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The Hows of General Contracting: How to Manage Construction Overruns and Change Orders

General Contracting

Despite every general contracting service’s best effort to avoid deviations and variations during construction, change orders are unavoidable factors that occur. The term is ubiquitous throughout the industry and may disrupt and cause disputes between the different parties involved because of the negative connotations and implications that change orders ensue. Managing risks involved due to change orders is important to avoid interruptions during construction, and most importantly, maintain a good working relationship with clients, suppliers, and other allied professionals.

UNDERSTANDING A CHANGE ORDER IN GENERAL CONTRACTING SERVICES

hange orders are triggered by either an alteration in the design, an amendment in the original specifications, an adjustment in the contract amount and time, a change in the scope of work due to unforeseen circumstances on site, or a combination of these factors. General contracting services regretfully receive unfavorable remarks when change orders are presented which is why it is imperative to outline and align terms in the contract about variations.

Change orders are legally binding, and acceptable terms of a construction contract. But these do not only work in favor of a general contractor. The original contract should have clear instructions on how to manage and carry out the change order because this alters the project scope and schedule affecting the contractor’s liability. A change order is considered valid, as long as the client and the general contractor agree on all terms. Such changes in the work may be executed without invalidating the contract through change orders, construction change directives, or orders for a minor change in the work, all of which are subject to the terms and limitations of the original contract documents. Equitable aspects of a change order should be respected both ways, between the general contractor and client.

GENERAL CONTRACTING AND CHANGE IN SCOPE OF WORK

Change in scope of work arises when the general contracting services offered by the contractor in the original contract are altered. Clients must be wary of the implications of change in the scope of work as they may trigger revisions that warrant effects on the schedule, and cost. Clauses in a construction contract must indicate procedural guidelines regarding revisions to a general contractor’s work to initiate and enforce the agreed terms that protect not only the contractor but also the client and the project.

All major standard form agreements deal with modifications to the work, typically within the context of the general conditions. Such standard form agreements help legalize a transaction and in other instances, custom contracts identify that oral modifications are not honored, but only written change orders will be binding for all involved parties.

CHANGE IN CONSTRUCTION DIRECTIVES

Construction directives are written orders prepared by the Architect and accepted by the owner, directing a change in the general contracting services provided by the contractor that must commence prior to agreement on adjustment. These adjustments can be either in the Contract Sum or the Contract Time, or both. The owner has the right to make changes to the construction project through a Construction Change Directive. These changes may involve additions, deletions, or other revisions, which are within the scope of the contract. It is important to note that such changes do not invalidate the contract. If no agreement on the terms of a Change Order is provided, the Construction Direction will be used.

An adjustment on the Contract Sum can be based on three methods:

  1. There should be a mutual acceptance of the lump sum. It must be properly documented, itemized, and supported by substantiating data for permit evaluation.
  2. Unit prices stated and discussed in the contract documents should be successively agreed upon;
  3. The cost must be mutually accepted by the parties involved, either fixed or by percentage fee. If the contractor does not agree with the method of adjusting the contract sum, the Architect will provide a calculation and detailed breakdown based on reasonable expenses and savings incurred by those involved in the work due to the change. This includes an allowance for overhead and profit. However, if none is mentioned, a reasonable amount is provided and supplied by the Architect. The Contractor may as well provide an itemized record together with supporting data according to the Architect’s requirements.
MINOR CHANGES IN WORK

There may be instances when the Architect of Record instructs minor changes in the scope of work that are consistent with the intent of the contract. These changes may not cause a significant adjustment in the contract timeline or budget, but such must still be recorded in writing. As a rule, if the general contracting services that the builder provides will entail an adjustment in the contract sum and time, then he must inform the Architect. Otherwise, if work commenced and notice was not given to the Architect, then the Contractor waives the contract sum adjustment and extension of time. Communication is always key to maintaining a positive relationship between the different parties involved.

UNDERSTANDING YOUR CONTRACT

Contracts establish expectations, and boundaries between the scope of work, budget, and time so be sure to have everything in writing to clarify revisions, deliverables, and timeline.  Ignoring this requirement may cause you to be at risk between payment refusal, guarantee, and bonds stipulated in your work. In worst cases, others take it to a court or an arbitration body to enforce the contract’s requirements which may cause unwanted headaches. The process of agreeing to a change order begins when either one of the parties involved requests a change. A general contractor then needs to prepare a proposal to give a quote for the price of the extra work requested from him.

VERBAL CHANGE ORDERS

Verbal change orders can be tricky. Enforcement of such instructions that are not first written down prior to work commencement may cause friction once enforced on paper and on-site. The primary issues with verbal changes are the following:

  1. Was the verbal change a direction that is expected to be completed?
  2. Does the person have the authority to direct change?
  3. What are the requirements of the verbal direction?

 

Federal contracts are awarded by the federal government which is bound by a strict set of conditions and clauses. During these contracts, there is already an anticipation for verbal instructions given other than the usual written change order which is why a constructive change clause is defined. This clause specifically details that any written or oral direction, instruction, interpretation or determination other than an actual change order that causes variation, the contractor may regard it as an order as a change order provided that he/she gives notice.

These clauses are rarely found outside federal contracts, but it is an example where there should still be a procedure to be followed prior to the execution of any change or variation. During these types of contracts, give prompt notice indicating the date, circumstances, and source of the verbal order. The contractor should note here as well that he regards this as an order for variation or change. Any impact to time and budget must also be included, if possible.

CARDINAL CHANGE DOCTRINE

Every project is expected to experience change at any moment once it has commenced. This however is not an unlimited opportunity for a professional to expend their services when variations tend to overreach. The Cardinal Change Rule is a doctrine that permits major changes and requests to be made to a contract for a construction project. The general contractor has the right to ignore variations that are substantially significant from the original contract and alter the original obligation undertaken because it would be a breach of contract by the owner if he insists on the contractor to perform the work.

To give an example, if the original contract for the general contracting services undertaken is for the construction of a 6-story mall, and later on revised to a 12-story condominium, then the cardinal change doctrine relieves the contractor from building the 12-story condominium even if there is an otherwise valid CCD directing the contractor to build the condominium.

This can be invoked if the overall change order significantly results in a substantial change and variation of the original scope of work.

KEY TAKEAWAYS
  • Determine which changes are within your scope of work. Secure a written change order, and/or a notice to proceed prior to commencing any work
  • Identify the effect on the contract. Changes and variations to work typically affects the contract price and/or timeline. Notify the client and owner if these instances occur.
  • Develop a change management plan. To the extent practically feasible, prepare a separate record for all changes and variations outside of the original scope and segregate your record to track these changes and their effects individually.
  • Change orders are not always a negative reflection of a project. Protect your time, profit, and client’s interest by reinforcing your professionalism through your commitment to quality.
  • Remember equity and fairness to avoid disputes. Reasonable terms should be the goal of all parties involved in construction.
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