Change Orders in Construction Projects

Prepared by Özgenur Baştuğ

Abstract

Construction projects are complex long-term projects with dynamic nature. They bring together multiple parties within different disciplines and require them to work coherently in a designated area to construct a structure with a constrained budget within a specified time. Most of the construction projects are incomplete in terms of design, procurement, contracting prior to the start of the construction due to their complex nature. Project properties are determined and finalized during the construction of the project and changes are exerted within the process.

Although the ultimate goal during the planning phase would be to minimize the changes and unexpected situations, it is almost impossible to plan a construction project without subjecting it to change during the construction phase. While these changes may stem from so many different reasons like material quality, change in design, time considerations, etc. they can be minimized as much as possible with careful planning and execution.

Any deviation from the work scope agreed in the contract is considered as a change in a project. A change order (also called variation order) is a formal document issued either by the contractor or the client for changes in the project such as changes in the project scope, design, completion date, contract price, etc.

By keeping in mind that changes will be needed at some point of the project, these possible changes must be foreseen before the start of the construction phase. To be able to protect the project from the unforeseen extra costs and disputes with the contractors, change order format should be prepared carefully within the planning phase of the construction. Change orders must be clear and detailed without leaving any important information related to description of the work, pricing and timing missing.

Change Order: Definition & Content

Any deviation from the work scope agreed in the contract is considered as a change in a project.

A change order is a written agreement to modify, add to, or otherwise alter the work from that set forth in the contract. In general, change orders involve change in scope, time and material for additional work, extra costs for additional working hours. Due to dynamic and complex structure of the construction industry changes in the construction projects is inevitable and change orders are utilized in all types of projects.

Changes are referred as “variations” in the FIDIC Red Book. According to FIDIC Red Book, each variation may include :

• Changes to the quantities of any item of work included in the Contract.
• Changes due to quality and other characteristics of any item of work.
• Changes to the levels, positions and/or dimensions of any part of the works.
• Omission of any work unless it is to be carried out by others.
• Any additional work, plant, materials or services necessary for the permanent works including any associated tests on completion, boreholes and other testing and exploratory work.
• Changes to the sequence or timing of the execution of the works.

It must be noted that the changes may be initiated any time before the take over certificate of the works is issued, and the change orders are formed either by the request of the client/owner or with the recommendation for a change from the contractor.

Content of a Change Order

Change Order Form Example

Since change orders are many times the reason for a conflict between the agreed parties a change order must be clear, it should involve no discrepancies. It should involve the work to be done, where and when the work should be executed, the payment method and time, changes in the duration, etc. Therefore, preparation stage of the change order should be handled very carefully. Change orders should particularly involve below mentioned information in order not to be the source of conflict/dispute later on between the agreeing parties  :

• Identification of change order
• Description of change order
• Reason for change
• Change in contract price
• Change in unit prices (if applicable)
• Change to contract time
• Statement that secondary impacts are included
• Approvals by owner’s and contractor’s representatives

Causes of Change Orders

The potential causes of the change orders and the agents who are causing these orders are investigated by many researchers. As a conclusion of the research conducted, four main agents were suggested for the change orders. These are clients, consultants, contractors, and some external agents. In these agents, it must be noted that clients and consultants are the main drivers for the change orders.

Potential reasons of the change orders and related agents who are causing these changes can be summarized as in the figure below:

According to research conducted (by , , , ,, ) ;

• The main drivers of the change orders are the clients which are followed by the consultants.
• Change orders are mainly issued for the additional works.
• The most common causes of the change orders are:

• Change in plans: Caused by the changes made by clients. They may happen due to insufficient involvement of the client in the design phase, lack of understanding of the client in terms of design or merely a change of mind or requirements.

• Change in scope: Occurs due to inadequate planning in the project definition phase.

• Financial problems: Client may undergo some financial problems leading to some budget constraints or may simply seek to make some savings. This problem may lead to change in schedule, specifications and the quality of the construction.

• Conflicting contract documents: Contract documents must be clear, there should be no room for misinterpretation. Details in the contract must be sufficient. If a contract fails to those, then it results in misinterpretation of the actual requirement of a Project These misinterpretations may later on result in change orders, conflicts, delays in the project, etc.

• Impediment in prompt decision making process: It is highly important for a project that the decisions should be taken as fast as possible in order to avoid extra costs and delays. Therefore, it is also an important factor for the success of the projects. The lack of this results in change orders during the life cycle of the project.

• Change in design: Changes in design are quite common in the fast track projects where the construction phase starts before the completion of the design. While the changes in the design phase, or the initial part of the construction phase do not have much adverse effects, changes in the later phases may cause severe impacts on the project.

Preparation of Change Orders

Preparation Process of the Change Orders

Change Order Procedure Flowchart (Own Chart Modified from )

Change orders can be either requested by the contractor or issued by the client. Processes followed in these cases slightly differ from each other.

If the change order is requested by the contractor:

1. Contractor prepares a change order request form and submits to the client.
2. Change order request is reviewed and evaluated by the client and if it found necessary the request is approved.
3. After the approval of the request for change order, proposed document is discussed between the client and the contractor including the effect of the changes on time and cost.
4. Upon agreement, final version of the signed change order including the scheduling and cost breakdown is submitted to the client by the contractor.
5. Client accepts and signs the change order and the work described in the change order may start.

If the change order is issued by the client:

1. The need for a change is determined by the client and the change order proposal is initiated.
2. Initiator change order is prepared and submitted to the contractor.
3. Proposed change order is evaluated by the contractor.
4. After the review of the contractor, proposed document is discussed between the client and the contractor including the effect of the changes on time and cost.
5. Upon agreement, final version of the signed change order including the scheduling and cost breakdown is submitted to the client by the contractor.
6. Client accepts and signs the change order and the work described in the change order may start.

It must be noted that if by any reason the change is deemed unnecessary for the client, then the client has the right to deny the change order.

Important Points During the Preparation of Change Orders

While preparing the change orders, the changed work should be considered in detail. According to Levy , before the submission, change orders should be complete in every aspect. There should be no need for any further explanation and the change order should cause no question marks regarding scope, cost or schedule. Below mentioned items should be considered for a detailed and complete change order :

• The reasons for the change should be explained in detail and there should be sufficient documentation attached to the change order to describe the changed condition. If necessary, copies of drawings, specifications can be included to prove and back up the need for the change.
• Steps required to implement the change should be explained in detail.
• Any impact on the target completion date or any other schedule impact on the completion of work should be detailed in the change order. A detailed scheduled should be submitted within the document.
• Any permits that might be required and the estimated time for obtaining these permits should be indicated.
• Any impact on the direct and indirect costs should be considered and the detailed cost breakdown should be included in the change order.

Negotiation of Change Orders

Problems Encountered During Negotiation of Change Orders (Own Fgure Modified from )

Before a change order is issued, the terms on the change order should be reviewed in detail by both parties and agreed on. In many cases, meetings are held for the negotiation of the terms in the change orders. There are problems encountered while negotiating. The most common ones are the determination of the cost, impact of the change order on the schedule and required time extension. These are discussed in detail until an agreement is achieved by both parties. The negotiation process, is one of the problems with the change orders since they extend the time for the approval of the order, require extra work for both parties and may cause dispute between client and the contractor.

Cost determination is the most common problem encountered during the negotiation since it directly affects the project cost. Direct and indirect costs, revised rates, additional preliminaries are discussed and often may lead to disagreement between the two parties.

Determination of the time required is another most common problem encountered during the negotiation. There may be disagreement between the parties regarding the duration of the work indicated in the change order and its impact on the overall schedule of the project.

Duration of the approval process may be one of the issues in the negotiation process. Change orders are reviewed and discussed in detail. It might take time to come to an agreement between the two parties, and also after the agreement it might take a while the change order to be approved. This causes problems for the contractors and may delay the works.

Impacts of Change Orders

Construction projects involve complex operations which cannot be accurately determined in advance. Change orders can be considered as escape points from the contract when the changes are required to the contract. These changes which are executed via change orders, may satisfy the needs of the client for the overall project, correct the problems faced during the construction phase and to be able to complete the project with maximum efficiency. On the other hand, change orders may cause significant problems throughout the course of the project if they are not handled carefully.

Changes can be divided into two as beneficial and detrimental changes:

Beneficial Changes

Beneficial changes are the type of changes which are good for the project. They provide positive impact to the project; therefore, they are welcomed by the management of the project. These impacts can be:

• Reduction in cost,
• Reduction in time,
• Improvement of the quality standards,
• Omission of the errors,
• Reduction in the degree of difficulty in the project.

Detrimental Changes

Detrimental changes are the type of changes that reduce owner value and have a negative impact on a project. They should be minimized as much as possible to avoid the problems. It must be also noted that the detrimental changes may not seem detrimental in the first place but due to their timing they might be considered as detrimental. They may have to be applied due to lack of any other alternative available at that moment of the project. Potential impacts of the detrimental changes can be:

• Cost overruns,
• Time overruns,
• Disputes between the parties of the contract,
• Adverse effect on the professional reputation of one or more parties,
• Additional specialist equipment/personnel,
• Additional health & safety equipment/measure,
• Degradation of health & safety,
• Degradation of quality.

As a common conclusion of the research made on the impacts of the change order, it has been found that the most common impact of the change orders is the cost overrun followed by time overrun:

Cost Overrun

Change orders are generally prepared for the additional works; therefore, they will cause the increase in the cost due to:

• Time and material charges,
• Overheads,
• Rework and stand by time,
• Loss of productivity,
• Change in cash flow due to inflation.

Time Overrun

Change orders might affect the project completion time adversely due to:

• Time spent during the preparation, negotiation and approval of the change order,
• Extra time needed for the additional works in the change order,
• Time spent due to loss of productivity,
• Loss of time due to delayed material delivery for the extra works.

Conclusion

A change order is a written agreement to change the work from that agreed in the contract. In general, change orders may involve change in scope, time, and material. They may be issued for addition or omission of work, change in plans, design, schedule, or scope. Due to dynamic and complex structure of the construction industry it is almost impossible to complete a project without issuing a change order.

Change orders may be used as powerful tools to modify the project according to the needs of the client and to maximize the efficiency of the project. However, if the change orders are not prepared carefully and in detail, then they might cause many issues between the involved parties and in the end may cause increase in the project cost and delays in the project completion time.

Annotated Bibliography

The following list provides resources for further research and study on change orders:

• Edward R. Fisk, Wayne D. Reynolds (1997): Construction Project Administration

Construction Project Administration can be used as a guide for the successful management of a construction project from design phase to close out. It has a complete chapter dedicated to change orders which is used and referenced in this page quite a lot. The book is very useful if one wants to learn more about specific aspects of the construction management since each subject is discussed in detail with examples.

• Sidney M. Levy (2000): Project Management in Construction

Project Management in Construction aims to provide relevant information about each phase of the construction projects for the managers and general contractors. It has a chapter for the change orders in which the author describes many aspects of the change orders from content of the change orders to pitfalls to avoid during the preparation of the change orders.

• International Federation of Consulting Engineers. (1999): FIDIC Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer.

Also known as FIDIC Red Book, it contains the conditions of contract for construction. There is a section dedicated to the variations in which the content of the variation orders and the variation process are described.