2008 AACE INTERNATIONAL TRANSACTIONS

EST.02
Reviewing Change Orders 101
Mr. Brian S. Clare, CCC

here is that dreaded word Change Order. As one of my colleagues recently stated, Change Orders suck.
During the building of the great pyramids, the builders surely ran into unforeseen changes to the original
design because of the weather, famine, wars, material shortages, and user changes (the Pharaoh).

A change order is defined as a written agreement between the owner, contractor and architect upon a change in
the work and any appropriate adjustment in the contract sum or the contract time [1].
Unfortunately, no project is without its share of changes or change orders, ranging from the home builder to the
mega billion dollar projects. How change orders are handled, however, can affect the outcome and financial
stability of the project. The sooner change orders are dealt with and resolved, the better chance of project success.
The contractor is also entitled to fair and reasonable compensation for the extra work that was performed.
The purpose of this paper is to present a methodology of how to review a change order, that any professional
layman can follow and use.
DETERMINATION OF MERIT
One of first line of defenses for change order review is the litmus test to see if the change order is definitely a
change in the scope of work. Comparing the change order directly to the contract documents (contract, drawings and
specifications) will help in the determination if the alleged change order has merit.
The following type questions should be asked:

Is it already defined in the drawings or specifications, or is the contractor is trying to pull a fast one?
Is it a gray area that is conflicting with contract documents?
Maybe the onsite inspector or fire marshal is advising changes for building or safety code compliance.
Depending on size of change order, is there a take off included? And,
Are there differing site conditions which may have been encountered?
There are numerous reasons for a change order, but are they legitimate?

The architect, engineer and onsite construction management staff can also offer a second opinion on the merit
issue. Their input can be easily obtained at the weekly meeting, or in a specific meeting set-up solely for the change
orders.
Proper notification by the contractor will also help in the entitlement of the change order. Notice requirements
typically are found not only in the changes clause of the contract but may also be found in other clauses contained in
the contract document. [2] This gives the owner options and allows time in how to react to the alleged change
order. Notification should be immediate, especially if it is affecting the critical path of the project. It may also be
formally required by the owner or government agency that the contractor is working for.
Options:

The owner can then decide if they want to track the proposed work on a time and material basis. That way the
owner can have more input to work around situations which will lesson the impact on operations.
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The owner can choose to get a lump sum price from the contractor before proceeding.

All these options allow the owner to make good sound business decisions and minimize the impact time of the
change order. In proving and pricing construction claims, it states, The requirement for notification is for the
benefit of the owner and is to allow the owner the opportunity to correct and/or accommodate a change in the most
effective manner. [3]
As an example of a notification time frame, this author has seen a contract where the first written notification
was to be within 10 days from the first time the change was encountered or determined. However, when it involved
a possible change in time or excusable delay to the critical path of the project, because of neglect of the owner or
architect, this author has also seen a contract with a provision for a 24 hour written notice. In return, the owner
should also provide a response back to the contractor in a reasonable timeframe, depending on its urgency.
Notification requirements should become part of the contract and change order procedure. Without them in
place, the contractor could submit a lot of after the fact change orders.
TYPES OF CHANGE ORDERS AND COST PROPOSALS
Once a change is known, the legal instruments commonly used to initiate scope changes are the change order,
letter or field directive. [3] These legal instruments are usually issued from the Architect or Engineer in the form of
a Bulletin or Change Order Directive to the contractor as a result of a Request for Information (RFI) or from direct
contact with the contractor. In return, the contractor will provide the owner with a Cost Proposal, which usually
includes a Rough Order of Magnitude (ROM) Estimate. A lot of times these costs are based on input from its
subcontractor and estimating team. Sometimes a Change Order Proposal is referred to as a PCO (Potential Change
Order) or a COR (Change Order Request), depending on the organization you are dealing with. There maybe formal
Change Order Forms for the contractor to use in filling out and presenting its costs, such as the AIA G701 Forms
(Architectural Institute of America) or specific forms developed or specified by the owner or government agency.
In Proving and Pricing Construction Claims it defines, A directed change is typically a formal change order
issued by the owner or its authorized representative. [2]. This is the formal kind of change that the owner or
architect is aware of that changes the scope of the contract. It also states, A constructive change is defined as any
conduct by an owner or its representative that is not a formal change order but which has the effect of requiring the
contractor to perform work different from that prescribed by the original terms of the contract. [2]
Typical types of change orders and cost proposals include the following:

Lump Sum Change Orders The contractor provides a lump sum price prior to performing the work. The risk
is usually on the contractor, as they may do it for less or more of the actual cost. The detail documentation may
still include a breakdown of labor, material, and equipment cost. Vendor quotes may also be included.
Time and Material The contractor proceeds with the work and records his time, material and equipment
costs on a daily report or some kind of a daily tally sheet which is then verified and signed by the owner. The
danger of the time and material change order is when the work is performed, it needs to be verified and signed
off by the owner, or its representative on a daily basis. The biggest disagreements come when this task is not
performed and the owner believes he is being taken advantage of. Another school of thought includes the idea
that the contractor may increase his crew intentionally or not worry about its productivity, since his fee is based
on a percentage mark-up f the actual cost.
Contract Time Extension Requests This is almost a separate subject and paper in its self. However, when a
change order affects contract time, the procedure is to develop a fragment or time line of events or activities for
the scope of the change order, and then to insert it into the current approved monthly CPM (critical path)
schedule to determine if it affects the critical path of the project and pushes the end date out.
Unilateral When no agreement in time or price is derived from the negotiation of a change order, it is called
a unilateral change order. [3] The owner then issues this change order unilaterally, and the contractor can then
accept it or contest it.

There can also be variations of these types of change order proposals, where there is a not-to-exceed amount set
as a limit, and further authorization is needed in order to proceed further.

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The contractor may reserve its rights to claim for additional costs which they may not be able to itemize, such
as productivity losses and lost overhead of having its staff out on the project longer. A lot of contractors have this
sort of contract language in the boiler plate of their change order forms. From the contractor side, they always want
to keep their options open, as additional costs may not have been observed and accumulated until after the change
work has been performed and completed. As the owner or its representative, you want to get final signoff of the
change order without the reservation of rights, so that you can close the loop and the contractor cannot come back at
a later date to claim additional costs. Thats not to say that the contractor is not entitled to something fair, they just
need to put the costs into their original change order proposal estimate.
REVIEWING THE CHANGE ORDER PROPOSAL
Do Not Procrastinate
Now that the change order proposal is in your court, its time to review it in a reasonable time frame. owners can
get reputations for sitting on or procrastinating on the review of change orders, and just blindly rejecting them on
face value alone. This could affect the owner in the market place when it bids another project, where the contractor
might mark up the original estimate to compensate for the unreasonable treatment it anticipates from the owner.
The contractor may also refuse to bid anymore work from that owner. There is nothing to be gained from being
totally unreasonable in the review of a change order.
On the flip side, I have observed that a contractor had blatantly asked for money he did not deserve in front of a
dispute review board. When they asked him why he even requested the change order, he stated If you dont ask,
you dont get. Other contractors develop reputations as Change Order Artists, especially in the public sector,
where they bid low to get the job and make it up in change orders. This is also pointed out in the Contract
Management Handbook, For the contractor who has made a bad bid, there is an irresistible urge to look for extras
in an effort to salvage at least some of his disappearing profit. [4]
Trust and Respect
This is where trust, mutual respect and a good working relationship between the contractor and owner can pay
off. Sometimes it may take several projects, working with the same project team where this trust and respect are
earned and developed. Partnering sessions can also help with establishing a good working relationship. However, an
inspector general report of INDOT (Indiana Department of Transportation) change orders found that project
personnel and contractors that often work in the same area year after year and developed close relationships,
sometimes a contractor and project engineer will meet prior to the bidding of a contract and drive the proposed
work area, discussing what items might be changed from the contract which has not yet been bid. This further
illustrates the collusion that may result. [5] There are certain ethics that have to maintain along with a certain
distance, along with not accepting gifts or favors from the contractor. But that doesnt mean that you cant be fair, as
long as everyone receives the same treatment.
Communication
Communication is essential to clear up any missing information, loose ends. In an article entitled Change
Orders Your Right and Your Headache, it advises contractors, As a small, but important courtesy, always call
your client personally before sending over a change order. This will keep your customer from being surprised and
caught flat footed.
Time Savers and Streamlining the Process
Some time savers for the review time include prior agreed upon labor, material, equipment, overhead and profit
rates to be used by the contractor. These agreed upon rates can become part of the signed agreement with the
contractor. Then you can focus on reviewing the worker-hours, quantities and scope of the change order that has to
be performed. Regular weekly meetings to keep track of change order progress also help to stop them from
accumulating and becoming overwhelming. A change order log can even be kept in a Microsoft Excel file, broken
down by categories and headings such as: approved, no merit/rejected, currently under review by owner or its
consultants, differed, additional information being required, and awaiting final signature. This log can also be kept
in the various project management software programs out there on the market such as Constructware, Prolog or
Expedition. By keeping the change order log up to date, both parties can easily track the progress of the change
order review process.
General Contractor Obligations
The general contractor also has a responsibility to review and run a sanity/merit check on its subcontractors
changes, so that it is not just a pass through to the owner This initial triage or review by the general contractor will
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also help save change order review time and weed out some of the un-valid ones. The general contractor can also
check for merit, reasonableness, agreed upon rates, and quantities and kick it back to the subcontractor if necessary
before it comes to the owner. In that same article entitled Change Orders Your Right and Your Headache, it
advises to contractors to Make sure you review subcontractor pricing to you for fairness. Do not simply pass along
the change order without confirming the cost. [6]
Proper Documentation
When reviewing the change order, it should have all the relevant documentation to prove its case. My litmus
test is to say that after a change order is approved, anyone should be able to pick it up and be able to track and
understand it, based on its easy to follow presentation format and back-up documentation to validate the costs. If
something happened to the original reviewer, the next person should be able to pick it up and understand the change
order package. A lot of review time can be lost by waiting for the additional documentation from the contractor.
This documentation may include e-mails, shop drawings, RFIs, construction schedules, correspondence, soils
reports, drawings and specifications, meeting minutes, consultant reports, IOR reports, certified payrolls,
instructional bulletins, and sketches.
Level of Detail to Review
The depth of review you go into is determined by your comfort level, gut feeling and eventual trust you develop
with that individual contractor.
You could initially test and sample the contractors detailed breakdown by doing the following:

Pick a group of line items and do a spot check using the resources listed below. Maybe after you have gone
through a few change orders in depth and detail, you see the pricing of the work is continually reasonable. In
some cases where the contractor is playing games, you might have to scrutinize everything. And,
It is best to keep your guard up and not to get too comfortable, as even the most honest people can make
mistakes. If you already know what the going prices are for the work, you can put together some quick working
crew and equipment rates and put together a quick ROM (rough order of magnitude) estimate to quickly test if
the contractor is in the ballpark.

When every change order has to be fully reviewed, the man-hours of labor and equipment use and the quantities of
materials can be reviewed by the following comparison methods:

Individual Takeoff Estimates and Comparison an independent take-off and pricing of the scope of work.
This can be done by an owners project staff, its consultants or architect.
Use of Industry Standard References References and trade publications such as Means, Walker, NECA
Manual National Electrical Contractors Association for electrical, MCA Manual Mechanical Contractors
Association, etc. can be used to compare labor production installation rates, and in some cases, material and
equipment rates. Even Caltrans the Department of Transportation, State of California, publishes a book that is
available on-line for equipment rates.
Use of Previous Change Orders or Similar Jobs Use previously approved change orders that you believe
were reasonable or similar project estimates. If they are older, you can escalate to normalize the costs.
Historical Data Bases - If one has been developed, unit rates from actual completed projects maybe available
for similar work.
Verification of Material and Equipment Costs from Vendors Call other contractors who do the work that
you trust for ballpark/rule of thumb numbers, call local material supply houses, manufacturers, distributors,
construction equipment rental companies.

Reviewing Your Results with the Contractor

There are many different styles people have in reviewing the change orders with the contractor, especially based
on everyones different personality. In my own case, when reviewing your results with the contractor, I believe you
dont have to come out with guns blazing or take a rigid stance, which could ruin the end results right from the start.
My colleagues inform me I take the Columbo approach, like the former TV Private Eye actor Peter Faulk used to
play. Maybe Im also from Missouri, the show me state, but I like the contractor to explain its position, and when
there is a major difference, it maybe for some reason I wasnt aware of or didnt know about. Some of these
differences could include restricted or off hour work situations, loss of productivity/ difficulty factors because of a
tight working space, extra waiting time on a submittal from a governmental agency, the user causing stop and starts
based upon operational issues, etc. Sometimes you may have to have the subcontractor come to the meeting to
further explain or state its case. You may also agree with some, but not all of the change order detail. You can then
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ask for further clarification and table it for the next meeting. As stated earlier, the contractor is entitled to a fair and
equitable adjustment to its contract if the change order is valid.
After final agreement, the change order proposal can then become a formal change order, adjusting either the
cost or time of the contract.
Further change order entitlement issues which are not covered in this paper, but come under the unresolved
change order and litigation/claims arena include constructive change orders and cardinal changes.
RAMIFICATIONS OF UNRESOLVED CHANGE ORDERS

f the change orders remain unresolved, it may become part of a claim package or Request for Equitable
Adjustment. Then even more time and money has to be spent to investigate and resolve them. The project
personnel originally involved with the review of the change orders may have moved on to other projects or even
companies, so the item they were arguing about may no longer apply. Litigation is also possible because of
unresolved change orders, which is costly for both the owner and the contractor.
The bottom line is that it is much easier to resolve these change orders as they occur, than to wait until the end
of the project when details maybe forgotten. Both the contractor and the owner will benefit from having an efficient
change order review process procedure in place.
REFERENCES
1. Callahan, Michael T., Construction Change Orders Claims, Aspen Publishers (2005): 10.
2. Cushman, Robert F., Craig M. Jacobsen, P.J. Trimble, Proving and Pricing Construction Claims, Wiley Law
Publications, 1996, pp.8-3,8-4 and 8-5.
3. Driscoll, Thomas, James J. OBrien, PE, and Robert G. Zilly, PE, The Contract Managers Handbook,
McGraw-Hill Book Company, 1971, p.16-2.
4. Inspector General Report, 2005-01-0043, INDOT CHANGE ORDERS, Indiana Department of Transportation
(October 27, 2005): 7.
5. OBrien, PE, James J. and Robert G. Zilly, PE, The Contract Managers Handbook, McGraw-Hill Book
Company (1971): 1-21.
6. Stevens, Matt, Change Orders Your Right and Your Headache, The Contractors Business Digest (May 17,
2007).

Mr. Brian S. Clare, CCC

Cumming Corporation
[email protected]

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