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Taking Orders

Oct. 21, 2011
How electrical contractors can effectively adapt to change orders from owners and engineers

Despite the canard that electrical contractors use change orders to increase their profits, most electrical contractors know of an instance in which a change order — or a series of change orders — cost them a large sum of money. “Despite stories about fat contractor profits in changes during construction, in reality, they are an onerous economic burden on all concerned,” writes Arthur O’Leary, FAIA, MRIAI, a 40-year construction project veteran, in the article, “Coping with Change Orders,” published in Design Cost Data magazine. “Contractors often have difficulty in breaking even on changes.”

Ron Soltis, president and CEO of Electrical Enlightenment, Inc., a Columbia Station, Ohio-based national professional electrical estimating service company, tells the story of an electrical contractor in his area that was contracted by a general contractor (GC) on a fitness club project. About a third of the way into the project, a scope change occurred, which added a pool and locker room. Although the electrical contractor generated several change orders that the GC’s project manager signed off on, after the work was completed, the GC refused to pay for the changes, which totaled more than $140,000.

The original contract for the project stated that the electrical subcontractor “shall obtain written approval with authorized signature for all changes prior to starting or installing any such changes.” In this case, the project manager who signed the change documents was, in fact, not the authorized signer. The only authorized signer was the president of the general contracting company. As a result, the electrical contractor was not able to recoup the cost of the changes.

Blame Game

A prerequisite on any project, contracts — based on documents published by the American Institute of Architects (AIA), Washington, D.C.; The Associated General Contractors of America (AGC), Arlington, Va.; or the Engineers Joint Contract Documents Committee (EJCDC) — limit responsibility of the subcontractor to the work that it is expected to provide. In addition, they outline the parameters on the project and provide structure for coordination, management, and changes.

It is rare that any construction contract can be undertaken from start to finish without some necessary changes. “Jobs are rarely completed exactly as originally planned,” explains Soltis, who has more than 29 years in the electrical construction field as a master electrician and electrical contractor, as well as an instructor in lien law, financial management, and business management. “The best planners and design teams will never be able to create a perfect project, so changes are inevitable.”

The number of change orders on a typical job depends on the nature of the project, according to Tim L. Linenbrink, P.E., NSPE, principal engineer for North American Engineering, PLLC, a Richland, Wash.-based electrical engineering and consulting firm. , who notes that especially in new construction — particularly the green field approach — seven to eight change orders per project are the norm. However, these changes have a tendency to have a higher dollar value. With renovation projects, especially in older buildings where construction crews can encounter surprises, there may be as many as 50 change orders. Yet, these will generally be for a smaller amount, unless something really significant is discovered during the course of the project.

There are several types of change orders, and also a variety of reasons for them (click here to see Table). “Some of the changes originate with the owner who finds that the scope of the project must be modified to reflect changes in the building’s ultimate use or for important economic reasons,” writes O’Leary. “Also, owners are entitled to change their minds. Other changes are caused by the necessity of correcting errors in the contract documents or to comply with evolving building code requirements. Sometimes specified materials or equipment are unavailable at the time of purchase.”

According to Linenbrink, the most common reason for change orders is when the owner decides to deviate from the plans followed by situations where the engineer has mistakenly omitted something from the plans. “Engineers are allowed a certain number of errors and omissions in the drawings and specs because nobody can be clairvoyant,” he says. “There are certainly times where I forgot something.”

Additionally, there are times when change orders are caused by a misunderstanding between the electrical engineer and electrical contractor. “The subcontractor in bidding the job will make one set of assumptions that was never the engineer’s intent,” explains Linenbrink.

This situation can cause animosity between the electrical engineer and the electrical contractor. “Almost every set of engineering drawings tries to shift the risk of an omission to the subcontractor with some verbiage on there, saying the electrical contractor has to be fully familiar with everything before they bid the job,” says Linenbrink. “Of course I agree with the subcontractors. It’s not their job to verify that the engineer’s plans are complete in every respect.”

This follows what he refers to as “the fountainhead of all construction law in the United States,” which is the 1918 case U.S. v. Spearin. “That’s basically where they established the fact that if an owner — and this is back in the days when most owners did their own engineering — gives a set of plans and specifications to a contractor, then the owner can’t come back and sue the contractor if he’s disappointed with the result,” says Linenbrink.

However, when it comes down to subcontractors issuing their own change orders, the case isn’t quite as clear. “[Sub]contractors discover physical or economic situations, usually unanticipated, that would make it imprudent or impossible to follow the contract documents,” writes O’Leary. “So, they make suggestions for changing the contract requirements. They also offer recommendations in the interest of value engineering applications.”

Proper Procedure

Soltis advises to never use or anticipate that a change order can help to gain competitively bid work. “Most owners recognize these situations and make it a significant difficulty to obtain change orders that will be over priced,” Soltis continues. “In some instances, the owner will look to third-party services to qualify change orders and negotiate very hard.”

Yet, on the other side of the spectrum, the electrical contractor should never give away work in hopes of receiving additional work in the future, maintains Soltis. “This can result in financial ruin for the subcontractor,” he says. “Do not let your change orders hang you out to dry.”

Still, there are steps electrical contractors can take to make sure they’re not left unpaid for work generated by change orders. From the start, advises Soltis, never sign a contract that states there are no extras or changes allowed. “These types of contracts only lead to significant grief for the subcontractor,” he says.

In addition to being unrealistic, a no-changes clause can indicate the owner doesn’t have enough money or experience to complete the project. “Neither party has an inherent right to change any of the terms and conditions of a validly executed contract unless the contract itself contains provisions that specifically allows for changes,” writes O’Leary.

If a change order is similar to the originally contracted work, the contractor is legally bound to perform it, but if it defines work that is dramatically different from the rest of the project, the contractor has a right to refuse it, according to the report, “Research Proves the Cumulative Effects of Change Orders,” by Awad Hanna, professor of civil engineering at the University of Wisconsin-Madison, commissioned by the Electrical Contracting Foundation (ECF), the Construction Industry Institute (CII), and the Mechanical Contracting Foundation (MCF).

If the contractor doesn’t refuse the change, whenever there is a deviation, amendment, expansion, or variation to the original job as planned and specified in the contract, a written change order should be issued to modify the original contract and add the changes as being part of the original contract and overall job, says Soltis.

With a clause requesting an “authorized signature,” such as in the nightmare scenario mentioned previously, the electrical contractor should make a request in writing to the contracting party at the time of signing the original contract, requesting the name, title, and contact information of the person who is approved to authorize change orders. The letter must be on the contracting company letterhead and signed by a principal of the company, preferably the president or owner. “This example and similar clauses are very dangerous clauses in your contract,” says Soltis.

In addition, informal conversations with the owner should never be accepted in lieu of the proper procedure. “Some changes will occasionally occur outside the formal process,” writes O’Leary. “These are highly susceptible to dissatisfaction and controversy and should be avoided if at all possible.”

Cost of Change

Change orders usually divert some manpower and equipment needed for the original contract work, according to Hanna in his report. “In addition to these expensive impacts on unchanged work, each change order is generally much more expensive to perform than an equivalent amount of work in the basic contract.”

It is estimated that change order work can cost 10% to 15% more than equivalent work from the original bid. Often, owners mistakenly believe the inflation is due to contractors charging more for this type of work. “The sad fact is that work will cost more when it is not done in sequence with the original work,” writes O’Leary.

Therefore, to dispel the unfair charge, electrical contractors must follow proper procedure for change order work. In addition, any change — up or down — in the contract price or unit prices should be agreed and entered into the change order form. “Don’t always assume where the costs go,” says Linenbrink. “Depending on the sophistication of the owner, they may be thinking that they’re getting all of these changes for free until the end of the project when they get hit by a $30,000 to $40,000 change order.”

Change orders disrupt the schedule developed for the project, notes Soltis. To properly execute a change order, document the name of the project, the date, and the date the change occurred; describe the change in detail and the work involved to incorporate the change into the project; provide impact on project in time and man-hours, as this will validate overtime or an extension of the overall project completion date; and provide a detailed cost of the change.

By failing on this front, Soltis says the subcontractor can jeopardize the change order or, worse, create a financial crisis. Properly costing a change order is essential to the contractor, as this will be the final stage of negotiating a change order cost. The electrical contractor should provide a complete material list with published pricing and labor units from a published source to ensure the cost negotiation is in his favor. Creativity in detail here represents higher return. “Don’t ballpark your quote,” he says. “It’s better to submit a price after a couple of hours or the next day before submitting a quote that will be wrong. It is poor policy to wait until the contract is completed before billing the customer for changes and extras. At that time, details may not be as clear. Invoice and get paid for extras as soon as they are completed.”

Contractors and owners often disagree on the pricing of change orders, writes Hanna. Contractors claim that change orders have a cumulative impact on labor and productivity. The more change is requested, the greater the impact on the efficiency of the total project — changed and unchanged work alike.

However, the report concludes the U.S. judicial system and owners agree that contractors have a right to fair adjustments in contract price for owner-initiated changes, but there’s no consensus on the cumulative impact of the changes. Documentation does, in fact, play a big part in winning arbitration and cases. In cases where cumulative impact is acknowledged, the contractor typically has an abundance of evidence supporting the claim. When he fails to collect substantial productivity data over the course of a project, the court typically sides with the owner or grants the contractor only a fraction of the argued sum.

“The reason for the change must be documented,” emphasizes Soltis. “The more specific the information, the easier it will be to negotiate the cost for the change order.”

About the Author

Beck Ireland | Staff Writer

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