Managing Risk When Construction Projects Change Course

Construction projects start with complete construction documents and a detailed schedule, but changes to the work are a normal part of construction. Owners may require modifications, designs may require revisions, and actual site conditions may be different from that which was anticipated. The objective is to manage the legal and commercial risk that arises when the work must be altered, and to convert that risk into structured, compensable adjustments.

Deviations from the contract documents should be directed in writing by someone with authority to bind the owner. Field conversations and informal approvals are poor substitutes for a written directive. Parties often proceed informally to expedite resolutions, but having a written record helps avoid disputes.

Changes should be priced in a manner consistent with the agreement. In addition, the contractor’s records should provide support for the adjustment by documenting labor hours, equipment usage, and material quantities that are tracked separately for changed work. For time and material work or any instance where there might be disagreement, daily tickets should be use for all parties to acknowledge the work performed on site and these tickets should be supported by photographs and brief narratives. Disputes over efficiency are common when changes are performed on a time and material basis, which makes contemporaneous tickets that match the field conditions even more important. Unit price changes require careful measurement and verification.

For contractors, documentation is the condition precedent to entitlement. In the absence of anything more official, a confirming email sent the days the change occurs may preserve rights, begin form the record, and frame expectations. That initial notice should be followed promptly by a change order request which explains the changes in scope, provides pricing consistent with the contract, and, if applicable, identifies the time adjustment required. A very common mistake when dealing with changes is to address additional costs but forget to request an extension of time. Every material change should be evaluated for schedule impact and presented with the requested extension if the critical path will be affected. Baseline schedules and monthly updates should reflect approved changes, with logic ties and durations revised to match the altered sequence. If the contract requires a time impact analysis, prepare one contemporaneously rather than retrospectively. The analysis need not be complex to be credible. Identify the activities affected, show how the directive changes sequence or duration, and calculate the additional calendar time required. The goal is to attach the extension request to objective schedule data so that the time adjustment is properly evaluated.

For owners, lender draw procedures and internal approvals must accommodate changes without disrupting cash flow. Contractors should list executed changes as separate line items in pay applications, attach the supporting documentation, and cross reference the change order log. Changes that are authorized but not funded create problems that may derail a project. Owners should forecast cumulative changes that materially affect contingency funds and/or completion dates in order to adjust funding or modify milestones if necessary.

An owner may resort to “not to exceed” directives and interim field orders, but should be used sparingly. An interim authorization can have a negative impact on a contractor’s schedule and productivity resulting in potential claims. Conversely, contractors should notify when costs are trending beyond the interim cap and should not proceed past the cap without written approval. These simple steps prevent the most frequent disputes associated with interim authorizations.

From a practical standpoint, change order procedures should be established before the work begins. Each party should have a single point of contact for issuing directives; oral discussions should be confirmed in writing the same day the discussion takes place; each party should log every change with date and scope and tie each executed change to updated schedules and pay applications. In addition, weekly coordination meetings should include a short review of pending change requests, interim field orders, and the schedule effects of approved changes. Meeting minutes should record all discussions and decision points.

When properly managed, changes to the work do not create disruptions or evolve into claims. If you should have any questions about how to handle changes to the work, please give me a call.

Scott Orenstein
(203) 640-8825