owner should periodically review the level of detail and progress of the contractor’s as-built drawings. Any deficiencies should be immediately addressed.
Changes often have a major impact on the success of projects. The procedures that are defined for change management in the general conditions sections of most construction contracts address the steps to take following the initiation of a Change Order. However, these guidelines do not normally identify the requirements for managing the change and its impacts. Items that should be considered as part of a project’s Change Order procedure include the following:
For the design and pre-construction phases of a project:
For the construction phase of a project:
There is no “one size fits all” process or set of procedures for Change Orders on projects. Owner’s, contractor’s and project specific requirements, contract types, management preferences, and logistical issues are a few of the many factors that may influence the structure of the change management process for a given project. Although there are expected differences in the change process between projects, the following diagram defines the basic elements and process that are typically expected during the construction phase of the project:
Figure 1: Example of a Construction Change Order Procedure
Regardless of effort and the best intentions, project planning is an imperfect process. Change Orders are an inevitable occurrence on any construction project. Although the owner can take steps to help mitigate the number of changes on a project, it is impossible to fully eliminate the issues that impact a project’s planned cost and schedule performance. There are simply too many unknowns and variables that are outside the control of management on any given project.
Often Change Orders can become a polarizing factor between the parties. The owner’s objectives are to minimize the impact of Change Orders to the greatest extent possible as a measure of control over a project’s budget and schedule. Comparatively, the contractor’s interests may involve expanding the scope of work beyond that defined by the contract, in addition to boosting its projected revenue. The differing objectives between the parties can result in divergent positions and the inability to attain fair and equitable resolutions on changes. If the owner and/or the contractor elect to ignore or postpone the negotiation and settlement of Change Orders until the end of a project, the issues that may have been previously solvable have a greater potential of being disputed and becoming claims.
For a project to be successful, it is important for management to be committed to processing Change Orders in an attentive and unbiased manner. It is beneficial for a project to establish a Change Order process with a defined set of procedures that is best suited to the requirements of a project, promotes open communications, is objective, and is structured to foster the resolution of Change Orders in an expeditious manner.
As Change Orders are negotiated and finalized, the information should be addressed as updates to the project record, including the project budget and schedule. The timely addition of change-related information provides management with a current perspective of the overall condition of a project, compared to its plan. This information also offers the ability for the parties to a contract to more accurately forecast the cost and time that will be required to complete the work for a project.
About the Author
James M. Bolin was a Senior Executive Consultant for Long International and retired in 2020. He has over 35 years of experience in all aspects of project and construction management, pre-construction planning, and project cost/schedule controls. His qualifications include claims and change order analysis and resolution, preparation of fixed-cost proposals and budget baseline planning, site management and coordination, prime and subcontract development and administration, materials expediting and procurement, and critical path method (CPM) delay analysis, schedule development, progressing and reporting. This diverse expertise has been obtained through involvement on numerous project types, including: oil production facilities, pipelines, pump stations, water and wastewater treatment plants, mineral processing facilities, water storage, hydroelectric plants, hospital/medical, transit, airports, communications, and environmental remediation. The value of these projects has ranged from US$50,000 to over US$10 billion. For further information, please contact Long International’s corporate office at (303) 972‑2443.
Barrie, Donald S. and Paulson Jr., Boyd C., Professional Construction Management, McGraw Hill, Inc., 2 nd ed., New York, New York, 1978, 1984.
Fisk, Edward, Construction Project Administration, John Wiley & Sons, Inc., New York, New York, 1978.
The Construction Industry Institute, Project Change Management, Special Publication 43-1, University of Texas, Austin, Texas, November 1994.
James M. Montgomery Consulting Engineers, Inc., JMM Construction Management Manual, CM 1102 Initiator Change Order Request, CM 1103 Change Order, CM 1106 Deviation Request, CM 1107 Technical Justification, 1987.
1 The term “owner” herein implies reference to the owner or the owner’s representative.
2 Construction Industry Institute, “Project Change Management,” Special Publication 43-1, November 1994, p. 7.
3 Samples of the forms (Forms 01–05) are provided in the Appendix.
4 Construction Industry Institute, “Project Change Management,” Special Publication 43-1, November 1994, p. 15.
6 Note that the contractor’s documentation of the quantities and costs for the labor and equipment resources can be based on hours or days and is dependent upon the actual duration of the work for the change. For example, if the work took less than a day to complete, then the time and costs for the Change would be summarized in hours. If the work took a minimum of one day’s time to complete, the time and costs would be expected to be summarized in days.
7 Construction Industry Institute, “Project Change Management,” Special Publication 43-1, November 1994, p. 29.
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