Managing and Negotiating Change Orders

1. Managing and Negotiating Change Orders Presented by Daniel Williams, P.E. May 1, 2008

2. Guidelines for Change Order (CO) Management • Discuss CO procedures before construction begins • Develop a potential change order (PCO) log and filing system • Distribute a PCO log at each progress meeting • Evaluate each PCO before making a recommendation • Never lower your standards of professionalism • Evaluate and resolve each PCO as fast as possible • Choose your battles wisely

3. Construction Management • Quality Assurance • Contract Administration • Change Order Management

4. Potential Change Order (PCO): An issue that could affect the cost or duration of a contract. Definitions Change Order (CO): A change to the cost or duration of a contract.   Claim: A potential change order.

5. Drawing error Specification error Contract document discrepancy Code violation Engineer-requested change Submittal review comment Request for information Owner-requested change Contractor-requested change Substitution request Permit agency request Permit requirement Easement requirement Property owner request Utility conflict Value engineering proposal Changed site condition Safety Code change Code interpretation Tax increase or decrease Quantity increase or decrease Weather Material availability Labor availability Issues that initiate PCOs PCOs that correct the design EX: $18K LS vs $31K T&M

6. Number of PCOs to Expect EX: Salem & Clearview

7. Time and Cost to Resolve PCOs

8. Percent (%) Change Orders to Expect Pump Station – 1.5% to 5% Reservoir – 1.5% to 5% Treatment Plant – 1.5% to 5% Pipeline – 5% to 10% Tunnel – 10% to 30%

9. Paying for Change Orders Lump Sum Time and Materials Unit Price

10. Meet and Discuss CO Procedures before Construction Begins #1 • Proposed Agenda • PCO log • Number of PCOs / COs to expect • Forms • Recommendation and Owner approval process • Lump sum vs. time and materials • Quantity overruns on unit price bid items • Markups on labor, materials, and equipment • Contract documents governing PCO and CO procedures • Liquidated damages • Distribution of PCO log at weekly progress meetings

11. Develop and maintain a PCO log and Filing System #2 • Never remove an unresolved PCO from the PCO log • Maintain a file for each PCO • PCO file should document the event that initiated the PCO • Correspondence regarding a PCO should reference the PCO number • Develop and maintain a CO log and filing system EX: Hajek & Curran

12. #3 Distribute a PCO log at each Progress Meeting IncludePCOs as agenda item Distribute PCO log and review status of each outstanding PCO Ask if there are there any PCOs that should be added to the log

13. Evaluate each PCO before Making a Recommendation to the Owner #4 • Scope • Cost • Schedule impact EX: Valve Stem EX: Math error EX: T Bailey valve/labor cost EX: Gas monitors EX: Clearview Attorney & River Crossing PCO EX: Use baseline schedule, schedule of values, certified labor rates, equipment rates, RS Means

14. Never lower your standards of Professionalism #5 Disagreements regarding PCOs are professional disagreements not personal disagreements • Always treat the people with respect • Let the other side have its day in court (i.e., listen) • You do not have to come to an agreement at a PCO meeting • Never infer that someone has deceived or lied • Public works contracts are a marriage not a date EX: Peter Falk (Columbo) EX: Ted & Munkdale EX: Sheffield and Landis EX: Kenko “run off road” EX: Gaynor and Cox EX: Hajek and Alia

15. #6 Evaluate and Resolve each PCO as Fast as Possible The longer a PCO goes unresolved the more time everyone has to determine its impact on cost and schedule.

16. #7 Choose your Battles Wisely You do not need to win every battle to win a war. 

17. EXAMPLE – Choose your Battles Wisely

18. EXAMPLE – Choose Your Battles Wisely $300K Contractor’s Proposal Negotiated Change Order $266K $250K $40K $200K 36 $171K 31 31 $30K $150K 29 28 23 $20K $100K 16 17 17 16 14 13 10 9 13 11 9 10 $10K 10 10 9 9 $50K 8 6 7 7 7 5 5 5 4 3 3 3 3 0

19. EXAMPLE – Pump Station Change Orders Contractor’s Proposal $403,000 Agreement $288,000 Savings $115,000 = 28.5%

20. EXAMPLE – Resolve PCOs as Fast as Possible Cost of CO Time to Resolve PCO Low Animosity High

21. Example – Never infer that Someone has Lied Owner’s Letter: “I conclude that the information received was designed to deceive and mislead. We have been led down a path of compromise and cooperation that has resulted in delivery of equipment that will not function as the contract requires. Given the now visible pattern of misinformation and misleading actions, the Contractor’s plan is rejected in its entirety!” Contractor’s Response: “While I would prefer to ignore this rejection letter in its entirety, to be silent would give the impression that it is accurate. The letter is full of inaccuracies and misinformation. It qualifies as “hate mail” rather than professional, accurate criticism. We deserve compliments not criticism. Instead we received slanderous criticism.”