No Work Shall Commence Without a Signed Change Order, Part 1

The mantra of almost every contractor in the United States is “No work shall commence without a signed change order.” With such a strict policy that appears universal in its application, why do so many firms struggle with the liability of unapproved, uncollected and litigious change orders? Most industry experts agree that change orders no longer represent untapped margin potential. With a few exceptions, change orders are productivity killers. They often become the focal point for schedule disruptions and project controversy. Many studies have shown that as the frequency of change orders increases, labor productivity decreases. Projects that have numerous trade contractors further compound this issue. Both general contractors and trade contractors suffer from the effects of poor change management. 

Eliminating collaborative delivery systems such as design-build, many contractors would agree that construction documents are declining in quality and presenting greater ambiguity in their interpretation. All signs indicate that the change order problem will continue to get worse before it gets better. How should this problem be addressed? Project managers are placed in the difficult position of simultaneously managing the project and maintaining the relationship with the customer. Herein lies the conundrum: Proceed with the work and maintain the schedule and relationship, or stop and haggle over change orders, disrupting the project’s progress. Proceeding is never without risk, either. 

While speeding the change order process to continue work allows the contractor to maintain the project’s momentum, change order liability is increased. Pricing negotiated at the end of the project rarely represents the full value of the work. In addition to the direct costs that are sacrificed, project teams placed in these situations often fail to capture to some of the hidden and indirect costs, such as expended general conditions and additional overhead. Developing a proactive change order management strategy will minimize the firm’s risk and provide a mechanism to manage customer expectations and relationships.

Managing Change Early

While some change orders are the result of a customer deciding to do something different from what was planned, the vast majority of change orders arise from mismanagement of expectations. These often come about in the form of flaws in design, errors in contract documents, unpreparedness for site conditions and misaligned interpretations of scope. Many contractors believe architects and engineers are the cause of all change order woes. However, these contractors should begin handling change before there is change. During the preconstruction meeting with the customer, whether it is an end user or general contractor, it is imperative to discuss the change order process. In addition to discussing project specifications, the following items should be addressed:

• Lines of authority – Who can approve what and for how much?
• Deadlines – What time frames are established for resolving change order issues?
• Escalation – If change orders cannot be resolved at the jobsite, what are the levels at which issues are escalated?

Many contractors view this method of addressing the potential of change orders as adversarial and worry that customers will view the mapping of the change order process as an invitation to change their specifications freely. However, when the change order process is discussed within the context of other standard operating procedures such as invoicing, quality control and schedule management, it becomes less contentious. Educating customers on the process will help them understand contract language and the problems that come with change orders. 

Historically, contracts become go-to devices in times of contractor-customer conflict. Instead, they should be tools to manage unforeseen conditions, schedule delays, schedule acceleration and damages. The next step in the process is to identify problem points before they are reached in the field. Often, necessary changes are not identified until the crew encounters a problem. This halts progress. To avoid disruption from change orders, scrutinize the plans during the planning phase of a construction project. While it is important to avoid creating an Easter egg hunt for potential change orders, the project manager and superintendent should examine the following potential progress hazards:

• Trade coordination – Review the scope of each trade contractor and supplier to identify scope holes or duplication. You can improve this process by developing and using a contractor and supplier matrix that helps you identify holes and redundancies.
• Detail review – Each member of the team should scrutinize connection details, grade changes, cross sections, panel summaries, room details, etc. It is often here that small details are missed.
• Staging – Especially with jobsites decreasing in size, it is important to develop logistical site plans to manage expectations on storage, deliveries and exit strategies. One way to do this is to laminate a site plan and use scale models to represent material bundles, access roads, trailers, crane swing radii, etc. This practice protects against change orders related to logistics and handling and guides the project team to strategically manage the site.
• Schedule review – Review all assumptions regarding schedule milestones, and ensure that production schedules and procurement schedules support the project goals.

Each piece of this planning exercise should be developed to match the firm’s core business. The level of detail will vary greatly between a mechanical contractor engaged in medical gas installation and a painting and coating contractor responsible for tilt-up warehouse finishes. Consistency, standardization and the application of lessons learned provide firms with enhanced opportunity to manage processes and root out potential conflicts of scope. Early identification of errors, conflicts and omissions will mitigate the risk of uncollected change orders and aid in the management of the project by reducing production killers and allowing firms time to develop alternative plans.