Coping With Change Orders
Keeping Confusion Under Control and Limiting Disputes
Arthur O'Leary, FAIA, MRIAI
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It is seldom that any construction contract can be pursued from start to finish without some changes having to be made. This is in spite of the best of intentions of all parties.
Despite stories about fat contractor profits in changes during construction, in reality they are an onerous economic burden on all concerned. Contractors often have difficulty in breaking even on changes.
Some of the changes originate with the owner who finds that the scope of the project must be modified to reflect changes in the building’s ultimate use or for important economic reasons. Also, owners are entitled to change their minds. Other changes are caused by the necessity of correcting errors in the contract documents or to comply with evolving building code requirements. Sometimes specified materials or equipment are unavailable at the time of purchase.
Projects plagued by numerous changes can become mired in confusion if they are not administered in an orderly manner. Serious problems arise when multitudes of changes are in various stages of progress. Some in the stages of deciding what to do, redesign or engineering, pricing, reconsidering, negotiation of price, contention about responsibility, approval in part, final approval, or cancellation. Some changes will have a profound effect on scheduling while others will have unexpected effects on interfacing trades. Some parts of the work may have to be deferred while awaiting final decisions and ultimate approvals of proposed changes. In some cases the proposed changes, after careful consideration, are cancelled, and the deferred work then becomes critical to the time schedule.
Often, controversy develops among owner, architect, contractor, subcontractors, material suppliers, and separate contractors in respect to financial responsibility for changes that had to be made as well as their detrimental time and cost consequences.
Anything that can be done to lessen the volume of changes or to simplify procedures for their administration will be a valuable advancement in efficient and economic construction. Owner’s Right to Make Changes Neither party has an inherent right to change any of the terms and conditions of a validly executed contract unless the contract itself contains provisions that specifically allows for changes. A construction contract would be impractical if it did not allow the owner to make changes in certain circumstances during the course of construction. Thus, construction contracts generally contain a change order procedure.
This article is based on the procedures set out in the AIA standard form contracts for architectural services and construction, including the AIA general conditions. (Note 1)
How Changes Become Necessary
Owners need to change their original program when there are unanticipated changes in their thinking, changes in their economics, or changes in their circumstances. It would be inadvisable, improvident, and inflexible to continue with all aspects of the proposed construction if it is physically possible and economically feasible to adjust the program to the changed conditions.
Contractors discover physical or economic situations, usually unanticipated, that would make it imprudent or impossible to follow the contract documents. So, they make suggestions for changing the contract requirements. They also offer recommendations in the interest of value engineering applications.
Architects find it necessary to recommend changes in the contract documents in response to unforeseen situations and to improve the project. If the architect becomes aware of errors in the contract documents, it would be unconscionable not to expose them for correction.
Some other sources of necessary changes are unexpected soil conditions, weather damage such as wind and rain, natural disasters such as earthquake, labor and material shortages, and fire and explosion. The construction contract allocates most of these risks between the owner and contractor and some are covered by insurance.
Originating A Change Order
A handy AIA form for starting the change order process is the Work Changes Proposal Request. (Note 2) It is a one page form that identifies the change and all the parties involved in the contract. The form is prepared by the architect and is directed to the contractor. It is essentially a request for a price and time proposal for carrying out the proposed change. A copy of it should be sent to all parties who are involved and a record kept of all recipients. There is no real necessity to use the AIA form as long as all the necessary information is included in the letter or office form used.
The Proposal Request is not an authorization to do the work. It is not a change order. It is only a request for information which will be needed by the owner and architect in making the decision to go ahead with the change, modify it, or to cancel it.
The form includes a time limit for the contractor’s submission of the proposal or for a commitment of the date on which the completed Proposal Request will be submitted.
The Proposal Request needs to be signed only by the architect. Each Proposal Request should be serially numbered and recorded in a Change Order Log.
The Change Order
If the Proposal Request is acceptable to the owner, or becomes acceptable after adjustment of the scope, negotiation of the price and/or the contract time, then the Change Order can be prepared. AIA’s Change Order form (Note 3) covers all the necessary details. After execution by the owner and contractor, and countersigned by the architect, it becomes a modification of the construction contract. It authorizes the contractor to do the work and obligates the owner to pay for it. Any additional drawings and/or specifications needed to explain the change should be attached to the change order.
Change in Contract Price. Any change, up or down, in the contract price or unit prices should be agreed and entered into the change order form.
Change in Contract Time. Any change, up or down, in the contract time should be agreed and entered into the change order form. If there is no change in time then the change order should state, “No change in Contract Time” or Zero (0) Days. It is a serious mistake to leave the time blank, as it will often result in a dispute. The owner will assume that the blank means no change in time, while the contractor reasons that the blank means it will be discussed later.
When there is to be a change in contract time only but with no change in contract price, it is good practice to handle it as a change order complete with a change order form and signatures of the owner and contractor. The form should clearly state the change in contract time and “contract price unchanged.” Pricing and Billing of Change Orders
Much of the dissatisfaction with change orders is centered around the cost. Owners often assume that contractors charge inordinately large amounts for change order work. The sad fact is that work will cost more when it is not done in sequence with the original work. Also, change order work is cost-analyzed more carefully than work done under the original overall bid. Each change order will be charged with discrete amounts accounted for under each heading of labor, material, delivery, subcontracts, taxes, coordination, supervision, permits, testing, insurance, bond, overhead, and profit.
Change order work will often cost 10 to 15 percent more than if it had been included in the original bid. This is for several reasons:
1. Lack of a competitive environment.
2. Inability to easily fit the change into the existing schedule.
3. The inordinate amount of paperwork and distraction experienced by the contractor.
Deductive Change Orders Unit prices for adding many materials and operations will be different from those for deducting on account of the effect of associated fixed costs. It is quite common that unit prices for adding will be more than for deducting and higher for small quantities than for large quantities. For similar reasons, it is customary for contractors to attribute profit and overhead to additive but not deductive change orders.
Construction Change Directives
Some change orders, after preparation by the architect, are acceptable to the owner but not to the contractor. The contractor could be dissatisfied with the change in work, contract price, or time, or both. Such a change order will be signed by the owner and architect but not by the contractor. According to the AIA General Conditions, A201-1997, the contractor is obligated to go ahead with the work, with the price and time adjustments to be determined later by the architect utilizing guidelines set out in Article 7.3.
This type of change should be administered by means of a Construction Change Directive. (Note 4) At any time that the contractor later agrees to its terms or mutual agreement is obtained by adjustment of its terms, it is then deemed to be a change order. In the event that the contractor finds it impossible to accept the architect’s determination of changed cost and time, the contractor’s recourse is to mediation and arbitration. (A201, Art 4.3 and 4.4)Back to the top of the Page
Consent of Surety
On projects where the contractor is bonded, the architect should be alert to any conditions or situations that would give the surety a legal excuse to evade bond coverage. Bonding companies base their bond premium on the contract price, which they use as a measure of their financial loss exposure. When the accumulation of change orders changes the surety’s financial exposure to a significant degree, the bonding company might claim to be exonerated from further obligation. Under usual bond language, the owner is allowed to make changes but might have to pay additional bond premium to cover the value of changes. The simple way of keeping the bonding company informed is to send it a copy of all executed change orders. Architect’s Minor Changes The architect is entitled to make minor changes in the work not involving adjustments in the contract price or time. (Note 5) Such changes must be consistent with the contract documents and must be in writing. A change order could be issued and the owner’s and contractor’s signatures would preclude either from asserting later claims concerning the scope of the change, cost, or time. Some Improper Ways to Order Changes
A change in the contract can only be made by an agreement between the owner and contractor. Thus, architects must be careful when carrying out their contract administration duties that they do not purposely or inadvertently create the erroneous impression that they are ordering or authorizing changes in the contract. Some ordinary situations are fraught with this possible hazard:
1. In the reviewing, correcting, and approving of shop drawings, any change in the contract requirements should be identified and processed as a change order. The architect is not empowered by the contract to require anything not in the contract documents.
2. In preparing field reports of site visitations, avoid ordering work that is not clearly required by the contract documents. New requirements can only be ordered by a change order agreed by owner and contractor. (Note 6)
3. In issuing supplemental instructions, avoid changing the contract requirements. (Note 7)
4. Issuance of Changed Drawings or Specifications. Any changes that elaborate on the original requirements or add new requirements should be clearly identified so change orders may be priced, prepared, and agreed by owner and contractor.
5. Casual conversations by owner or architect at the jobsite should be carefully monitored so the contractor or site superintendent is not left with the erroneous concept that contract changes have been sanctioned.
The Change Order Log
The architect is now required to maintain records relative to changes in the work. This is a new requirement in the latest edition of AIA’s owner-architect agreement. (Note 8)
The AIA has not as yet devised a form of change order log but it should not be too difficult to invent a schedule in which to record dates and status of all change order requests, proposals, reviews, and approvals as the documentation is sent to and received from owner, contractor, consulting engineers, and others involved in the process. The main objectives will be to know the status of the contract sum and time at all times as well as the status of all change orders in process. Informal Changes
Some changes will occasionally occur outside the formal process. These are highly susceptible to dissatisfaction and controversy and should be avoided if at all possible.
Contractor’s Unauthorized Changes normally become known only after discovery by the owner or architect. These would be usually in the form of covert deviations from the contract documents. Contractors sometimes solve practical problems without consultation with the owner or architect. Sometimes the changes are for the purpose of reducing the production cost and increasing profit. Experienced contractors are well aware that there is little or no chance of getting paid for this type of change and are fortunate if the work, after discovery, is allowed to remain. Sometimes, after negotiation, the contractor will be required to offer a credit in lieu of removal and replacement, at the option of the owner. (Note 9)
Unwritten Change Orders. During construction some owners visiting the jobsite might enter into informal discussions with the contractor or job superintendent. The owner might ask the contractor to move a door opening, change a window, add an electrical outlet, or raise a ceiling. The contractor assents, assuming that the paperwork will catch up in due course of time. The owner is pleased with the ease of dealing with the contractor but fails to reach an agreement on costs and time. Later, after the changed work is carried out, the contractor quotes the cost and asks for additional time, say three days. At this point the owner expresses the view that the work would not have been authorized at this price and definitely would not be approved if the project time must be extended three days. Some owners in this situation would refuse to pay for the work, since there is no written change order as required by the contract. Most judges and arbitrators would not enforce this provision, however, if the extra work was done with the owner’s knowledge and consent.
1. General Conditions of the Contract for Construction, AIA Document A201-1997.
2. Work Changes Proposal Request, AIA Document G709-2001.
3. Change Order, AIA Document G701-2000.
4. Construction Change Directive, AIA Document G714-2001.
5. A201-1997, Subparagraph 7.4.1.
6. Field Report, AIA Document G711-1972.
7. Architect’s Supplemental Instructions, AIA Document G710-1992.
8. Standard Form of Agreement Between Owner and Architect With Standard Form of Architect’s Services, AIA Document B141-1997, Subparagraph 220.127.116.11.
9. A201-1997, Subparagraph 12.3.1.
Additional Uses For
The Change Order Process
The change order process can conveniently be used to formalize all adjustments in the contract work, cost, or time, such as:
• Owner's carry out of contractor's work (A201m 2.4.1)
• Resolution and accounting of contract allowances (A201, 18.104.22.168)
• Cost differences resulting from owner's rejection of subcontractors (A201, 5.2.3)
• Cost of property insurance ordered by contractor and charged to owner (A201, 22.214.171.124)
• Cost of insurance charged to contractor (A201, 11.4.4)
• Cost of replacing insured damaged property (A201, 11.4.9)
• Cost of uncovering and replacing work which was not required to be inspected and which after uncovering proved to be in accordance with the contract documents (A201, 12.1.2)
• Reconciliation of contractor's requests for additional time due to conditions determined by the architect to be justified for delay (A201, 8.3.1)
Owner's acceptance of uncovered defective or non-conforming work, with or without a credit, should be formalized with a change order. (A201, 12.3.1)
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