Change Orders

Avoiding Claims in the First Place

Change orders are the key to avoiding claims. The problem is that many change orders remain unresolved for months because the parties can not agree on whether any time extensions are warranted. The contractor is often too busy building the project to follow through on every potential schedule impact. As a result, the official end date of the project is questionable or disputed.

Time and money are basic components of any project. Besides knowing how much he will get paid for the work, a contractor wants to know when the work must be performed. The time of year may affect the price of the work as weather can impact productivity. If the work can not be performed until some point in the future then higher costs for labor and materials may need to be factored in as well.

When it comes to additional work, however, time is not the same as money. As attorney Justin Sweet explains in his book, Sweet on Construction Law, resolution of changes have a “pecking order” in terms of difficulty:

Defense
More time
More money
Discharge (termination)

Mounting a defense that the change was unexpected (and could not have been anticipated) is the easiest step. An underground storage tank not shown on the construction drawings is pretty easy to classify as a changed condition. Sweet then lists more time as being easier to obtain than more money. Discharge of responsibility for performing the additional work is considered the most difficult resolution. An example of this would be termination for convenience.

We would argue that more time is harder to obtain than more money – much harder, in fact. Using the example of the underground storage tank, the contractor will very likely get paid something for removing the tank. He may disagree on the amount of compensation, but it would be very difficult for the owner to argue that the contractor should have known about this hidden “treasure”. And it is rather improbable that a contractor would accept more time in lieu of more money, when the opposite is often true.

Owners are much more circumspect when it comes to granting time extensions. There are situations where the cost of a change would increase unless more time is also granted, but anyone who has reviewed thousands of change orders like we have will see that owners typically try to discount the time impact of a change by inserting “no increase in contract time” or similar language. The contractor must take the extra step to obtain more time.

Information is needed to make a decision. If the contractor fails to submit a proper schedule analysis the owner really has no choice but to deny a time extension request. This seems rather fundamental, yet it is a mistake that contractors make over and over. It is the contractor’s responsibility to educate the owner as to how a change in scope is impacting the schedule. Getting more money requires an estimate; more time requires a proper schedule analysis. There will be more resistance to getting a time extension if for no other reason than the fear of time-related damages being piled on, either in the current change order or later on via a claim.

There are situations where the owner will make it quite clear that more time will not be granted under any circumstances and that pricing of the change order should take this restriction into account. However, just because “time is of the essence” (it always is, apparently) the contractor should not automatically assume that a time extension is verboten. Sometimes a little more time will lower the cost of the additional work substantially. These discussions are important and should take place before starting the work.

Another consideration is that subcontractors rely upon the general contractor to make demands for time extensions. When the general contractor neglects to obtain time extensions he may still face requests for time and time-related damages from subcontractors. In essence, the general contractor is often “caught in the middle” of a dispute that is really between the owner and the subcontractors but contractually must be resolved through the general contractor.

Leaving “Money on the Table”

We strongly believe that the schedule implications of any change order can (and should) be analyzed when pricing the change order. This protects the contractor by establishing a realistic completion date and provides the owner with a more accurate projection for move-in and occupancy.

Our experience suggests that 80% of contractors are losing money on change orders by not immediately addressing the schedule ramifications of change orders. Schedule logic is continually being revised during the update process to mitigate slippage without fully understanding why the slippage is happening in the first place. Schedule revisions typically result in more concurrent work, which means more resources and more supervision. The end result is often lower productivity.

In a worse-case scenario the schedule updates eventually become unrealistic because they demand a level of resources beyond what the contractor is willing (or able) to commit. Without the necessary resources, more schedule slippage occurs, which in turn means even more logic changes are required to maintain the status quo. In the meantime, additional change orders are issued. Getting caught up with the schedule analyses becomes very difficult.

The contractor must also consider the shift in bargaining power. During the original bidding process the owner has more bargaining power than the contractor. There are typically multiple bids for the work. One bidder has no idea how motivated the other bidders might be to obtain the work and may therefore trim his bid more than necessary.Once a contract has been executed, however, bargaining power shifts in favor of the contractor. The owner must, for the most part, award all additional work to the contractor. There is no competition for the work. If the owner does not accept the price being proposed for the work he may direct the contractor to perform the work while the pricing is still being negotiated, but this can backfire. Once the contractor knows the actual cost of the work he may decide his original pricing wasn’t high enough.

When it comes to a time extension, however, protracted negotiations often work against the contractor. He makes changes to his schedule after the additional work begins – changes that may unintentionally minimize the impact of the work. Or the contractor finds a way to perform some of the critical tasks faster than expected. The owner looks at the current schedule and sees no delay. Another risk to the contractor is that he allows non-critical tasks to slip during the negotiation phase. In the contractor’s mind, these tasks are not important in light of the delay being experienced. The owner, however, sees a concurrent delay being caused by the contractor. This is the de facto response to requests for time-related damages. When both parties cause a delay of equal length then a time extension is the only recourse.The point is, the contractor must recognize the advantage he has in negotiating time and money before the additional work is performed. Unless the schedule updates are carefully monitored during the negotiation stage (which becomes more difficult if other change orders are likewise unresolved) there is a very good chance the contractor will not get the compensation he otherwise deserves.

Compounding the Problem

Managing multiple time extension requests presents another problem. Owners find themselves wondering how the time requested in one change order relates to other requests. Are the requests additive, concurrent, or perhaps slightly concurrent? Under this scenario both parties may simply concede that a final determination can not be made until the project is completed. A forensic type of analysis is, however, the most expensive option for all parties.

Contractors are also under pressure to maintain the original completion date of the project until a formal extension of time is granted. Many public contracts allow for a reduction in retention when the project reaches a certain percentage of completion – but only if the project is “on” schedule. This encourages contractors to rework logic or reduce durations on tasks that have not started yet, giving further “proof” to the owner that a time extension is not necessary.

Another consideration for contractors is that failure to obtain valid time extensions may very well expose them to claims for additional time and money by subcontractors. In essence, the contractor is caught in the middle between the owner – who still expects the project to finish on schedule – and subcontractors who feel no responsibility to accelerate to overcome delays not of their making. This happens all too often in the construction industry yet is easily avoidable.

Fixing the Problem

Our Change Order Management System ensures that every change of scope is quickly analyzed to determine whether it impacts the project duration. Even when the correct answer is “no” this eliminates the uncertainty of how subsequent change orders should be analyzed. Both the contractor and the owner benefit from knowing what the “real” end date of the project is at all times. The contractor will not feel compelled to accelerate because time extensions have not been received and the owner is assured that no time extension requests will be submitted long after the extra work was performed.

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