Last month we looked at the Progress Payments process required for California public works construction. This month the discussion is about Change Orders and the logistics of getting paid for extra work. The subject of change orders is always one of controversy due to the conflicting attitudes that prevail by the contract participants. From an Owners perspective, change orders are obviously never wanted. From the A/E firm’s perspective, a Request for Information (RFI) that results in a change order is dreaded as it makes their design appear deficient. And finally from a Contractor’s perspective, a change order is not always a good thing as it disrupts the original schedule and requires additional effort to implement the change into the course of the work. And CONTRARY to popular belief, change orders do not always result in increased profits for the contractor, especially in public works contracts.
Within the set of contract documents, the specifications will contain a section that details specifically the handling of change orders. For public works construction contracts, those provisions always cover every aspect of the process from notification of a pending request for additional compensation, to pricing and implementation of the change order and/or the claims process.
Since every PW construction contract is worded so that liability and risk are the responsibility of the contractor, this article is written from the contractor’s perspective.
Change Orders are usually generated by one or more of the following:
1. A legitimate request by the owner for additional work (a change in the Scope of Work)
2. Hidden conditions that weren’t apparent at bid time (quite often in remodels)
3. Value Engineering (the contractor offers a better way to build something)
4. Resolution of discrepancies in the design (RFI points out design deficiency)
CHANGE ORDER POINTS of CONCERN
a. Find out at startup meeting who is authorized to issue any changes to the work
b. Pricing: There are basically two rules to follow:
a. Price the work fairly and realistically. Inflating costs will destroy your credibility
b. Follow the markup allowances to the penny as they are always defined in the specs.
c. Proceeding Under Protest: Unfortunately in public works contracts an all too common occurrence is the issue of disputed work. The most common scenario is the contractor submits an RFI saying “the plans and specs do not cover this situation and in order to proceed we will have to do the following and incur added expense which we do not believe is in our scope”.
If the A/E firm or the CM deny your claim, then you have entered a Disputed Work Claim scenario and once again, the specifications cover that situation as well. The following should be your next course of action.
These are the most important steps to follow:
1. Identify – As soon as the problem in the field becomes apparent, review the plans and specs again to be sure it is not already covered in the contract documents. Nothing will kill your credibility faster than submitting a COR and finding out the scope IS covered in the documents. Once you are confident it is a legitimate issue, then proceed to the next step.
2. Notify – Every contract will have a deadline date by which the contractor must notify the owner of a pending request for a change order. If that date is not met, then the request is automatically denied without recourse. This step will start with an RFI that asks the question.
3. Quantify – When you ask for a COR, you must describe in detail what you claim is the extra scope of work. This includes labor, equipment and materials and time necessary (as it impacts the schedule), you feel must be expended to accomplish the work. Bear in mind that any such claim will be scrutinized to the max. So inflating the cost, or providing incorrect or insufficient backup data will lessen the chance of it being approved. ANY Change Order Request (COR) must be fully documented, period! In other words, photos, daily diaries, supplemental drawings, emails, calculations, subcontractor costs, etc. must accompany the COR in order to validate your claim. Backup data submitted after the fact is always harder to justify.
4. Implement – Once all of the above are in place, you proceed with the disputed work and document every cost via a Daily Extra Work Report. This serves the purpose of keeping a daily log of the expenses incurred so they are not an issue of concern later.
5. Resolution – You must follow the process and insist on resolution by the owner’s rep. An all too common occurrence is an owner and/or the CM taking months to arrive at a decision on whether your claim has merit or should be denied. During that time period, both the GC and the subs will not be compensated for any costs associated with the disputed work.
It should be noted here that contrary to another myth, refusing to proceed with disputed work is NOT an option in public works. Doing so will put you into a breach of contract situation. In public works contracts any disputed change order work is resolved after the fact and the contractor either gets paid or not, depending on the decision of the CM, or arbitrator or whomever has final authority to decide. The worst case scenario is of course resorting to litigation.
Change Orders are usually never a pleasant subject, but in the real world they are almost always a fact of life. It is a very rare project that proceeds without them. As a contractor, you must be prepared and know your plans and specs to the maximum degree possible.
By: Ed Duarte, Public Works/ Construction Specialist
DBE Supportive Services