Understanding Construction Change Orders

Understanding Construction Change Orders

By Rick Bacon, FAIA

If you are building or renovating your kennel, it is almost guaranteed that you will encounter at least one change order. Change orders during construction are common and should be anticipated. They are either owner requested or caused by issues encountered during actual construction. A change order during construction is work that is added to or deleted from the original scope of a contract for construction with the general contractor. The change order alters the original contract dollar amount and/or completion date. The change order is agreed to by the owner, contractor and architect/engineer.

The common abbreviation for Change Order is CO. Do not confuse it with a Certificate of Occupancy, also called a CO or the Construction Observation (CO) phase. They are entirely different and the context in which CO is used will help you differentiate between them.

Common causes for a change order to be created are:

  • The cost for the project’s work was incorrectly estimated.
  • The customer or project team discovers obstacles or possible efficiencies that require them to deviate from the original plan.
  • The customer or project team is inefficient or incapable of completing their required deliverables within budget, and additional money, time, or resources must be added to the project.
  • During the course of the project, additional features or options are perceived and requested.
  • The contractor looks for work items to add to the original scope of work at a later time in order to achieve the lowest possible base bid price, but then adds work items and fees back in once the contractor has been hired for the work. This is an exploitative practice.
  • Extreme weather conditions cause delays or require additional work to complete construction. (Source Wikipedia)

Construction Related Change Orders
A construction change order may be the result of hidden conditions, a conflict or ambiguity in the construction documents, or a construction material that is no longer manufactured. Another example is a change order requiring time extensions necessitated by what is considered an “act of God,” such as heavy winter storms or a hurricane. The change order is initiated by either the contactor or architect via issuing a Request for Proposal (RFP). This will ask the contractor to provide a cost or time proposal for the change. The RFP is then issued to the architect or engineer for review. The contractor will then be issued a change order that must be signed by the owner. The cost or time changes will then be part of the construction contract.

Another example requiring a change order would be the contractor discovering an abandoned water line directly under the building slab. The pipe was an unknown condition during the design and contract document preparation or during the bid. The contractor is legitimately owed more money for removing the pipe. Further, the removal of the pipe required additional construction time. Both the additional cost and time extension are part of the change order.

Some change orders are good. An example is a product specified for the project, such as a porcelain tile, has been back-ordered and the contractor locates a similar product that is equally as good, is available now, and is less costly. A request for proposal to support a change order would show a credit is due because the product was less expensive for the contractor to purchase.

Owner Related Change Orders
As the owner, you may request changes in the project’s scope. An example is you decide to add in another 25 dog boarding suites to your building while it is under construction. A change like this increases building area and also includes the cost to build the architecture, structure, mechanical, plumbing and electrical systems. This obviously is just cause for additional compensation and maybe additional time to the contractor.

Change Orders to Increase Construction Time
The construction contract should stipulate the number of days for completion of the project from the Notice to Proceed to the date of the Certificate of Occupancy, when the owner takes possession of the building. The contract should stipulate a certain number of days to accommodate situations such as rain days. The contract should also require that the contractor document the “rain” days and if warranted, an extension of time should be granted. These additional days should be included as part of a change order.

I don’t usually approve rain days until the end of the job is near and it is obvious that rain or other weather conditions really did cause a time over-run. This is a judgment call, but I have a hard time granting additional days, at one point when the work site is idle during good weather at another point during the project.

Being “Nickeled and Dimed”
If it becomes obvious that the contractor is asking for change orders over small items or too frequently, there are hidden reasons that are symptomatic of a bigger problem. The contractor or his/her sub-contractor may have under-bid the project and is now trying to recover as much money as possible. Every little change from then on is charged by the contractor to make up for that lost money. It now takes everyone extra time and effort to negotiate the smallest of issues. Accepting the lowest bid is not always the most economical path.

Design Errors and Omissions
No set of documents prepared by the design team is perfect. The architect’s goal is to identify document errors through quality control reviews. Documents are open to different interpretations, so you want your contractor to issue Requests for Information (RFI) before construction starts to clarify the design intent, if necessary. It is through this process where the possibility of change orders, due to an error or omission on the documents or misinterpretation of design intent, is reduced. These types of errors are often minor and can be corrected in the field.

Unfortunately, design errors do happen and a change order could be required. Your design team is motivated to find reduced or no cost solutions to document discrepancies discovered during construction and avoid the need for a change order.

Contingencies to Cover Change Orders
I usually recommend two contingencies for your construction budget. The first contingency is included in your construction budget line items and I try to set it at 10% of the construction cost. The amount of money is known to everyone, including the contractor. However, only you have the authority to use the money.

A contingency of this type is used to cover unknown or unexpected costs such as removing the hidden pipe, mentioned previously. The contingency may be used to add items when your project is nearing completion and you are comfortable that the money will be unused otherwise.

The second contingency is reserved for the same basic purposes but is not known to the contractor and maybe not known to the architect. This hidden reserve is used if an extreme situation arises. By the time the construction documents (these are the documents submitting for permitting and bidding the construction) have been completed, each contingency percentage can be lowered to 5%.

Be Your Own Watch Dog
Anticipate that there will be change orders on the project. Hopefully any change orders you encounter will be minor and will not burden the budget or time allotted for completion. Learn how to read a set of construction documents so you can spot discrepancies, too. Visit your construction site often and review work for yourself, comparing it against your design plans; you have every right to do this. Evaluate the contractor’s request for proposal and change order requests closely to make sure there are no duplications, cost savings are included if appropriate, and that the mark-up is consistent with the original contract.

When you are negotiating your construction cost initially, try hard not to eliminate your construction contingencies altogether. It is always recommended to have fallback dollars available to cover the unexpected, including change orders. It will make decision making much easier and faster while avoiding having to come up with money out of your pocket instead of from the designated construction budget.

Richard S. Bacon, FAIA, is owner and principal architect at Bacon Group, Inc., an architecture firm that specializes in the design of animal care facilities. With over 35 years’ experience, Rick is a registered architect, member of the American Institute of Architects and the AIA College of Fellows, credentialed by the National Council of Architectural Registrations Boards, a LEED Accredited Professional in sustainable design, and a licensed General Contractor. He is a frequent workshop presenter on a variety of design topics for the boarding, veterinary, and animal humane care communities. Rick may be contacted by phone at 800-961-1967 or via email at [email protected]

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