Managing an education institution’s budget (including a construction contract and subsequent change orders) is paramount to cost control, regardless of a project’s size and complexity. When an overall budget is established, it must include a contingency line item to cover the costs of anticipated change orders that are needed to complete the project.
In recent years, the term "change order" frequently has been misunderstood; many who are not familiar with the construction process view change orders as a negative.
Part of the process
It helps to understand why change orders are a normal step within the construction process. An education institution, as well as the design and construction teams, needs to have a thorough understanding of the contract terms before any project begins. A change order is the only legal means by which an owner and contractor can amend the construction contract after a project is bid and the contract is executed. A change order may increase or decrease the contract amount, or it may modify the contract time. Because of the perceived negative context, it is important that all parties carefully review and understand the circumstances that lead to change orders.
Changes in construction law philosophy and other trends in recent years have created issues that are not always easily understood. Unlike many science professions, building construction is not considered an exact science. A building designed for a client generally is constructed only once. All construction projects require good communication and planning so that construction progresses smoothly. Construction documents, which ultimately become the contract documents, are only as accurate as the information known during the time they were prepared.
Once the design team completes the construction documents, they are "put out to bid" to construction teams, which take the documents and interpret them in order to prepare their bids. Once a contractor is selected, all the individual trades take these same documents and interpret them from their points of reference. Shop drawings are prepared and submitted to the design team for one final review, and then the material orders are placed and crews brought onboard to perform the task of completing the building.
During the construction process, mutual understanding and communication among the institution and the design and construction teams are critical to ensure the documents are executed properly, and that questions are answered promptly and accurately. The shop drawing process and ordering of materials often can lead to a change order because of change in material selection or availability.
Contractor methods of delivery:
•General contractor (GC). Using a GC is the traditional "design, bid, build" process, where one contractor holds the contract with an owner, and a contractor in turn holds contracts with individual sub-contractors.
•Construction management agency (CMA). This contract method requires multiple contracts because the owner holds a separate contract with each contractor as well as the construction manager, who coordinates the work of each contractor and coordinates with the owner and design professionals.
•Construction management at risk (CMR). The CMR holds all the individual contracts with the sub-contractors, has a prime contract with the owner and provides a guaranteed maximum price to an owner that can be modified only by using change orders. The CMR coordinates the work of each subcontractor, as well as coordinating with the owner and design professionals.
Change is inevitable
Reasons for change orders:
•Allowances. Allowances are specific dollar amounts included in the construction contract to cover work expected that is not able to be detailed prior to a contract being signed between the owner and contractor. An allowance amount may be established for such things as miscellaneous steel, touchup painting or repair to paving sub-bases. A change order provides the final accounting of how much of an allowance is used and how many dollars are to be deducted from the construction contract.
•Bid alternates. Design teams often establish bid alternates, either as add alternates or deduct alternates, as a means to control project cost; work can be added or deleted from the bid in order to stay within an owner’s budget. When a project is bid, the base bid work is work that is necessary for the completion of a project. After the bids are received, bid alternates are evaluated and can be either accepted at the time the contract is written, or be held and brought into the contract later using a change order.
•Unit prices. Unit prices are another means of protecting the education institution, at the time bids are received, from unknown conditions. A unit price can be taken on a variety of items, such as importing soil to the site, in order to have a firm price established prior to work being done, if needed. Work performed using predetermined unit prices is brought into the construction contract via change order.
•Owner-requested changes. During construction, it is not uncommon for owners to request changes to the contract as their programs change or as additional finances may allow.
•Contractor voluntary changes. Throughout construction, contractors or subcontractors may provide suggestions for other materials or other product manufacturers. This collaboration can help a construction team stay on schedule and can improve the functionality of a system. A change order is used to detail these voluntary and proactive changes. And, in many instances, the changes can reflect a cost savings or adjustments to the contract duration.
•Manufacturers’ changes in products. During the design process, a design team will review and coordinate design intent with manufacturers. However, manufacturers continually update their product lines, so, between the time that a project is bid and an order is placed, some products that had been desired no longer may be available. When this occurs, the owner, design and construction teams need to review the product submittals carefully to ensure the design intent is maintained or enhanced using materials and products that are available. If an alternative product has to be selected, a change order is used to document the change and adjust the contract amount, if appropriate.
•Authorities having jurisdiction. At the same time that a project is being bid, the design team submits the construction documents to "Authorities Having Jurisdiction" (AHJs). These city and state governmental entities review the documents for compliance with building codes; planning and zoning regulations; and fire prevention and other life-safety matters. The final review comments often are received after a project is bid, and if those changes affect cost or material selections, a change order may be necessary.
•Omissions. Even though design teams strive to produce a complete set of construction documents, occasionally a detail is left out or a product does not get specified. Construction law has deemed that an owner will pay for these omitted items using the contingency line item in the budget and the change-order process. Any premium costs, those costs above the cost of the work had it been included in the original bid, typically are paid for by the design team. Had the materials or details been included in the original documents, they would have been accounted for and included in the original bid from the contractor.
•Errors. Errors in the construction documents include items that have been installed as called for in the documents, but will need to be changed to make the system work or provide the desired final appearance. An owner should not be required to pay twice for any product or system. These errors generally are caught near the end of a project as systems are brought online or an owner sees an installed material or finish. Again, because the contract documents are being modified, a change order is required.
•Expedited project schedules. A trend in the construction industry is to fast-track project schedules when bidding environments are positive and material and labor can be obtained at favorable costs. An expedited schedule benefits an owner and the budget, but because the design and construction process has to move at an accelerated pace, normal coordination processes cannot be accommodated. An owner needs to be made aware that expedited project schedules can result in higher-than-normal incidence of change orders.
•Current insurance law: Rates have risen significantly, and many design professionals have been forced to increase their deductibles in order to afford coverage. Many education institutions may assume that any error or omission is covered by the design professional’s insurance; that is simply not the case. Insurance is carried for major liability issues that might arise; deductibles often are in the tens of thousands of dollars.
•Importance of a contingency plan: The initial, overall project budget must contain a contingency line item to cover items that are not included in the construction contract or contracts. Change orders, regardless of the reason, are paid for out of this contingency or from savings identified at the time the bids were received. At the start of each project, the design and construction teams should alert education institutions about the expected frequency of change orders. This discussion also will assist an institution in deciding how much to include in the appropriate contingency line item.
Jackson, RA, is partner, and Carlson, AIA, is project manager with Hollis + Miller Architects, the longest continually practicing architecture and design firm in Kansas City with offices in Kansas and Missouri. Jackson can be reached at email@example.com and Carlson can be reached at firstname.lastname@example.org.