War or Peace: Change Orders
Ulf Wolf / March 2016
Why, when you hear the words “change order,” should your first notion be “contract amendment”?
It is because, legally, a “change order” is in fact the industry term for an amendment to your construction contract and is what they call a bilateral agreement between the parties to the contract: between owner and general contractors, between the general contractor and the sub, or even between two subs to make a change to the original construction contract.
In fact, the change order represents a mutual consensus between these parties on a project change, whether that be to the work itself, to the schedule, to the price or to some other term of the contract.
Never lose sight of that: The change order is a bilateral amendment to the construction contract. So, legally, neither the sub nor the GC can “issue” a change order and expect it to be executed without agreement by all concerned to do so.
Bottom legal line: Change orders must be agreed upon in writing.
Of course, anyone may propose a change order, but this change order must still be agreed upon by all concerned before it takes legal effect.
Meanwhile, back on planet Job Site …
Handshake vs. Clauses
More often than not, the need for a change order rises due to shortcomings in design, sloppy GC project management or below-par work done by other contractors on the site. And, invariably, time is of the essence—meaning, the owner or the GC is not about to let the completion date slip.
Given these circumstances, there is rarely enough time for the change order protocol to be followed to the letter (as laid out in the contract): written quote from the sub, accepted by the GC, approved by the owner, returned to the sub all signed and sealed. No, this change has to be completed by the end of the day, because the electricians arrive tomorrow morning.
Given this situation, without a formally approved change order, would you refuse or oblige?
Says Robert Coyle, operations manager and vice president at Dayton Walls & Ceilings, Inc. in Ohio, “We have never refused, but where we have been burned by a particular PM in the past, we would refuse no matter what GC they are working for at the time. If we are working with a trusted GC/PM—based on past experiences—we’d have no problem obliging them.”
Shares Mike Heering, president of F.L. Crane & Sons, Inc. in Mississippi, “We always weigh the impact of a refusal on the project, and we also look at who the GC is and what our record is with them when it comes to resolving things after the fact. When there is little cost impact, or if I owe the GC a favor for something he has done for us, I’d return the favor.”
Brian Mead, president of Commercial Builders, Inc. in Florida, recommends sticking to the contract. “I’d always refuse,” he says. “In the end, it all comes down to your contract language, so make sure you’re up to speed with this part of your agreement.”
He then adds, tongue in cheek, “The only way I’d perform without a formal change order would be if I was handed a rather thick envelope.”
Todd Lawrie, president of Delta Contracting Service, Inc. in Michigan, shares his experience: “We rarely refuse. However, with certain GCs, I’d insist the owner of the company signs a letter stating that his field superintendent is authorized to approve change orders in the field that obligate the GC to pay.”
Kevin Biddle, president of Mader Construction Co., Inc. in New York, would refuse an unofficial change order if “we have not done work with the GC in the past or if we have done work and had issues on COs on previous jobs. That said, if we have a good working relationship with the GC, no problem.”
Giles Turgeon, president of Green Mountain Drywall Co., Inc. in Vermont, agrees. “It all depends on our relationship with the GC,” he says. “Some I trust and some I don’t. I’d help any GC with whom I have a good relationship.”
Says John Kirk, owner of Kirk Builders in California, “One national GC gave us a really hard time with CO work we did on a very challenging job. I will do no future CO work for them without full, written approval, regardless of their schedule problems. I will, however, help GCs with whom I have a trusting and comfortable relationship.”
Robert Aird, president of Robert A. Aird, Inc. in Maryland, shares this: “We refuse such change-order work all the time. The only exception would be when the risk/penalty of not performing is greater than not doing the work.”
Robert Sutton, estimator and project manager at Reitter Stucco and Supply in Ohio, says he would “refuse such COs on any government/public project where the contract language clearly states that ‘no work is to be performed without a formal executed change order.’ The same can be said of any client with standard subcontract agreement language where their policies forbid performing additional work without an executed CO. And, we definitely would not do additional work for any client who may have stiffed us in the past on valid additional work.
“As for when we would perform, I believe every subcontractor has a client or two they do most of their work for and feel very comfortable performing extras for, knowing they will eventually get paid. It’s called building trust and developing relationships. Unfortunately, this seems to be happening less and less in today’s construction industry, and the days of performing work on a handshake seem to be a thing of the past. If you’re lucky enough to have clients like this, remember not to overcharge them, and treat them with respect. Most of all, be fair. They will undoubtedly return the favor.”
George Kissamis, manager of the tenant/acoustical division at Marek in Texas, has this take on the issue: “We usually refuse CO work without formal written approval, unless the scope is minimal and doesn’t impact designs or dimensions or the schedule.”
Greg Smith, vice president of estimating at Superior Wall Systems in California, says, “We rarely refuse to perform change order work. The relationship has to have eroded to the point where we no longer trust the GC and/or owner, and we have not been paid for previous change orders. Refusing is a strong position to take and one needs to be prepared for quite a battle and some vibrant conversations once that decision is made and communicated. Of course, performing change order work without prior written approval is more the norm, especially when there is two-way trust: The GCs trust us to perform good work, and we trust them to pay us for extra work.”
Ron Hughes, construction manager at Daley’s Drywall & Taping, Inc. in California, shares this: “Since we are usually obligated by contract to perform any and all changes that fall within our scope of work, it is difficult to refuse changes without breaching the contract. However, we view owners who deny payment or who refuse to approve change orders as in breach, and we can use future changes as leverage to collect on unpaid change orders already performed. This is a very difficult situation, since most contracts favor the owner and we are now at a point of considering the change order policies very closely prior to signing a contract. If the protocol cannot be agreed upon, we’ll simply not sign that contract, especially in cases of poorly designed projects that may carry considerable risk of changes.”
“Now,” Hughes, continues, “if GC and owner are slow to approve change orders but have demonstrated that they do in fact issue them (eventually), we will usually proceed without a written or formal change order, but not without a written direction to proceed and the acknowledgment that a change order will be issued.”
It does seem to boil down to mutual trust, and here experience speaks louder than legal language. Those fortunate enough to work with trusted GC partners, the formality (or not) of COs becomes a non-issue. But where trust is absent, the contract language must direct your decisions and actions. So be very sure that you—with the aid of legal counsel as needed—have a very good grasp of the ins and outs of change order clauses.
These days, change orders seem to be a way of life. But are wall and ceiling contractors seeing more of them these days, or fewer?
Says Coyle, “We see more of them due to incomplete drawings.”
Heering agrees. “We see more change orders today than we have in years past,” he says. “I feel this is the result of the architect being obliged to lower his price to land the job and having to cut the more time-consuming, detailed work from the plans. Perhaps the owner does not have the experience to examine the drawing side of things closely, so he does not see the design shortcomings that the builder then runs into during construction.”
Observes Sutton, “I believe we are seeing more change orders, mostly due to lack of information at bid time.”
Says Mead, “As the market continues to expand, architects are in much the same position as the GCs and subs: too much work, not enough skilled help, under pressure to start the next project. Consequently, plans in general are deteriorating. In a competitive bid, you can and must only bid what the plan documents and specs call for, nothing more, nothing less; so you must make sure that you qualify your bid and have those qualifications spelled out in your contract.”
In the experience of Michael Taylor, vice president at Liddle Bros. Contractors, Inc. in Tennessee, there are more COs on every job. He says, “This, in my opinion, is due to lack of knowledge throughout our industry—architects, GC (new PMs), spec writers, etc. Plans are not detailed since the owners, to my understanding, do not want to pay the architect to provide this. This creates jobsite confusion. GCs have CO protocols in place but often bypass them due to time constraints. This puts all of us in a mess. We will, as a rule, not perform CO work without proper written approval, but this is often lost in the paperwork. It’s a battle that we fight daily, and it costs us all a fair amount of money.”
When it comes to paperwork, Lawrie could not agree more. He says, “We have begun adding costs associated with managing added work orders into our bids. There have been times when the additional work took less time than the process to initiate and obtain approval for the work.”
In New York, Biddle also sees an increase in COs. “We seem to see more on the larger projects,” he says, “mostly due to lack of detail in the drawings. The owners do not want to pay for a complete set of drawings, and sometimes it comes back to bite them with extra work.”
Aird agrees: “There are more RFI and COs today due to the fact that drawings are seldom complete. The word is that owners are not giving the architects enough time or money to produce full, accurate sets.
“On the other hand, BIM is gaining popularity and greatly reduces the number of hiccups and RFIs. When I was teaching the AWCI EIFS—Doing It Right® course for a large California drywall outfit, there was a project manager in the class who was working on a hospital where 7,200 RFIs were generated. In the same room was a young architect who had been hired to deal with owners and architects. He claimed to have worked on a $100 million project at Disney World that employed BIM and there were 10 RFIs. Let’s hope that’s the wave of the future.”
Adds Hughes, “In most of our commercial work, change orders are increasing with every new project and, in my opinion, becoming a problem. Most contracts (including the standard AGC—Associated General Contractors contract), indicate that changes are to be priced, and when accepted by the owner and GC, a change order is written and signed. However, if the owner and/or GC do not agree with the price or the scope of work, a Construction Change Directive can be issued forcing the contractor to proceed with the work on a T&M basis while acknowledging that there is still not an agreement on the terms of the change. This CCD loophole is a major problem since it is a way for the owner to gain complete control over pricing (materials, labor and markups), something they normally don’t have during the bidding process. When we as a sub are forced to proceed with a change on T&M, we are held to contractual markups, which only cover the basic costs and nowhere near cover overhead, let alone profit.
“The standard markup allowance is 15 percent, and at that markup, we lose money on every single change order. In effect, the owner is having work done for much less than the amount at which it was bid. This is becoming the norm, and we are now seeing jobs awarded with incomplete design, where the bulk of the design (that should have taken place prior to bid by the owner’s design team) now being done by the subs and then added to the contract via change order.”
“I’m fairly convinced,” Hughes continues, “that this is a strategy that, when implemented, forces the subcontractors not only to perform but to finance these changes since change orders for T&M work typically take 90 to 150 days to see the light of day. Add to that the time for billing and collecting.”
The consensus is that the number of change orders are on the rise, and this mainly due to incomplete drawings and specs, making it hard, if not impossible, to submit complete scopes and details at bid time.
Aside from incomplete drawings, are there other contributing factors to the rise in change orders, such as the fact that the industry—having lost a large layer of experience during the downturn, not only among subs but among architects and GCs as well—has had to hire many new and inexperienced employees?
Says Turgeon, “This is definitely the case with the architects and GCs.”
Adds Aird, “In the last couple of downturns, some senior, experienced architects, superintendents and project managers were released. When the market improved, young, bright, computer-literate people with little or no field experience were hired to replace them. Sometimes these guys ask for the impossible, not knowing the difference between the possible and the impossible. Sometimes they hold us to the absolute letter of the contract, which is not always fair.”
Sutton says, “Absolutely, yes, but they are typically not at fault. Newer employees simply lack the negotiating skills their elder counterparts have or had. The younger generation (of GCs) can be very rigid in their approach to change orders and what should be deemed as fair. Too often they forget, or simply don’t know how, to reach a deal with the subcontractors.”
Kissamis concurs. “Yes,” he says. “The amount of experience does affect the change order landscape. Inexperience leads to design changes after scope is finalized to long-lead items not being incorporated into the schedule, which in turn leads to unachievable deadlines.”
“There are a couple of types of change orders that come into play,” says Smith. “Those that are owner-requested change-in-scope, where experience has no real bearing. Another scenario is where we have to seek compensation through the change-order process due to a poorly managed project that has us working out of sequence and with subs who do not perform up to standard.”
Adds Hughes, “Young and inexperienced PMs working for GCs greatly impact the communication between subs and the owners. A seasoned PM can ‘sell’ change-order requests to a difficult (or inexperienced) owner because of his experience, whereas a green PM most likely will not go to bat for you in the case of a complicated change, especially when he doesn’t fully understand the reason for the change or has little experience with ‘industry standards.’
“So, yes, inexperience can and often does create a new layer of complication in trying to sell and collect on change orders.”
Many architects, who also shed a layer of experience during the downturn, have had to recruit fresh, computer-based employees whose main skill is computer-aided, cookie-cutter design, and who lack any sort of field experience. This, along with slashed budgets, goes a long way to explaining the shortcomings of current designs (and their lack of detailing).
As many contractors have expressed in the past, some of the designs they are presented with at bid-time simply cannot be built, leading to a host of change orders in the field.
With COs increasing—a fact that must have struck the GCs as well—do wall and ceiling contractors see any changes in contract language concerning change orders? If so, how they are to be processed? Are CO clauses becoming more stringent or lenient?
Observes Heering: “These days I see contracts that specify that no change orders are allowed, and it does not get much stricter than that. I think the GCs (or so they tell us), in order to land the jobs, end up signing owner contracts with these no-change-order clauses in place, and they are then adamant with us that they cannot pass them on to the owners, and that they have to eat them. Needless to say, they are reluctant to approve any change orders.”
Says Mead, “No real change. Nearly all GCs use boiler-plate contracts, so it’s up to you to add addendums to the agreement that benefit your firm.”
Adds Lawrie, “It seems that the owners are becoming stricter, which causes GCs to tighten up when it comes to accepting work changes.”
Says Turgeon, “Some GCs include specific contract guidelines on precisely how to manage change orders. For example, how much you can charge per man-hour (and no more). Additionally, they now would like to see copies of your material invoices, and they will only permit a 5 percent markup.”
Shares Sutton, “Clients never become more lenient with subcontractor agreements and definitely not with their change-order clauses. These days we are seeing less and less markup allowed, and in some instances clients have attempted to remove the markup completely, citing it should have been covered in our initial bid.”
Quips Biddle, “Most of them do have specific protocol on extra work and change requests, but the GC seems to forget that protocol as the job heats up.”
Kissamis says, “In general, the rules have toughened due to the owner and architect being more involved in the pricing process. We are often asked to provide line-item backup to all our pricing, as well as total quantities and takeoffs. Also, some changes are often expected to be done at no additional cost.”
Hughes says, “Even though contract wording on changes to scope of work is generally vague, the restrictions to what can be included in those changes are very specific and have become more stringent.”
While many contractors do see tougher and more restrictive change order clauses—favoring the general contractor and/or owner in each case—it should also be said that many see no significant changes to the contract language.
War or Peace?
On paper, the change order is very much a legal issue, while in the field, it is very much a relationship issue.
Be aware that the more inexperienced the GC’s PM, the more he or she will live by the letter, rather than the spirit, of contract language—in which case you need to ensure, before signing, that the contract and the change order clauses work in your favor as well as the owner’s. In this improved economy, you may well have the option of not signing if you find the terms unfair.
Ultimately, though, peace will only be won through the mutual respect and trust that builds with experience. Treating the GC (and owner) fairly will see you treated fairly as well.
California-based Ulf Wolf is the senior writer at Words & Images.