By Craig Tappel
Change orders are a fact of life in the construction industry and, for that matter, so are the disputes they often cause. They pose a big risk and the legal consequences are only part of it.
They occur when there is a request to change the original construction contract for a number of reasons, like a request for additional services that add labor costs or a design change that adds materials and labor costs. You may or may not have a process in place for recording the work and billing for the extra changes. Even if you do have a process, it may be followed haphazardly. And that’s when disputes arise.
One study outlined the price paid, finding the five top reasons for change orders were lack of coordination between contractor and consultant; design error and omissions; “value” engineering; design changes; and owner plan changes. Whatever the reason, project costs increased an average of 11% to 15% as a result of them as work was pushed 10% to 20% past scheduled completion dates.
Managing change orders effectively takes having a process in place before the project starts, and making sure that everyone – the owner, contractor and trades – buys into its terms. Some considerations to offset the risks of disputes include:
- Review your contract for process requirements. Re-read your contract to ensure the specifications for managing change orders are clear. It should identify who receives change orders and a submission timeframe. Timeliness is critical. You may want to also specify the documentation that should be included.
- Review all plans. It helps to be able to identify ambiguities, errors or omissions in the scope or plans before work starts. It’s always better to have delays at the beginning of the process due to documentation revisions than to manage issues with change orders midway through construction.
- Put it in writing. Every change order should be specified in writing, written clearly and in detail, with a protocol for signoffs by all parties that is strictly adhered to.
- Define communications. Change orders can affect the broader schedule of the project, so contractors on the job, whether directly or indirectly involved with the changes, should be alerted and brought into discussions of their potential impact.
- Invest in technology. As the industry increasingly becomes more tech oriented, project management solutions with change order functionality are a smart alternative to paper logs and email. Between change order templates and approval tracking capability, you will be able to manage your change orders that much more effectively.
For all your best efforts, disputes may happen anyway. Sharpening your change order management process from the start of each project should give you some protection and result in fewer issues from surety and professional liability perspectives. Your property and casualty policy won’t come into play until a claim is triggered. But when the facts are well documented and the process is done right, risk is mitigated and everyone is more likely to come out ahead.
HUB International’s construction industry consultants are available to work with you on trends and developments that may impact your risk posture today and in the future.