Contract Change Clause

The Change Order Process

January 29, 2008

Presented by the
Claims Avoidance & Resolution Committee
Construction Institute
Claims Avoidance and Resolution Committee 1
 Presenters

• Dan Becker, PMP, M.ASCE, CCE

• Michael Radbill, PE, F. ASCE, CPC

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Changes are a Natural Part of
construction
• Changes may have both cost and
schedule impacts.

• Dealing with changes promptly will have

the least amount of impact on the budget
and schedule.

• Delaying resolution will increase costs,

jobsite friction, and delay the completion
of the project.
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Reasons for Changes

• Differing site conditions.

• Regulatory changes
• Owner/stakeholders change their mind.
ƒ Scope added/deleted during construction.
• Information missing from the contract documents
• Project Delays
• Adverse Weather
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Owner’s Perceptions of
Change Orders

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Contract Changes Presentation
Goals

• Define the change order process.

• Provide recommended practices for use on your

contracts.

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Change Process Elements

• Define the Process

• Change Proposal Submittal
ƒ Scope
ƒ Timing
ƒ Pricing the Change Order Request
ƒ Time and Materials Work
ƒ Schedule Impacts

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EJCDC
• Many of the terms and processes included in
this presentation are based on the Engineers
Joint Contract Documents Committee Standard
(EJCDC) General Conditions.

• Issued and Published by:

ƒ American Society of Civil Engineers
ƒ American Council of Engineering Companies
ƒ National Society of Professional Engineers

Disclaimer: Terms used here may vary depending on the Owner,

process, and/or contract used.

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Change Order Clauses

• Most construction contracts state “… the Owner

has the right to issue changes without invalidating
the Contract.”

• EJCDC – Article 10.01 (Work Change Directive or

Change Order)

• AIA A201 – Section 7.3.1 (Construction Change

Directive)

• FAR Contracts – Section 52.243

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Defining the Elements
• Work Change Directive (WCD) – A statement to the
Contractor from the Owner (design team, Owner’s Rep, CM,
etc.) requesting an addition, deletion, or change to the work.

• Field Directive (FD) – Written directive from the Owner

directing a minor change to the work that will not impact the
contract price or time.

ƒ If the Contractor feels the FD impacts the budget or

schedule, it is required to notify the Owner.

• Change Request (CR) – Notification from the Contractor to the

Owner of a change to the Contract time and/or schedule

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Defining the Elements

• Change Order (CO) – Document that incorporates changes to

the scope, price and/or time into the Agreement/Contract.
ƒ Bilateral Change Order – Change Order whereby both the
Owner and Contractor agree to adjustment to the price and
time.
ƒ Unilateral Change Order – Change Order issued by the
Owner when the Owner and Contractor cannot come to an
agreement on the price and time.
• Claims – A demand or assertion by the Contractor (or Owner)
for an adjustment to the contract time or price.

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Owner Directed
Change Process

The General Conditions

of the Contract define
the process to follow.

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Contractor Change Request
Process Contractor Identifies
a Change

• Most Contracts do not Contractor Notifies

spell out a “Contractor

the Owner with
Contractor Change Request
Withdraws
Request

Change Request”
process. CR Rejected
Options
Owner’s
Review
CR Accepted

Contractor CR Accepted
Prepare

• If the Contractor wants to

Prepares Claim
Engineer’s
Contractor Prepares Estimate of Time
Cost & Time Estimate and Cost Impact

submit a change request

it needs to follow the Owner Review
Contractor's
Submittal

“claims” process defined

in the contract to request Negotiate Cost and
ScheduleImpacts
with Contractor

a change.
Reach
Yes No
Agreement

No

Execute
Issue Unilateral
Change Order Withdraw
Change
WCD / FD
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Notification Requirements

• EJCDC Contract states that the Contractor must

notify the Owner within 30 days of notification of
the change by way of the Claims clause.
(Section 10)

• The AIA document has no requirement for

submittal of Change Proposal.

• FAR General Conditions state that the

contractor must assert its rights for added costs
and/or time within 30 days of notice of change.
(Section 53-243-4)
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 Recommended Practice
• Include in the Contract’s General or Special
Conditions or Division 1 a statement like
“The Contractor has 10 days to provide the Owner with their cost and
schedule impacts resulting from this Work Change Directive.”

• If the Contractor is “allowed” to extend the

submittal date; don’t let the proposal submittal
extend indefinitely.

• Benefits:
ƒ Receive the information early enough to make a decision on
whether to move forward with this change or an alternative.
ƒ Resolve issue while fresh in everyone’s mind.
ƒ Reduces ability to claim at the end of construction.
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 Change Request

Sample Title:

Request Date:
No.:

Change Form
Project:
Contractor:
Contract No.: WO Contract No.:

Initiated by:
Owner Engineer Contractor CM Other:

Include a Change Request

The following change is proposed for the project. Please provide us with your proposed cost and schedule
changes for this request as described below (use additional pages if necessary):

proposal
return date
This work shall be constructed in accordance with the terms and conditions of the Contract Documents.

The Contractor shall provide it’s proposal for this work by _____________________________.

Contractors Proposal:
Increase Decrease $

Increase Decrease Days

Recommendation: Amount $
Comments

Accept Reject Accept Reject

HDR Engineering, Inc. Date Otak Date

Local Programs:
Accepted Rejected By: Date:

Utility Provider: (if required)

Accepted Rejected By: Date:

City:
Accepted Rejected By: Date:

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Work Change Directive
Proposal Submittal Requirements
• Pricing Changes
ƒ Forward pricing changes
ƒ Time and Material pricing
ƒ Define the basis for costs
• Labor rates
• Equipment
• Materials
ƒ Define mark-ups
ƒ Define mark-up distribution

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Forward Pricing Changes

• Agree on the change order price before the

Contractor begins the added work.

• Risk shifts from Owner to Contractor

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Advantages of Forward
Pricing Changes

• Owner – Certainty of the cost and schedule impacts

before changed work starts.

• Contractor – Payment for the changed work when

changed work is performed.

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Disadvantages of Forward Pricing
Changes
• Owner – They may feel they are paying more
than the change is worth.

• Contractor – Changed work may cost more

and/or take longer to complete than the agreed
amount.

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Committee 20
Forward Pricing Changes
Using Unit Prices (UP)

ƒ Use Contract Unit Rates for changed quantities

ƒ Many UP Contracts allow for re-negotiating Unit
Rates when quantities
• < 75% of bid quantities
• > 125% of bid quantities
• Use process for lump sum contracts to negotiate UP
rate changes

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Final Thoughts on Forward
Pricing Changes
• Lump Sum Proposal supported with cost breakdown.
• Some contracts define how changes should be priced
in the changes clause. (AIA Section 7.3.6, NYC
Contract Article 26)
• Others default to other clauses such as force account
or accounting clauses. (EJCDC directs to Section
11.01, Section 15.4 of the FAR)

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Recommended Practice for Forward
Pricing Changes in Your Contract

• Define how the Contractor should price labor,

materials, equipment, construction equipment and
tools in the Contract.

If you cannot include this in the contract, then…

• Agree on how you plan to price labor, materials and

equipment at the start of the project, before the first
change is issued.

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Defining Basis for Costs

• Determine how labor productivity will be defined;

using actual, projected, or industry defined
production rates.
• Labor wage rates; Based on:
ƒ Davis Bacon
ƒ Prevailing Wage Rates
ƒ Contractor’s actual payroll
• Actual labor costs or blended rates.

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Forward Pricing Changes
• Material prices based on:
ƒ Invoices
ƒ Quotes
ƒ Audited costs

• Construction Equipment prices based on:

ƒ Invoices
ƒ Quotes
ƒ Contractor’s accounting records
ƒ AGC/Blue Book

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 Change Order Mark-ups

• Some contracts define mark-ups.

• Typical mark-ups:
ƒ Labor 10% to 30%
ƒ Materials 10% to 20%
ƒ Equipment 10% to 20%
ƒ Subcontractor work 5% to 20%

.
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EJCDC Mark-ups

• EJCDC Contract Mark-ups.

ƒ Labor 15%
ƒ Materials & Equipment 15%
ƒ Construction Equipment 15%
ƒ Subcontractor work 5%

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 AIA Document Addresses
Mark-ups

• “…cost plus a reasonable sum for Overhead

and Profit.”
.

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NYC Contract Mark-ups

• NYC Contract Mark-ups.

ƒ Overhead
• Labor 10%
• Materials & Equipment 10%
• Construction Equipment 10%

ƒ Profit 10%

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MTACC (New York City)

ƒ Overhead & Profit ≤ 21%

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ConsensusDOCS

ƒ “…costs calculated on a basis agreed upon by the

Owner and Contractor plus ___% Overhead and
___% profit; or
…
ƒ “…if there is a net increase in the Contract Price, the
Contractor’s Overhead and profit shall be adjusted
accordingly.”

ƒ In case of a net decrease in the Contract Price, the

Contractor’s Overhead and profit shall not be
adjusted unless ten percent (10%) or more of the
Project is deleted.

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Time & Materials/Force Account

• When Owner and Contractor cannot Agree on the costs,

Owner issues the change directive to be performed on a
time and materials basis.
• Risk is on Owner vs Contractor
• Payment based on actual costs plus agreed on mark-ups.
• Daily T&M sheets are completed and signed by the
Contractor and Owner.
• Payment is made after incorporated into the Contract by
Change Order.
• The contract should state what support activities and costs
will be included in a time and materials change.
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Advantages/Disadvantages to T&M

• Advantages
ƒ Owner – Work starts on change when directed; reduces
potential for schedule impacts
ƒ Contractor – Certainty of costs after the work is
completed
• Disadvantages
ƒ Owner – Uncertainty of costs when the change work
begins
ƒ Contractor – Loses ability to make more money on
efficiencies

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 Recommended Practice

Change Order Mark-ups

• Define mark-ups in the Contract.
• Mark-ups should be reasonable and consistent
with area practices.

• If you can’t put them in the Contract, then

negotiate the rates at the start of the project as
a first order of business.

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 Recommended Practice

Time & Materials Work

• Issue a Not-to-Exceed amount for the changed
work.
• Mark-ups (profit) for Time & Materials should be
reduced due to reduced risk.

• If you can’t put them in the Contract, then

negotiate the rates at the start of the project.

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 Recommended Practice

Identify what the mark-ups cover.

• Field office – Identify facilities, office equipment, etc.
• Field staff – Project Manager, Superintendent, Field
Engineers, administrative support, etc.
• Home office – Office expenses, officers, legal, accounting,
etc.
• Insurance
• Bonds
• Profit/Fee
• State whether OH included in the mark-ups is applied to any
contract time extensions
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 Recommended Practice
Proposal Submittal Requirements

• Schedule Impacts
ƒ Include schedule impacts in all changes to avoid schedule
impact claims at the end of the project.
ƒ Require a preliminary Time Impact Analysis (TIA) with any
schedule extension request and a TIA 30 days after the
event is complete.
ƒ Negotiate extended overhead and/or acceleration issue
NOW
ƒ Agree on new project end date.

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Cost of Extended Overhead

• Agree to extended overhead amount when you

agree to the new contract completion date.

• Costs for extended overhead based on:

ƒ “Modified” Eichleay
ƒ Negotiated Amount/Rate
ƒ Time related overhead

NOTE: Some States have regulations prohibiting

“No damages for delay clauses.”
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Time Related Overhead (TRO)

• California Department of Transportation (Caltrans)

uses TRO on some Unit Price contracts
ƒ Bid Item either:
• Lump sum (divided by the number of contract days)
• Daily Rate

ƒ Contract states that the rate will be used for any

schedule extension up to 180 days beyond original
contract completion date.

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Calculating Time-Related-Overhead

Lump Sum Overhead Amount $1,534,500.00

Contract Days (working days) 620
Daily Rate $ 2,475.00/day
Days Added by Change Order 12 days
Extended Overhead Amount to
be included in Change Order $ 29,700.00

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 Recommended Practice

• Identify how you calculate extended overhead in

the contract.

• Define what is included in the extended

overhead:
ƒ Construction support equipment (cranes, forklifts,
etc.)
ƒ Field office – Identify facilities, office equipment, etc.
ƒ Field staff - Project Manager, Superintendent, Field
Engineers, administrative support, etc.
ƒ Home office – Office expenses, officers, legal,
accounting, etc.

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Questions?

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Time Impact Analysis
NTP Baseline Schedule: Early Start
Submit shop dwgs

Review/Approve shop drawings

Fab. Granite
120 Day TF
Install Granite

Baseline Schedule: Late Start

Submit shop dwgs
120 Day
TF R/A shop dwgs

Fab. Granite
Install Granite
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
43
Time Impact Analysis
NTP Baseline Schedule
Submit shop drawings

Review/Approve shop dwgs

Fab. Granite 120 Day
TF

As-Built Schedule 40d

Owner’s
Submit shop dwgs Responsibility
60d Delay
100d Owner delay R/A shop dwgs

Fab. Granite
Install Granite

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 44Dec