Change orders are an integral part of every construction project. No amount of design, engineering, planning or scheduling can completely eliminate the potential for construction changes with cost impacts to the contractor. Something will always come up in the project that requires the installer to do something different than what they had planned, estimated, bid or previously installed.
Let’s begin with some definitions. A Change Order Proposal (COP) is a document prepared by the subcontractor and is submitted to the General Contractor (or Owner). It may also be called a Proposed Change Order (PCO) or a Cost Estimate (CE).
A Change Order (CO) is a document prepared by a GC (or Owner) that legally changes the contract value, scope and/or terms to include items from a COP. A GC may accept a COP in part or in whole, and a resulting Change Order is then generated. Both the GC and the subcontractor must sign the CO to accept it as written before it becomes integrated into the contract; it is not legally binding without signatures.
Most change orders are the result of a combination of two or more factors. With that in mind, let’s look at the most common causes of change orders.
These are the most common types of changes on a construction project. These are usually the result of an updated design, plan revision, RFI response or returned submittal. Change Order Proposal pricing typically includes a detailed estimate of the changes between the original design and the new conditions, often referred to as the variance or delta between the two (‘Delta’ is a mathematical term that means ‘variation’ and is used often in estimating). Pricing will include materials and labor costs associated with the change, and might also include rental equipment and/or sub-subcontractor costs.
Scope changes may also be the result of construct-ability issues that arise during the installation process. This might occur when there is an unforeseen conflict between trades, or a physical inability for things to coexist in a shared space. For example, a conduit run and an HVAC duct cannot be in the same place, and one will need to be re-routed to avoid conflicting with the other. In this case, the HVAC duct will typically take precedence due to engineering and design limitations on duct bends, so the electrical system will be re-routed to avoid the conflict. If the re-routing causes significant time and/or material impacts, then the electrical contractor should be able to submit for the increase in scope. This can be driven by the RFI process if time allows, but may also be generated by a field directive from the GC in order to avoid schedule delays while waiting for an RFI to make its way through the formal process.
Another type of COP would be for changes or repairs to previously installed work. In this case, there would also be a demolition or de-construction component to the COP pricing. The subcontractor will need to remove something that was already in place in order to make the change or replace the damaged installation, so additional labor costs would be included for these types of changes.
Material changes resulting from the submittal process constitute another reason to generate a COP. As electrical contractors, this will most often occur through the light fixture and power distribution equipment submittals. Fixture pricing is estimated from the fixture schedule and specifications provided at bid time. Fixture submittals are generated after award of contract and sent to the designer/owner for review and approval. Once received back by the subcontractor, any changes made by the design team or owner would be priced, and a COP would be generated. This would typically be a material cost only change, but could include a labor component if the fixture change is significant. For example, if recessed cans were changed to pendant fixtures or chandeliers, there would likely be an increase in man-hours required for the installation.
Power distribution equipment changes usually occur different than fixtures. In most cases, the engineer designs the equipment or system without a specific manufacturer in mind, and the design is often representative and diagrammatic in nature. Through the submittal process it may be determined that the design is not practicable or available, and a reconfiguration or additional pieces of equipment may be required. The subcontractor would then have the opportunity to submit a COP for any additional costs related to these equipment changes.
Material price escalation is another reason to generate a COP. While this is a fairly infrequent situation, it does occur and can be justified if material prices experience a drastic increase outside of normal market fluctuations. Electrical contractors would most commonly experience this with copper and aluminum wire pricing, but could also be impacted by fluctuations in the steel market as well (i.e.: strut, conduit, fittings, enclosures, etc.). As the commodities markets experience price fluctuations, so might the cost of goods that a contractor would purchase.
We previously touched on this topic in our recent article about Centralized Purchasing. Larger contractors will commit bulk orders for copper and aluminum and lock in pricing for the year or duration of a project, thereby insulating themselves from the day-to-day market variations that might affect materials costs. However, smaller contractors typically do not have this luxury and are subject to these variations and escalations. Should a large material escalation occur (typically >10-15%), the contractor might be able to submit a COP for material cost increases. While this is not guaranteed to be approved, and may in fact be precluded by language in the subcontract agreement, it is worth noting that the opportunity exists and should at least warrant a conversation with the General Contractor.
Changes in schedule most often occur as delays, extensions, compression and out-of-sequence work. Most subcontracts contain specific language about delays and preclude a subcontractor from recovering costs due to schedule delays. Instead, the subcontractors are afforded a schedule extension equal to the amount of time they have been delayed. These clauses usually contain very specific terms and conditions for notification requirements and limitations for such compensations. Therefore, it is important to read and understand these terms for each project, as they vary between projects, contractors and subcontracts.
Should the General Contractor or Owner extend the duration of the project past the contractual completion date or timeframe, for reasons outside of the subcontractor’s control, the subcontractor is typically entitled to a contract modification to provide compensation for the ‘Extended General Conditions’ required by the extension. Typical EGC’s would include costs for salaried positions (Project Managers, superintendents, administrative personnel), job site office and rental equipment, small tools and consumables, and any other direct project costs that are incurred as a result of the extended schedule.
Schedule compression is becoming more prevalent in the construction industry, typically to combat schedule extensions. There are a myriad of reasons for this, which we won’t explore in this article, but they mostly boil down to financing and construction loan terms. Project schedules are built with little ‘float’ or extra time, and are very sensitive to unforeseen delays. Any delays must be overcome to keep the project on schedule without using up all the float, so activities are compressed and trades are ‘stacked’.
What might this look like? Let’s say that due to a delay (weather, failure to perform by another subcontractor, unforeseen conditions, etc.) an activity or area that has been allocated on the master schedule as a ten day activity must now be performed in five, and multiple trades are now working in the same area at the same time, instead of one after the other. The result is that more workers are required to perform the same scope of work in a shorter duration, overtime costs are incurred, and the workers’ efficiency is reduced due to the congested work area. These conditions all have a direct and measureable impact on cost, and are compensable.
There are plenty of resources available to help contactors understand and quantify these cost impacts more clearly, including Schedule Compression courses offered by trade organizations such as NECA (click here for the NECA class schedules).
There are also plenty of books on the subject, such as:
The following is a sample chart showing the productivity impacts and decreased efficiencies experienced by working extended 50-hour weeks. This chart is widely used in a variety of reports and studies, and its source is ‘Scheduled Overtime and Labor Productivity: Quantitative Analysis’ by H. Randolph Thomas and Karl A. Rayner.
Subcontractors should also be aware that there are scheduling professionals who can assist with quantifying such cost impacts and assist with presenting to an Owner or GC for compensation. Ascent Consulting offers training and education around this subject, and can also provide expert scheduling analysis and reporting for our clients.
Out of Sequence work may also constitute an opportunity for compensation. Much like delays, most subcontracts contain language that allows a GC to redirect a subcontractor’s workforce or alter the construction sequence as needed, often with as little as 24 hours notice. This allows the GC to avoid cost impacts from subcontractors due to unforeseen obstacles that may arise during construction. For example, let’s say you’re scheduled to begin work in area A on Wednesday. On Monday the GC discovers they have a problem in area A that must be corrected before any work can start. They can direct you to work in an alternate area while they correct the situation in area A without incurring a cost impact for the redirection.
While there are typically no limits on this ability written in the contract, it is understood that you must be given the originally schedule duration to complete your scope in area A. If not, then the redirection may result in schedule compression when you are finally cleared to work in area A, which is compensable as previously explained.
The final group of cost impacts we will explore consists of unforeseen conditions, weather & Acts of God, and safety. Unforeseen conditions are most common in subgrade activities (i.e.: excavation, rock removal, de-watering) and in renovation and rehabilitation work (i.e.: asbestos, unknown structural interferences). These usually result in time and material impacts, and may also carry a schedule impact, which are all compensable. Weather impacts and Acts of God are almost always addressed in the subcontract with specific legal language and should be evaluated on a project-by-project basis. Normally, no compensation is available for schedule delays resulting from these occurrences, but time extensions are granted. If the occurrence results in damage or rework, these costs would be compensable to the subcontractor.
Safety is a more complicated subject, and therefore more difficult to substantiate and recover costs. A safety incident that shuts down a jobsite for an extended duration (days or weeks) would carry a compensable cost impact, but only if your company was not the reason for the shutdown. Costs may include demobilization and remobilization, schedule extension, extended general conditions, additional safety training and travel-related costs if the project is outside of your local territory. All of these may be submitted for compensation to the GC or Owner, dependent on the nature of the safety incident that closed the jobsite.
Now it’s your turn! I’d love to hear your thoughts this topic.
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