Change Order Management
In previous section we learnt that incentives motivate and penalties keep a check for faults that occur in a project. In this section we will understand about a change order management.
A change order is order for work that is added to or deleted from the original scope of work in a contract, which alters the original contract amount and/or completion date. A contractor?s claim for such an alteration due to a work perceived by him as additional work remains as a claim until the change order is resolved. A claim is a potential source of dispute. Hence resolution of change order situations knowledgably, fairly and promptly benefits both owner and contractor.
Change order is a component of the change management process in contract management. The change management process should enable implementation of changes in a system in a controlled manner by following a predefined framework/model. Change order management is hence a critical aspect of any construction job.
The rights of a contractor to a change order arise from the contract. If the contractor?s claim is not consistent with the contract, it will be denied, unless you admit it by oversight.
Project construction contracts always incorporate a Changes clause which provides allows you to order extra work without invalidating the contract or make changes to the existing work by altering, adding to or deducting from the work, with the contract sum.
The reasons this change clause is needed are:
- Impossibility of perfect drawings and specifications: A fundamental truth in the construction industry is that no design can be made perfect.
- Impractical risk allocations: The fundamental principle of risk allocation is to assign each risk to the party who is best able to control, manage or absorb that risk, which is the way to achieve maximum efficiency and economy. When contract for construction is taken up by a general contractor, his tendency will be to shift the risks to subcontractors and so on down the line leading to improper risk allocation.
- Contractor-suggested changes: In many project contracts, value engineering proposals from contractor should be encouraged by owner.
- Owner-suggested changes: You may discover obstacles or possible efficiencies that require them to deviate from the original plan.
Other than the above reasons, incorrectly estimated work or failure to meet commitments can lead to claims by contractor. Examples are:
- Unforeseen adverse site conditions or actual site conditions being more adverse than what is mentioned in the contract.
- Failure to make the site available at the time and in the condition required by the contract.
- Failure to grant, or delay in granting, legitimate time extensions.
- Unreasonable or mistaken inspection.
Although you can unilaterally order that changes be made, there is a commensurate duty on you, to make adjustments in the contract sum or contract time. Hence changes provisions in contract should typically provide methods for making these adjustments.
Changes in contract sum or contract time are made on the basis of negotiations between owner and contractor. The basis can be:
- Unit prices for specific items of work.
- Recognised mark-ups for contractor?s work and subcontractor?s work.