Dispute Avoidance Through Improved Change Order Management
By Travis C. Wingo, Construction Executive
Contractors and owners involved in a construction project understand that the project will inevitably experience changes that will impact the scope, cost or schedule. An effective change order management system can be the difference between a successful project and a delayed and over-budget project that ends up in a dispute.
Projects where a third-party construction consulting firm is engaged to assist with claims typically involve elements of ineffective change order management. This article addresses several key factors in effective change order management, as follows:
- understand key contractual requirements;
- plan and prepare for project changes;
- identify project changes;
- notify and substantiate project changes;
- designate a change order representative; and
- negotiate and finalize change orders in timely manner.
UNDERSTAND KEY CONTRACTUAL REQUIREMENTS
Although many contractors and owners have internal change order management systems in place, the contract is the controlling document that mandates the proper change order processes. Each project is unique and may have different contractual requirements for dealing with project changes. Therefore, it is imperative that the project team is knowledgeable about the contractual requirements concerning change order management processes. Some important contractual provisions that need to be identified concerning change order management are the following:
- structure and terminology of project change orders;
- change order notice timing requirements;
- change order notice delivery procedures ;
- information required to support change orders; and
- acceptable pricing and schedule impact, if any, for the changed work.
The elements listed above should all be spelled out very clearly in a provision in the contract regarding project changes. In an effort to mitigate any unnecessary delays or additional costs, each party should fully understand and comply with the change management requirements specified by the contract prior to beginning the changed work. Unresolved and unapproved change order requests almost always disrupt the progress of a project and complicate the success of a project for both the contractor and owner.
In addition to the parties having a clear understanding of the contractual requirements, it is important that the parties consistently adhere to the change order provisions provided in the contract. Failure to do so may set a precedent for handling change-related situations outside of the contract and result in further difficulties if the issues are escalated at the end of a project. An early and comprehensive review of the contractual provision regarding the change management process is a highly advisable practice when beginning a new project. This review may result in further dialogue between the parties to clarify any gray areas and provide each party with a better understanding of concerns, which, if left unattended, may result in unnecessary delays and costs as the project progresses.
PLAN AND PREPARE FOR PROJECT CHANGES
When managing any construction project, being proactive rather than reactive is advisable. Planning and preparing for project changes tends to be time well spent. After a comprehensive review of the contractual provisions regarding the change management processes, the project team should meet to discuss and review the required processes. At some point in the project, the change management processes will be utilized by both parties. Therefore, having a project team that is knowledgeable about the contractual requirements will produce a more effective and efficient change order process and will reduce the probability of disputes.
In fact, many sophisticated, multi-national contractors require their project teams to regularly attend meetings on the change order management process specific to each project. While it seems that a typical project may already have too many meetings, spending time preparing for project changes is time well spent for avoiding costly disputes.
IDENTIFY PROJECT CHANGES
Often, identifying a project change is the most challenging part of change management. Some changes may initially appear to be minor in nature or subtle at first glance, but result in significant cost increases and delays that are not apparent until much later in the project. For the purpose of this article, a change can be defined as any anticipated or actual deviation from the contract relative to the scope of work that has a cost, schedule or performance impact. Changes may be caused by any or all of the following:
- modification of a contractor’s planned work methodology;
- late and defective material supply;
- late and insufficient engineering and construction drawings;
- work stoppage or disruption;
- schedule acceleration or delays;
- site congestion or trade interference;
- out-of-sequence work;
- regulatory compliance, risk or health and safety requirements; and
- changes in plant performance requirements.
Some changes may be identified during construction by work crews, rather than by the upper levels of supervision and project management. As such, it is important that all key project team leaders, including superintendents and foremen, be familiar with the contractual scope of work. This knowledge will enable the project team to more quickly identify variances from the contract and alert the project team to begin properly documenting and managing the change.
NOTIFY AND SUBSTANTIATE PROJECT CHANGES
Timely notice and providing substantiation of changes is critical to ensuring an effective and efficient change management system. Preparing a comprehensive change order request that includes all relevant documentation, references to the proper contract clauses to demonstrate entitlement under the contract and support for any cost and schedule impact can be very time consuming and tedious.
However, investing the initial time up front to provide a quality change order request that concisely demonstrates the contractual change, cost and schedule impact helps prevent rejected change order requests. Rejected change order requests can result in significant delays and impact other outstanding work that is dependent upon the approval of a change order request.
Although it is important to invest the time required to provide a quality change order request, when a condition that deviates from the contract is identified, a notice indicating the change should be issued in a timely manner, even if the notice is preliminary with cost and schedule impacts to be determined. The comprehensive change order request, including proper substantiation, can be compiled and submitted after issuing the preliminary change notification. Maintaining quality contemporaneous records that demonstrate the impact of a change is critical to an effective and efficient change management system.
DESIGNATE A CHANGE ORDER REPRESENTATIVE
While this activity can be time consuming for already stretched resources, it is important to designate a change order representative from each party at the beginning of the project. This person should consistently monitor the project status and be aware of potential areas of change. The change order representative should be resident to the jobsite, or regularly visit, and keep in close contact with the project team. The change order representative should be the primary point of contact for each party when a potential change has been identified and documented.
The designation of a change order representative is beneficial for both parties. From the contractor’s perspective, having a person dedicated to identifying and handling changes may result in less unnoticed and undocumented project changes. From an owner’s prospective, a primary change order representative can ensure that the contractor consistently follows the change order management process specified by the contract. In addition, having a designated change order representative will build rapport between the parties and ensure a more effective and efficient change order management system.
NEGOTIATE AND FINALIZE CHANGE ORDERS IN A TIMELY MANNER
Both parties should strive to review, negotiate and finalize change order requests in a timely manner. Contracts typically require a signed change order before starting the subject work. Changes that are recognized earlier in a project, rather than later, are commonly less expensive. In general, change orders that remain unresolved only become more expensive over time. Both parties should plan regular meetings, such as on a monthly or quarterly basis, to review and finalize changes.
Although effective and efficient management of change does not guarantee a successful project, more often than not, projects that suffer from poor change management end up in costly disputes. Understanding that change will occur and being prepared to properly manage change can be the difference between a successful project and an over-budget and delayed project.
Reprinted from Construction Executive, a publication of Associated Builders and Contractors. Copyright 2018. All rights reserved.