The Essential Change Order Picture

The bane of owners, developers, designers and contractors is the Change Order. Inevitably, change orders lead to acrimony and distress among the various groups. I have recently been involved in some innovative construction contract design that has as its goal reducing or eliminating change orders.

Key to this discussion is the definition of a change order, why they occur and who is responsible for the financial impact. There are two basic types of change orders: owner initiated and non-owner-initiated. In general, the first type is requested by the owner because there has been a change in scope needed for some aspect of the project. In an owner-initiated situation, the other parties are typically not at any fault.  The other type of change order, however, is a result of some inconsistency, error or omission in the contract documents.

The Perfect Set of Contract Documents

No designer produces perfect contract documents.  The problem lies in the fact that almost all building designs are prototypes to at least some extent. Although the materials and methods are used over and over in many designs, the unique combination of the materials and methods in each building poses problems that are not all foreseen. In addition, designers are human and we all make mistakes. Thus, there are always changes necessary to implement the contract.

Some owners see the world through their own industry or occupation and thus demand that if it’s the designer’s fault that something has to change (and it costs more money, I have not found an owner yet who was unhappy when something cost less) then the designer should pay for the change’s cost. If you are a manufacturer or a sales organization, this is indeed how your world operates. It doesn’t work that way in building design and construction because it isn’t fair to the owner.

Responsibility

Finger Pointing

The comparison I recently heard was based on a car dealer’s perspective: “if I sell a car with a problem, it’s my responsibility to fix it – I don’t get to charge the customer for the fix.” True enough. But manufacturers of cars and other items have defect rates built into their costs – they expect a statistical amount of problems and charge accordingly.  If this same model were to be applied to the design of buildings, the design costs would be considerably higher. For example, if I go to a Toyota dealership and ask to buy a Tundra pickup with standard features and options, we can haggle over a price but the dealership knows how much the vehicle costs. Toyota knows what to expect in terms of warranty service because of its history with automotive design and production and a solid group of statistics.  If, however, I go to my Toyota dealership and ask for a Tundra with a V10, gull wing doors and dual rear axles, the price is going to be unknown. And so are the issues with the design. Though Toyota has the engineering skill with each component, they have never put them together in the way I just described. Toyota and the dealership would struggle not just with production cost but also with the problems to expect with such a combination of components.

For comparison, say that in the building design and construction industry, change orders due to errors and omissions average 2% of construction costs. If the designer were to indemnify the owner against these types of mistakes, then the cost of design should be higher by at least that amount or more, to insure that the designer will not lose money in the deal. As the average design fee for mid-range projects is around 6% of construction costs, this would amount to a 33% increase in design fees.

However, the 2% number is an average: some overall changes will be greater and some will be lower. If your project only has 1% change orders, the designer gets a large bonus for doing a good job. While, as a designer, I like this idea, it isn’t fair to the owner. Thus the industry uses a different model – the idea of beneficial use.

Beneficial Use

Beneficial use is the idea that as an owner, you are obligated to pay for parts of a project that are needed for the project. As an example, take an unreasonable, but simple case: If I leave off the entire third floor of your project, then you still have to pay for it to be added because you get the third floor. This despite the fact it was omitted from the drawings. In this example the beneficial use is relatively straightforward. In other cases, such as a reinforcing bar revision to meet code requirements, it may seem less clear. But you, as the owner, get the benefit of that extra bar even if you think I already specified too much.

What isn’t covered, and the designer is still on the hook for, are damages. Damages, in the simplest sense, are work and material items that would not have been required to implement the work if the error or omission had not occurred. To use our oversimplified example, you, the owner would have to pay for the missing third floor but you shouldn’t have to pay for the rework of the top of second floor columns because, if the error had not occurred that work would not have been necessary.

In my experience, the designer has to produce the best drawings possible to begin with and then carefully follow the project through construction to head off the damages portion of any changes. It should be obvious that if we need to add a piece of rebar to a concrete beam it’s the owner’s responsibility to pay for it before the pour. This is relatively inexpensive and far easier than fixing it after the concrete is poured.