ConstructionPro Week, Volume: 1 - Issue: 24 - 10/15/2012

Should Change Order Administration Be Recovered as a Cost of Contract Performance?

By Bruce Jervis

While change orders are sometimes associated with contractor claims, the majority of change orders are initiated by project owners. The reasons vary. There may be problems with the original planning and design of the project. There may be developments the owner could not have reasonably anticipated. Or, the owner may simply change its mind.

Regardless of the cause, an owner request for a change order proposal is a cost for the contractor. Subcontractors and suppliers are queried. Cost estimates must be prepared, schedules revised and contract documents reviewed. With changes of considerable magnitude or complexity, consultants and attorneys may be involved.

Are these expenses recoverable by the contractor as a cost of contract performance? Surprisingly, there is little guidance outside the realm of federal contracting. On a federal contract, the reasonable cost of responding to an owner request for a proposal is a recoverable change order cost if the request results in an actual contract modification and the contractor’s efforts involved administration of the change order process, not the preparation of a claim against the owner.

In a recent decision by the U.S. Court of Appeals for the Federal Circuit, a contractor recovered its consultant and attorney fees incurred in negotiating the price of a change order even though the scope of the changed work had already been established. Had this been a private, state or local contract, recovery of those costs would have been in doubt. The contract documents and procurement regulations do not necessarily address the issue.

What do you think? Should change order administration be absorbed as part of the contractor’s overall G&A expense? Or should it be treated as a cost of contract performance when the change was initiated by the project owner? Where does one draw the line? I welcome your comments.

COMMENTS

No! Cost of Contract Performance....

Posted by: Deb Charles - Thursday, October 18, 2012 11:55 AM

Too often architects and owners insert a clause in the contract stipulates a limit to profits in change orders. These stipulations to change order profits are often less than the original contact profit. I have seen change orders that triple the cope of work and in doing so make the job break even at best. A better clause would limit profit in change orders to what the profit was in the original contracted amount.
Posted by: Garrett Garland - Thursday, October 18, 2012 12:00 PM

Should absolutely be recoverable.
Posted by: D. Rhodes - Thursday, October 18, 2012 12:00 PM

Reasonable costs incurred when an owner initiates changes due only to preference or business circumstances would seem recoverable.

Somewhat similar logic applies when a tenant initiates changes under a lease that contains provisions for the landlord to recover costs incurred to support the work - managing utility interruptions, contractor access, waste removal, security, fire alarm and communications systems work, inspections - those sorts of things, that go beyond uneventful occupancy as anticipated in the basic lease.
Posted by: David Reynolds - Thursday, October 18, 2012 12:02 PM

Thogh the claims depend on the overall contract conditions about dealing with the Change Orders, however I feel that the minor changes are a different issue however the Change Order initiated by the owner and needed planning and involvement of Consultants definitely need be born and paid for to the Contractor. There cant be any free stuff because the Client missed something initially.
Posted by: Sunil Gupta - Thursday, October 18, 2012 12:03 PM

The cost of administrating a Change Order should be included in the general conditions part of the CO if this is allowed by contract. If GC's are not allowed by contract, then it is possible to add this cost to any time extension granted as a result of the change order.
Posted by: Kenneth J. Resizes, AIA - Thursday, October 18, 2012 12:05 PM

Garrett- I agree with your thinking, but not sure how that could be achieved an tendered projects. Bidders would have to disclose margins at tender, which could complicate the bid selection process, as well as compromise the bidder's competitive advantage should the information be made public-
Posted by: D. Rhodes - Thursday, October 18, 2012 12:10 PM

Sure these costs should be recovered since the contractor incurs costs upon obtaining quotations, analysis the price, negotiate,...until reaching an agreed price, yet the additional amount added over the actual cost of overhead and profit includes all those administrative costs. Yet the amount of this change against the over all amount of the contract plays a role as well in determining these additional costs

Posted by: Monif Loutfy - Thursday, October 18, 2012 12:20 PM

Refer to my old articles (nothing is new):

"So Change the Contract" The Construction Specifier,June 1986; "Fair Contracts" The Construction Specifier, June 1989. It does not matter if a deviation from the contract documents is at request of the Owner, Architect, or Contractor, it is all a simple matter of ethics, sometimes refered to as fair to all parties. Keeping it fair is the arbitor and judge role of the Architect. Do no contracts with out the architect in that role.
Posted by: H. Maynard Blumer, FAIA, FCSI - Thursday, October 18, 2012 12:20 PM

The short answer is yes it should be absorbed.

In our case all of our work is compettivily bid, contractors spend lots on money putting together bids as a cost of doing business. The same in my opinion should apply to change orders.We also include an allowance in the bid documents to cover about 5% of the estimated contract amount. This money already has the contractors overhead and proffit built into the allowance. It generally covers most of the change orders for the project. Owners, however, should not over use the change order process to price out a "grocery list" of items that is not essential to the project, unless they are willing to pay the contractor for his time. Also, change orders, not covered by the allowance, include a line item for overhead and proffit which should cover the contractors expence of providing the C.O.
Posted by: J. Arnold Von Hagen - Thursday, October 18, 2012 12:33 PM

Why shouldn't any extra work involve extra pay? There is always extra admin. work involved with C.O.s and needs to be recovered. Complex projects that brakeout the reimbursement for various admin. items are different than smaller projects where such items are probably put in the overall design or construction additional work as a lump sum. Audits may find any number of items that "don't fit contract requirements" at the expense of the contractor or designer if OH and profit items are required to be broken out seperately. You should be paid for all work required in a C.O. I've had C.O.s that amount to more than 70% of the original contract price.
Posted by: Don Godi - Thursday, October 18, 2012 12:38 PM

Costs should be recoverable, unless the change is initiated by and provides benefit to the contractor or their subs. Efforts by the contractor (or consultant, for that matter) to develop a change order at the request of and for the benefit of the owner should absolutely be compensated.
Posted by: J Moore - Thursday, October 18, 2012 12:40 PM

There is no such thing as a "No cost change order", the operative word here is "change", that means the cost of analyzing the change request was not contemplated in the original contract; therefore, under contract law, there was no "meeting of the minds" in that regard and the costs involved should be a compensable additoinal cost
Posted by: James Didericksen - Thursday, October 18, 2012 12:57 PM

Costs should be recoverable especially if change is initiated by the Client and profit should be related to the conditions under which the CO is to be executed.
Posted by: Adeleke Abon - Thursday, October 18, 2012 1:34 PM

Change Orders that do not extend the completion date should be marked up at a higher Profit and Overhead fee percentage than the base contract, in order to cover the higher administative and management costs. The general contractor is at risk to complete he base contract on time; additional Change Order management takes time away from the base contract completion. Sometimes, even NO COST changes take time to estimate, prepare, and discuss. Change Orders that extend the completion date should be increased by additional General Conditions as well as the higher P & O margin.
Posted by: Andrew R Voikos - Thursday, October 18, 2012 2:07 PM

The cost of preparing a proposal for a change order, whether it is additive or deductive to the contract amount, should be paid to the contractor. There are real costs incurred in preparing these proposals and they cannot be absorbed into already thin margins. Could an owner ask a design professional to make changes to the documents without providing additional compensation? Would the design professional accept those terms?
Posted by: Bob Liberato - Thursday, October 18, 2012 2:18 PM

If you word and document it correctly most CO reviews will accept the additional cost. Although some owners / clients will expect the costs associated with developing the CO to be included in the Overhead, although as mentioned above some contracts limit the pct of OH & Profit which again is why it is important to include these costs in your submittal and clearly documenting the costs.
Posted by: John Brandquist - Thursday, October 18, 2012 4:00 PM