Change Orders – How to Plan, Mitigate, and Minimize the impact of Changes on Your Construction Projects.

In construction, change orders result anytime; an Owner changes the design, the contractor uncovers hidden conditions, or errors are discovered in the scope of work.

With so many potential pitfalls, it’s nearly impossible to prevent all change orders, but there are several steps you can take to reduce the quantity and cost of changes.

Discovery

Discovery refers to site testing and surveying that should occur before the start of design and construction.  During discovery Owner’s should commission several tests and investigations to document existing conditions of the site.

Discovery typically begins with surveying.  Surveyors start with a desktop review where they research historical maps and previous surveys.  During the desktop review, surveyors may; identify the location of buried utilities and structures, identify easements, or uncover other relevant information.  This kind of research is a great precursor for identifying areas that require additional investigation.  This research also ensures your Architect has the information needed to comply with set-backs and other zoning regulations.

Another form of discovery is known as a Geo-technical investigation.  Geo-technical investigations typically includes soil sampling to test the quality and density of the soil.

In it’s simplest form, discovery can mean a site or building survey to measure existing conditions.  You may even decide to have a 3-dimensional laser scan of your building.  This is essential if you plan on developing a BIM model.

These are just a few of the most common tests and surveys you should have done before you begin your project.  Your Architect will be able to help you determine what other test may be necessary.  Investing time and money in discovery up front will realize considerable financial, emotional, and schedule benefits for you later.  The temptation to begin designing right away may be high, but taking the time to document existing conditions is essential for avoiding change orders later.

Architect and Contractor Integration

Early engagement of the Contractor together with collaboration between the Architect and the Contractor is another great way of avoiding change orders.

Engaging a contractor early means you are hiring the contractor to perform pre-construction services before the design has been completed.  The services included in this phase could include one of the discovery items we discussed above or it could simply be a series of consulting services which include; drawing reviews, estimating, scheduling, ordering of long lead items, or mobilizing.

Since early engagement requires a Contractor to quote the project without a full set of drawings, engaging a Contractor early typically means using a Cost Plus method of engagement.  Cost Plus engagements solicit from the Contractor a series of rates which will later be applied to a Cost of Work (the trade labor, equipment, and materials used in construction).  You should not solicit a firm quotation on Cost of Work until the drawings are complete.  Owner’s typically shy away from this form of engagement because they don’t like not knowing the cost of the project before signing a contract, but the pros outweigh the cons in my opinion.

Solicit Change Order Rates

Nothing causes a plan to fail more than failing to plan.  Don’t allow any work to start without pre-negotiated change order rates.

There are those in the construction industry who oppose negotiating change order rates.  Their rationale is, “negotiating change order rates invites the Contractor to submit change orders!”, but I would argue that if you wait for a change order to happen (after you have signed a contract and broken ground), you will have no leverage at all.  This is why I prefer to solicit change order rates at a time when the Owner has the most leverage and the most options.

There are a few ways you can negotiate change order rates.

Alternates

The best way to negotiate a change order is when you can anticipate a change order.

Typically this happens when you have a portion of a project where your design is not complete or you have more than one solution in mind.  These kinds of changes are called alternates.  The cost for alternates can be quoted as fixed costs at the same time as the rest of the project.  Just be sure to clearly define each alternate and provide a separate line item in your solicitation.

Allowances

For anticipated changes where you don’t have a design you can solicit an allowance.

Allowance work well for last minute items that you can loosely described in words.  I don’t generally like allowances because although they are better than nothing at all, they are not binding quotes which still leaves you exposed.

Mark-ups

The final way for negotiating change order rates is to solicit mark-ups.  Mark-up work well from completely unforeseen changes.  Markups are typically made up of a few different rates.  The first and most obvious rate is the contractor’s profit and overhead.  This rate gets added to third-party costs associated with the cost of work of the change order.  Note that I said “third-party”.  This means that you should negotiate a separate rate for any cost of work that the contractor plans to self-perform.

Key Performance Indicators and incentives

Another strategy to reduce change orders is to use incentives tied to Key Performance Indicators (KPI).  The way this works is that you present the contractor with KPI’s on the quantity and value of change orders.  If he keeps the quantity and/or value of changes down, he is entitled to some bonus.

The bonus is paid as a percentage of how closely he held to the original contract value.  This strategy creates an incentive for the contractor to only present a change order when absolutely necessary.  It’s also a form of contingency you apply to the project.

What makes this a powerful option is that the bonus represents free and clear profit for the contractor, whereas the profits from a change order (which typically includes other sub-contractors) represents a significantly smaller fraction of the bonus.  This drives the contractor’s behavior away from change orders as a way to increase profits and towards no change orders as a way to increase profit.

Rip and Tear Clause

When you think about change orders you typically think about the contractor and the contractor’s contract, but there is a clause you can add to your contract with your Architect that can help you mitigate the cost of changes in construction.

Admittedly, this one is the most difficult clauses to negotiate, but when done right, adding a rip and tear clause into a design contract can help create and incentive for your designer to avoid costly mistakes and possibly help offset the cost of changes when they happen.

Rip and Tear clauses are meant to cover the additional construction costs that an Owner incurs as a result of an error or omission in the drawings.  It’s not meant to relieve the Owner of costs they would have incurred if the error or omission had not occurred.

A Rip and Tear clause covers the added expense of the contractors re-work or additional work only.  It does not cover the cost of the work itself.

To make this clause enforceable, you will need to allow for a margin of error.  Courts don’t like contract that impose a standard of perfection, so be prepared to carry some contingency of your own, but beyond that contingency, the rip and tear clause kicks in to help cover your additional costs.

Closing

Changes in construction are an unavoidable fact.  They happen on every job.  Those who choose to ignore this will undoubtedly pay more when changes happen.  Planning for change does not weaken you or invite the change, it tells the contractor that you know how construction works and you are prepared for anything.

I hope you adopt these strategies and they help mitigate the impact of changes on your projects.

What about you?  What strategies have you used to reduce or mitigate change orders?  Have you tried any of these?  Did you feel they helped?  Tell me your stories.

Thanks for reading.  If you enjoyed this content, please feel free to browse my previous articles and please like, share, comment, and subscribe.  This helps promote my content and is greatly appreciated.

 

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