For contractors, the normal instrument of change on a construction project is the “change order.” When entering into a contract to build or design/build a project, it is important that the contractor clearly understand the process for issuing change orders set forth in its contract, and the rights of the owner to order changes during the project that the contractor may not want, or may not want at that particular time. The contractor also needs to understand what its obligations are in responding to change orders, including whether it has to follow them before any change in price is agreed upon, and what methodology is going to be used in eventually determining how implementation of the change order will affect the contract price.
CHANGE ORDER DIRECTION
There are two basic types of directions that can be issued to the contractor through a change order: additive changes, which increase the scope of the contractor’s work, and deductive changes, which reduce it. Either type can have a dramatic impact on the contractor’s profit or loss on a project, depending on what specific work is added to or subtracted from the job, and how the contract price is adjusted to take them into account. A particular change order can also contain both types of directions, such as with substitutions of material, or totally revised plans for a portion of the project. How such multiple directions are combined, and how far into the project a change order is issued, can have a significant impact on the contractor’s overall cash flow, profitability, and risk on the project, especially if the work is on a tight time schedule, and the contract provides for liquidated damages.
Major additions to the work can unexpectedly stress a contractor’s financial and management resources, for example, even though they may present an opportunity for more profit on the job. If the contractor’s professional staff have not had the chance to plan and prepare for the added work, there is an increased risk of mistakes, since simply “adding more staff” is often not an option. It may also prove challenging to secure the necessary labor and materials, and subcontractor assistance, on short notice, and to arrange to have the added financial resources available to pay them. Then, once they are obtained, determining how and when the added resources should be deployed, so as to minimize disruption to the existing contract work, can also be difficult.
This is particularly a concern on large complex projects where all the impacts of an additive change on the overall project schedule cannot always be easily determined. If the design of the HVAC system in an industrial plant is altered by change order so as to increase the number of air handling units, for example, or to increase their capacity, the associated changes to the piping layouts in the facility may require a resequencing of much of the previously planned work, and the resequencing of that work could have a ripple effect on windows of time available for other work to be performed. Unless a sound and well-developed critical path analysis has been performed and kept up to date, and an experienced scheduler capable of using it made available to the contractor’s project staff to analyze the newly-ordered changes, it may be impossible to reliably determine all the areas of the project that those changes will affect, and to ensure that the contractor’s work in those areas, and/or the owner’s use of them during construction, is not disrupted more than necessary.
Similarly, if the original scope of a cable installation project is exclusively aerial work (e.g., stringing cable above ground on utility poles), and a change order is issued during construction requiring that substantial portions of the cable instead be installed in new underground conduits, that will require the contractor to assign or retain excavation subcontractors familiar with local “dig safe” procedures, as well as obtain different types of permits, licenses, and access rights. This may take more time than expected, depending on the availability of such subcontractors, and without careful planning such a change order may considerably disrupt the smooth, section-by-contiguous-section installation process that the contractor had originally planned to follow, and on which it may have even based its bid.
Deductive changes present a different set of challenges, but they still carry risks because they can significantly reduce the scope of work on a project after the contractor has already committed resources to it, and leave the contractor with less opportunity to make cost-effective use of whatever labor force it has assigned to the project. Depending on the nature of the work which is deleted, deductive changes can also deprive the contractor of a particularly profitable part of the project, which might have been a critical factor in the contractors’ overall bid calculation.
For all of these reasons, the contractor should try to ensure, as much as possible, that its contract provides it with an adequate opportunity to fully assess all the implications of a change order, and determine how the change will affect its costs, and its potential for a profit on the job, before being required to implement it. All too often, the form “changes” clause of a contract fails to provide that opportunity to the contractor, and instead simply compels it to proceed with the changed work, or to delete previously planned work, without providing adequate opportunity for review. Then, to compound the problem, certain forms of contract change order clauses require in advance that those price changes be calculated based on the new work’s added direct costs, without taking into account indirect costs and loss of the opportunity to make a profit through the use of the relevant resources elsewhere.
Where the contractor has the opportunity to negotiate revisions to the change order provisions in its contract at the outset of a project, it should not pass up that opportunity, as those revisions could make a huge difference to the amount of money it makes on additive change order work, and the amount it loses as a result of deductive change orders. Change orders may be inevitable, but managing them effectively is not. It requires foresight and planning long before they are ever issued.
About the Author:
Robert J. Kaler, Esq. is a partner with Holland & Knight LLP (www.hklaw.com), an international law firm of more than 1,200 lawyers and professionals in 27 offices throughout the world. He also is a member of the Construction Law and Litigation Committee of the International Association of Defense Counsel. He is listed in Best Lawyers in America in the area of Construction Law, and is ranked among the Chambers USA – Leaders in Their Field in the area of General Commercial Litigation. He represents corporate clients in complex engineering and construction matters, including both arbitrations and jury trials, all over the United States and abroad. He can be reached at firstname.lastname@example.org.
Modern Contractor Solutions, December 2017
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