Change Orders in Construction Projects in Saudi Arabia

1. Change Orders in Construction Projects in Saudi Arabia CEM 520 Term Presentation Presented by Samer Al-Jishi & Hussain Al-Marzoug January 2007

2. 1. Change Order A change is defined in literature as any deviation from an agreed upon well-defined scope and schedule. Stated differently; a change is any modification to the contractual guidance provided to the contractor by the owner or owner's representative.

3. 2. Literature Review Divided into four parts: 1. The basics of changes and their terminology. 2. The legal aspects of changes. 3. Evaluation and cost aspect. 4. Controls.

4. 2.1 Initiation/Classification of change order Initiation parties of change order: • Owner may request a change. • Engineer because of differing site condition or new governmental regulation. • Project management firm usually in schedule. • Contractor may due to design errors, value engineering ,or field requirement. Changes can be classified in terms of net effect on scope: • Additive change. • Deductive change. • Rework-due to quality deficiency • Force majeure change

5. 2.2 The legal Aspects The major legal aspects: • Selecting the best delivery system • Drafting and interpreting change clauses • Documenting change orders The choice of the type of contract (Fixed cost Vs. cost reimbursable) should be heavily influenced by four circumstances: • The extent to which work is defined. • The desired allocation of risk between owner and contractor • The availability of owner expertise and effort on the project • The need to accommodate fast-tracking of design and construction • The general market place conditions

6. Cont’d: Selecting the delivery system The commonly accepted ideas with respect to contract strategy as follows: • Risk allocation is considered to be, primarily directed toward the contractor in fixed price contracts. • Risk allocation is considered to primarily directed toward the owner in cost reimbursable contracts. • More owner administrative time is required in cost reimbursable contracts. • Documentation and scope definition effect is more critical in fixed price contracts. • Fixed price contract provide less incentive for high quality work. • Cost plus contracts provide more flexibility to change design or scope • Cost reimbursable contract assist in minimizing the schedule while fixed price contracts minimize costs

7. Cont’d: Drafting & interpreting change clauses • It defined how the two parties will handle changes and change orders and form the basis of any legal claims. • Some times owner or an engineer may attempt to avoid responsibility for changes by using disclaimer clause or risk shifting clause in the contract.

8. 2.3 Cost Aspect This type of study about cost aspects can be classified as either : • Qualitative studies discuss the various attributes of cost and schedule impact without Quantifying them. • Quantitative studies on the other hand attempt to quantify the various attributes of cost and schedule impacts. The impact of a change on a cost are classified in the literature as follows • Direct cost impact • Direct schedule impact • Indirect or Consequential Impacts

9. Cont’d.. Direct cost impact There are two components to the cost of change: labor and material cost. Material cost is easy to estimate and predict to certain accuracy. However it is difficult to estimate labor cost due to • The effect of changes on the productivity rate itself • The uncertainty about a the scope o a change

10. Direct Schedule Impact Cont’d.. • It is easy to document a schedule impact of a change after change work is done, because all data is available regardless of its accuracy • Most project are planned using a critical path method

11. Cont’d.. Indirect Impacts • Occur later in other work packages and thus on the total project. Possible consequential effects: 1. Effects on the methods or procedures used in other work packages due to a change in a previous task or package. 2. Degradation of productivity in subsequent packages or activity. 3. Increase in overhead cost. 4. Impact on subcontractors. This situation is called ripple effect

12. Cont’d.. Costing Changes The following procedures are used in costing changes: 1. Price and schedule adjustment are negotiated prior to the start implementation. 2. If unit prices are part of the contract, they will be used as the basis of change work pricing. Unit prices quoted in the contract should not be used to cost changes without consideration to change variation. 3. The contractor is directed to proceed with after the fact adjustment. The first technique is in wide use in the construction industry. However, it requires a commitment form both parties to expedite and carry change procedure in an open and trustworthy environment.

13. 2.4 Management Aspects Change Control To help in controlling changes: • The owner should define his needs and project objectives easily in the project life. • Forming a change review committee which includes owner's project engineer, Business manager and process engineer to carry out the owner's commitment to reduce change effects. • A team effort by all parties to promote recognition, reporting ,and resolution of a change is required throughout the life of the project • Freezing the design is a strong control method. • All changes must be justified from a cost point of view. • Efficient change procedures must be followed to avoid any delay in evaluation.

14. 4. SURVEY QUESTIONNAIRE Questionnaire Design • Brainstorming • Meeting with key members in industry • English/Arabic versions

15. 4.1 Contents The questionnaire has six sections: • Instruction to respondents • General information about respondents • General industry Characteristics • Causes of change orders • Effects of change orders • Controls of change orders

16. 4.2 Statistical Sample Four restrictions were imposed on the selection process of respondents: • Large projects (>= SR 20MM) • Large contractors (>= grade 2) • Building projects • Projects at Eastern Province of KSA • To determine the sample size form each population, the below equations were used: • n0 = (p*q)/V2 -------------------------- (1) • n = n0/[1+(n0/N)] -------------------- (2) • A sample size of 16 was used

17. 4.3 Gathering Data • 17 responses were used for both contractors and consultants • Standard error assumed to be less than 10%

18. 4.4 Scoring Causes, Effects, and Controls sections are scored based on the following: Very often = 100% Often = 75% Sometimes = 50% Seldom = 25% Never = 0 % Importance Index, Prevalence Index and Utilization Index of each causes, effects and controls are calculated as follows: IIc1 = 100 x1 + 75x2 + 50x3 + 25x4 + 0x5 / (x1 + x2 + x3 + x4 + x5) II: Importance Index, C1: Cause one

19. 5. RESULTS AND FINDINGS • Data analysis about causes are categorized by Importance Index (II) • Data analysis about effects are categorized by Prevalence Index (PI) • Data analysis about controls are categorized by Utilization Index • Hypothesis “Contractors and consultants don’t agree on the causes of change orders” was tested.

20. 5.1General Info & Industry Characteristics

21. Cont’d..

22. 5.2 Causes of Change Orders Ranking of causes

23. 5.3 Effects of Change Orders Ranking of effects

24. 5.4 Controls of Change Orders Ranking of controls

25. Cont’d.. The most important causes, effects and controls

26. 5.5 Test & Agreement • The null & alternative hypothesis (H0 & HA) are formulated and the degree of agreement or disagreement between consultants and contractors on the causes, effects and controls of change orders is tested. • Results: Contractors & Consultants do agree on the causes of CO’s. Contractors & Consultants do agree on the effects of CO’s. Contractors & Consultants do agree on the controls of CO’s.

27. 5.6 Comments from Respondents • By Consultants • Accuracy of documents, drawings, specs and BOQ’s is required. • Coordination is very helpful. • Improvement of project management in governmental project is necessary. • Use of project management consultants (PMC) is recommended. • All finishing materials and equipment should be selected & approved prior to construction.

28. Cont’d.. • By Contractors • Consultants should explain the design to the owner clearly to have full understanding. • Site conditions and design packages should be studied carefully by the owner. • Cost of change order should be negotiated before commencement of any work. • Owners should consider the negative effect of CO’s and try to avoid it by doing a good design before calling for bidding.

29. 6.1 SUMMARY • Chapter 1: Introduction, Objectives, Scope, Limitations • Chapter 2: Basics, Legal aspects, Cost aspects, Management aspects of CO’s. • Chapter 3: Parameters to be measured • Chapter 4: Process of developing the questionnaire, scoring methods • Chapter 5: Results & Findings

30. 6.2 CONCLUSION • Changing the plans by the owners is the main source of change orders. That is due to lack of involvement in the design development and inability to visualize it while not appreciating the negative effect of it. • Because of new materials are becoming available in the market or change in mind, substituting materials and/or procedures is the 2nd source of CO’s. • Consultants are the 2nd major contributor to changes by generating conflicting design documents or through change in design afterwards. • Increase in project cost and duration are the main two effects being noted for change orders. • Clarity of scope of CO’s ranked the 1st among controls adopted.

31. 6.3 RECOMMENDATIONS • Make use of 3D models to help owners see their project before construction starts. Animation would be greater! • Owners to make a good financial planning during planning stage. • Owners are advised to have PMC to supervise both design and construction to ensure that owner’s expectations are met by the design. • Consultants to specify the materials in a detailed matter or use performance specs. • Owners to use the control of “freezing the design” more often to avoid the problem of creeping scope.

32. THANK YOU QUESTIONS?