Controlling Change Order Costs
In a perfect world the first line of defense in controlling change order costs would be to reduce their number through the architect/designer’s comprehensive client interview and subsequent production of detailed, error – free construction documents. In the fast moving commercial leasing venue there is seldom time for this process – diligence is often traded for time. The number of project change orders simply reflects the degree to which a meticulous (and time consuming) approach was abandoned in favor of a speedy lease transaction.
In this environment brokers and property managers are forced to rely heavily on the design/build general contractor who has the talent to turn the client’s concepts into a reasonably accurate scope of work and cost proposal, often without benefit of substantive drawings. After the deal closes the design is finalized and, frequently, there are change orders. They can be described as falling into one of two classes.
Express Change Orders
The express change order is a clear-cut and uncontested addition or deletion to or from the scope of the work and is usually issued as a directive from the owner to the contractor.
Owner says to contractor:
1) ‘Add this work to the contract’ or
2) ‘Delete the painting from the contract - my cousin’s a painter’ or
3) 'Get my tenant into the space in 6 weeks instead of the Contract Time of 8 weeks’.
Constructive Change Orders
The typical constructive change order is a claim for reimbursement for money or time, or both, for changes in the work arising from circumstances unforeseen at the time of bid and outside the contractual obligations of the contractor who initiates them.
Owner caused delays
Additional cost in completing the work may be claimed by the contractor on projects in which the Owner or his agents fail to carry out their obligations under the construction agreement.
Concealed conditions
Discovery of concealed physical conditions, or physical conditions of an unusual nature, unknown at the time of bidding, may cause the contractor to initiate a change order to recover the expenses in accommodating the ‘condition’ into that of the work. An existing defective air conditioning unit needing repair, which was thought to be in working order and proposed to be re-used, is a good example of a concealed condition in a tenant improvement.
Incomplete Plans and Specifications
This is by far the most common source of change orders in the design/build setting. Construction documents, where they existed at all during the estimating phase, were sketchy at best. Finalizing these documents reveals the extent to which the tenant was pre-occupied with other aspects of his move and unable to from a perfect picture of his operation in its new space.
Exceeded Allowances
Design/build estimates normally will contain line items for dollar amounts that are characterized as “Allowances”. When these Allowance amounts are exceeded by the actual cost the contractor issues a change order to recover the difference. Conversely, when an Allowance is greater than the actual cost the client is due a deductive change order.
Change Order Cost Origins And Controls
Like the majority of the base contract expenses, change orders reflect the costs submitted by the subcontractors who will perform them. While a job is in progress the owner and general contractor could find themselves exposed to a subcontractor’s careless or greedy estimator.
An experienced and reputable general contractor, knows what trade work should cost and, because it’s bad for business, scrupulously avoids presenting the owner with either dubious change orders or exploitative amounts. Although it is exceedingly rare for this contractor to receive an illegitimate change order from its subcontractors we get the occasional overpriced one. If the subcontractor cannot justify the amount and refuses to adjust it TiCon has a contractual remedy.
Stipulate T&M Rates for Change Orders
A good contracting practice – one that TiCon employs – is to carry a contract provision for disputed change order amounts. In cases where we disagree with a subcontractor on the fair market value of the subcontractor’s change order work, TiCon may enforce a provision of its Master Subcontract Agreement – the T&M change order. In such a case the work would be ordered on a Time and Materials basis using a predetermined fair market labor rate for various skill levels and predetermined materials markup percent. We then track the time and material on the change order item; inevitably the cost is less that the original lump sum change order.
It is fairly common to find this kind of clause in prime contracts (between owner and general contractor) but the real benefit is accrued by having the same provision reflected in the contracts between the general and his subs.
The cost control of change orders is a challenge that TiCon takes seriously.
|
