Contractor's Guide to Change Orders

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Uncover hidden cost items and receive full compensation for them. Each chapter of this great book contains step-by-step procedures, checklists, full-size forms, and word-for-word letters to help you increase your acceptance rate and get paid for all changes on the job -- without disputes or misunderstandings.



Shows how to find, document, and negotiate payment for every added delay and expense that slips past your "early warning system."

Weight 2.1600
ISBN 1-55701-427-2
Page Count 382
Author Andrew M. Civitello Jr. with William D. Locher, J.D.
Publisher BNi Building News
Dimensions 8-1/2 x 11

Uncover hidden cost items and receive full compensation for them. Each chapter of this great book contains step-by-step procedures, checklists, full-size forms, and word-for-word letters to help you increase your acceptance rate and get paid for all changes on the job -- without disputes or misunderstandings.

Shows how to find, document, and negotiate payment for every added delay and expense that slips past your "early warning system."

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Contents

Preface, vii
What This Book Will Do for You, ix
How to Use This Book, xiii

Part One
INDUSTRY AND CONTRACT ENVIRONMENTS


1

The Contractor's Move to Power, 3

1.1 Introduction, 4

1.2 The Changing Building Industry, 4
1.2.1 The Contractor in Control, 4

1.2.2 Claims Consciousness, 5

2

Contract vs. Contact: Parlaying Subtle Differences into Dramatic Advantages, 6

2.1 Introduction, 7

2.2 Ending the Confusion About Contract Structures, 7
2.2.1 (Traditional) General Contracting, 8
2.2.2 Design-Build, 9
2.2.3 Construction Management (Pure), 10
2.2.4 Construction Management with a Guaranteed Maximum Price (GMP), 12

2.3 Clarifying Contract Responsibilities to Garantee Accurate Assessments, 13
2.3.1 The Owner: 12 Categories of Responsibility, 14
2.3.2 The Architect: 10 Categories of Responsibility, 22
2.3.3 The General Contractor: 15 Categories of Responsibility, 29
2.3.4 A Final Note, 35

3

Proven Strategies for Applying Construction Contracts, 36

3.1 Strategic Interpretation: Applying Contracts to Secure Power Positions, 37
3.1.1 Contract Law Concepts, 37
3.1.2 Construction Law Concepts, 38

3.2 The Contract Documents: Simplified Descriptions to Prevent Oversight, 38
3.2.1 Contract Components, 38
3.2.2 The Four C's of Contracts, 40

3.3 Rules of Contract Interpretation: The Cards Up Your Sleeve, 41
3.3.1 Introduction, 41
3.3.2 Standard of Interpretation: Reasonable Expectations, 41
3.3.3 Ambiguities Resolved Against the Drafter, 42
3.3.4 Right to Choose the Interpretation, 43
3.3.5 Specific vs. General, 43
3.3.6 Usage of Trade Custom, 43

3.4 Applying Construction Contracts Without Resistance, 44
3.4.1 Introduction, 44
3.4.2 Change Clauses, 44
3.4.3 The Pass-Through Clause, 46
3.4.4 The Dispute Clause, 48
3.4.5 Authority (Formal/Constructive), 49
3.4.6 "General Scope" of Work, 50
3.4.7 "Reasonable Review", 51
3.4.8 "Intent" vs. "Indication", 51
3.4.9 "Performance" and "Procedure" Specifications, 52
3.4.10 Equitable Adjustment, 53

Reference, 54

Part Two
CHANGE ORDERS EXPOSED


4

Change Order Diagnosis, 61

4.1 A Normal Part of the Construction Process, 62

4.2 Clarification or Change?, 62

4.3 Reasons for Change Orders (Additions and Deductions), 63

4.4 Change Order Categories, 63
4.4.1 Owner-Acknowledged Changes, 64
4.4.2 Constructive Changes, 64
4.4.3 Consequential Changes, 66

5

Understanding How Change Orders Arise, 67

5.1 Introduction, 68

5.2 Defective Specifications, 68
5.2.1 Cut-and-Paste, 68
5.2.2 Silly Specifications, 69
5.2.3 Old and Outdated Specifications, 70
5.2.4 Inconsistencies, 70
5.2.5 Impossibilities, 71

5.3 Nondisclosure, 72

5.4 Lack of Coordination Among Design Disciplines, 72

5.5 Incomplete Design, 73

5.6 Latent Conditions (Defects), 73

5.7 Owner Changes, 74

5.8 Improved Information, 75

5.9 Improvements in Workmanship, Time, or Cost, 75

5.10 Illegal Restrictions, 76

5.11 Nonapplicable Boilerplate, 77

5.12 "Intent" vs. "Included", 77

6

Using the Change Order Process to Your Maximum Advantage, 78

6.1 The Six P's of Change Orders, 79

6.2 Prospecting for Change Orders (Discovery), 79

6.3 Preparing the Change Order, 80
6.3.1 Establishing the Change Order File, 80
6.3.2 Change Order Research, 81
6.3.3 Change Order Research Checklist, 82
6.3.4 Notification, 86
6.3.5 Sample Notification Letter to the Owner on Changes, 87
6.3.6 Notice Components, 89

6.4 Pricing the Change Order, 89
6.4.1 Now or Later, 89
6.4.2 Pricing Methodology, 92
6.4.3 Selecting the Proper Tone, 92

6.5 Presenting the Change Order, 92
6.5.1 Proposal Submission, 92

6.6 Performing the Work, 93
6.6.1 Tracking, Project Effects, 93

6.7 Change Order Payment, 95
6.7.1 Billing and Payment, 95
6.7.2 Claims and Disputes, 96

Part Three
PROSPECTING FOR CHANGE ORDERS AND THEIR COMPONENTS


7

Where and Now to Find Potential Change Orders, 101

7.1 Introduction, 103

7.2 Predesign, 103
7.2.1 Adjacent Properties, 103
7.2.2 Boring (Subsurface) Data, 104
7.2.3 Building Code Compliance, 105
7.2.4 Easements/Rights of Way, 106
7.2.5 Special Agency Approvals, 107
7.2.6 Interference from Utilities Not Properly Shown, 108
7.2.7 Plan Approvals (Building Permit), 109
7.2.8 Temporary Utilities-Availability Within the Contract Limit Lines, 110

7.3 The Contract and Bid Documents, 111
7.3.1 Award Date, 111
7.3.2 Named Subcontracts, 113
7.3.3 Sample Letter to the Owner Regarding Obligation to Determine Responsibility for Questionable Work, 115
7.3.4 Sample Letter to Subcontractor Regarding Owner's Decision Directing Work, 117
7.3.5 Price/Bid Allowances, 119
7.3.6 Contract Time, 119

7.4 Plans and Specifications, 121
7.4.1 "As Indicated", 121
7.4.2 Ceiling Spaces (Conflict), 123
7.4.3 Sample Letter to Subcontractors Regarding Coordination of Work in Ceiling Spaces, 125
7.4.4 Changed Existing Conditions, 127
7.4.5 Column and Beam Locations, 128
7.4.6 Design Change TeUtales, 130
7.4.7 Design Discipline Interfaces, 131
7.4.8 Duplication of Design, 132
7.4.9 Sample Letters to the Owner Regarding Design Duplications, 135
7.4.10 "Fat" Specifications, 139
7.4.11 Finish Schedule vs. Specification index, 140
7.4.12 Inadequate Level of Detail, 140
7.4.13 Light Fixture Locations, 142
7.4.14 Match Lines and Plan Orientations, 144
7.4.15 Mechanical, Electrical, and N.I.C. Equipment, 145
7.4.16 Sample Letter to Subcontractors Regarding Material and Equipment Coordination, 148
7.4.17 Sample Letter to the Architect Regarding Contract Equipment Coordination, 150
7.4.18 Sample Letter to the Owner Regarding N.I.C. Equipment Coordination, 152
7.4.19 Numerous Details and Dimension Strings, 154
7.4.20 Performance and Procedure Specifications, 155
7.4.21 Proprietary Restrictions (Public), 156
7.4.22 Sample Letter to the Owner Regarding Equal for Proprietary Item, 158
7.4.23 Sample Letter to the Owner Regarding Rejection of Equal for Proprietary Item, 160
7.4.24 Specification Section "Scopes", 162

7.5 Site, 162
7.5.1 Introduction, 162
7.5.2 Grades, Elevations, and Contours, 163
7.5.3 Sample Letters to the Owner Regarding Change Site Conditions, 165

7.6 Change Order Discovery Checklist, 169
7.6.1 Introduction, 169

Part Four
CHANGE ORDER PROPOSAL PREPARATION AND PRESENTATION


8

Designing and Constructing Effective Change Order Proposals, 181

8.1 Change Order Components, 183
8.1.1 Introduction: The Three Costs, 183
8.1.2 Direct Costs, 184
8.1.3 Indirect Costs, 184
8.1.4 Transforming Indirect Costs into Direct Costs, 185
8.1.5 Direct Project Management and Administrative Cost Form, 186
8.1.6 Consequential Costs (Damages), 188
8.1.7 Practical Management of the Three-Cost Approach, 189

8.2 Developing the Change Order Proposal, 190
8.2.1 Change Order Identification/Notification, 191
8.2.2 Sample Letter to the Owner Regarding Pending Change Order, 193
8.2.3 Assembling Component Prices, 195
8.2.4 Sample Change Order General Conditions Checklist and Estimate Sheet, 196
8.2.5 Assembling Subcontract Prices, 198
8.2.6 Sample Letter to Subcontractor-Request for Change Order Quotation, 199
8.2.7 Sample Letter to Subcontractor--Change Quotation, Second Request, 201
8.2.8 Sample Letter to Subcontractor Regarding Change Order Price by Default, 203
8.2.9 Sample Change Order Telephone Quotation Form, 205
8.2.10 Sample Letter to Subcontractors Confirming Telephone Quote, 207
8.2.11 Determining Schedule Impact, 209

8.3 Finalizing the Proposal, 212
8.3.1 Introduction, 212
8.3.2 Proposal Format and Timing, 213
8.3.3 Sample Change Order Proposal Cover Letter, 214
8.3.4 Sample Letter to the Owner Regarding Change Order Cost Escalation Due to Untimely Action, 217
8.3.5 Representing Change Order Components, 219
8.3.6 Presenting the Total Change Order Price, 221
8.3.7 Presenting the Effects on Contract Time, 221
8.3.8 Requiring Approval Action, 222
8.3.9 Additional Terms and Conditions, 223

9

Substantiating Change Order Prices: Settling Arguments Before They Begin, 224

9.1 Introduction, 225

9.2 Lump-Sum Prices, 227
9.2.1 Sample Letter to Subcontractor Regarding Improper Proposal Submission, 228

9.3 Detailed Cost Breakdowns, 231

9.4 Time and Material, 233
9.4.1 Sample Letter to Subcontractors Regarding T & M Submission Requirements, 235

9.5 Unit Prices, 237

9.6 Historical Cost Records, 238

9.7 Industry Sources, 239

9.8 Invoices-Records of Direct Payment, 239

9.9 The Schedule of Values, 240

10

Using Project Records to Discover, Define, Support,and Track Change Orders and Claims, 241

10.1 Introduction, 243
10.1.1 Active Working Files, 243
10.1.2 Item Completion and Close-Out, 244
10.1.3 Archives, 244

10.2 Establishing Dates in the Correspondence, 244

10.3 Daily Field Reports, 245
10.3.1 Sample Daily Field Report Form, 247

10.4 Payroll Records, 251
10.4.1 Sample Field Payroll Report Form, 251
10.4.2 Sample Monthly Administrative Tune Sheet, 252

10.5 Photographs--What, When, and How, 255
10.5.1 Introduction, 255
10.5.2 Photograph Layout Requirements, 256
10.5.3 Sample Photograph Layout Form, 256

10.6 Construction Schedules, 258
10.6.1 As-Planned, As-Built, and Adjusted Schedules, 258
10.6.2 Six Requirements for Presentable Evidence, 259

10.7 Using Job Meetings to Establish Dates, Scopes, and Responsibilities, 261
10.7.1 Introduction, 261
10.7.2 Job Meeting and Minutes Guidelines, 262
10.7.3 Sample Letter to Subcontractors Regarding Mandatory Job Meeting Attendance, 264
10.7.4 Sample Letter to Subcontractors Regarding Lack of Job Meeting Attendance, 266
10.7.5 Sample Job Meeting Form, 268

10.8 Shop Drawings and Approval Submittals, 271
10.8.1 Approval Responsibility, 271
10.8.2 Approval Response Tune, 273
10.8.3 Treatment of Differing Conditions, 273
10.8.4 Absolute Contractor Responsibility, 273

10.9 Time and Material Tickets, 274
10.9.1 Introduction, 274
10.9.2 Sample Letter to the Owner Regarding Acknowledgment of Actual Work Performed, 275
10.9.3 Sample T & M Form, 277

Part Five
CHANGE ORDER AND FILE PRESENTATION


11

Keeping Change Orders Under Control: How to Save Time and Improve Records with Administrative Housekeeping, 281

11.1 Introduction, 282

11.2 Establishing Easy-to-Research Change Order Files, 282

11.3 File Content, 284

11.4 Correspondence File, 287

11.5 Tracking Change Order Trends, 288
11.5.1 Introduction, 288
11.5.2 Evaluating the Change Order Summary Sheet, 289
11.5.3 The Change Order Summary Sheet Procedures, 290
11.5.4 Sample Change Order Summary Sheet Form and Sample Completed Form, 291

11.6 Approval Submissions, 294
11.6.1 Introduction, 294
11.6.2 Shop Drawing Review and Coordination, 294
11.6.3 Shop Drawing Submission Requirements, 295
11.6.4 Sample Form Letter to Subcontractors Regarding Shop Drawing Submission Requirements, 296
11.6.5 Submittal Review, Distribution, and Follow-Up, 299
11.6.6 Sample Form Letter to Subcontractors Regarding Shop Drawing Resubmission Requirements, 301

11.7 Sample Letter of Transmittal, 309
11.7.1 Sample Form Letter of Transmittal, 309

Part Six
DISPUTE RESOLUTION


12

Winning in Change Order Negotiation, 315

12.1 Introduction, 317

12.2 Acceptance Time, 317

12.3 Agenda, 317

12.4 Gentleman's Agreement, 318

12.5 Agreement vs. Understanding, 318

12.6 Allowances, 318

12.7 Alternatives, 319

12.8 Arbitration and mediation, 320

12.9 Aspiration Level, 321

12.10 Assumptions, 321

12.11 Authority, 321

12.12 Averages, 322

12.13 Boilerplate, 322

12.14 Catch-22, 323

12.15 Change Clauses, 323

12.16 Change the Negotiator, 323

12.17 General Contractor as a Conduit, 324

12.18 Contingency, 325

12.19 "Convenience" Specifications, 325

12.20 Concessions, 325

12.21 Constructive Clauses, 326

12.22 Correlation of Contract Documents, 327

12.23 Cost Perceptions, 328

12.24 Credits-Turning Them Around, 328

12.25 Deadlines, 329

12.26 Deadlock, 329

12.27 Deliberate Errors, 329

12.28 Level of Detail, 330

12.29 Discipline, 330

12.30 The Eighty-Twenty Rule, 331

12.31 Elaboration, 331

12.32 Empathy, 331

12.33 Designer's Estimates, 331

12.34 Equitably Adjustment, 332

12.35 Exceptions, 333

12.36 Excusable Delays, 333

12.37 Use of Experts, 334

12.38 Face-Saving, 335

12.39 Job Meetings, 335

12.40 The Power of Legitimacy, 335

12.41 Letter Wars, 336

12.42 Lost Notes, 337

12.43 "Nonnegotiable" Demands, 337

12.44 Objections, 338

12.45 Off-the-Record Discussions, 338

12.46 Patience, 339

12.48 Presentations, 339

12.49 Proceed Orders, 340

12.50 Promises, 341

12.51 Questions, 341

12.52 Quick Deals, 342

12.53 Reasonable Review, 342

12.54 Reopening Change Proposals, 342

12.55 Split the Difference, 343

12.56 Statistics, 343

12.57 Telephone Negotiations, 343

12.58 Plain Hard Work, 344

12.59 Unit Prices, 344

12.60 Value of Work Performed, 345

12.61 Conclusion, 345

13

Preparing for Winning When Changes Become Claims, 346

13.1 Introduction, 347

13.2 Turning Around Change Order Rejections, 348
13.2.1 Introduction, 348
13.2.2 "Good" or "Bad" Faith Rejections, 349
13.2.3 The "Nothing to Lose" Attitude, 350
13.2.4 Change Amount vs. Litigation Expense, 351
13.2.5 Meetings at the Highest Levels, 351
13.2.6 Checklist for Meetings at the Highest Levels, 352
13.2.7 Sample Letter to the Owner Confirming a Special Meeting, 353

13.3 Arbitration/Litigation/Mediation-What Is the Difference?, 355
13.3.1 Introduction, 355
13.3.2 Arbitration, 355
13.3.3 Litigation, 358
13.3.4 Mediation, 360
13.3.5 Conclusions, 362

13.4 Finding an Attorney, 362
13.4.1 Introduction, 362
13.4.2 Characteristics of the Lion, 363
13.4.3 Characteristics of the Pussycat, 363
13.4.4 How to Find Your Lion, 363

13.5 Selecting Consultants, 364

13.6 Construction Claims Checklist, 366

Appendix: Sample Contract Change Order, 369

Index, 375

1.1 INTRODUCTION

The construction industry is comprised of a large number of small companies operating in one of the most intensely competitive work environments ever to evolve. In this country, all construction firms, large and small, share remarkably similar characteristics: The competitive economic factors affecting resources, time, and management are nearly the same for all businesses.

Moreover, the construction contract agreement on a $1 million job will be very similar to that on a $50 million job. The plans themselves may be more elaborate on the larger project, but the bid documents, General Conditions of the Contract, and the Working Procedure will all be very similar. In addition, the functions, rights, and duties of the owner, design professionals, prime contractors, and subcontractors will likewise be fundamentally the same. So, again, the factors affecting the interpretation of our construction contract documents are nearly the same for all businesses, regardless of size or organizational complexity.

As a result of the current competitive environment, many contractors have seen their profitability decline. But some companies continue to record superior rates of growth. These successful firms have recognized that work environments and the nature of the business have changed, and they have moved to accommodate these changes.

In the discussions that follow, we review how the contractor's power and importance have increased as a result of the changes in the contracting environment.

1.2 THE CHANGING BUILDING INDUSTRY


1.2.1 The Contractor in Control

A hard lesson was learned by the building industry as a result of the recessions of the 1970s and early 1980s: Increases in the cost and complexity of doing business dictate that all costs must be tightly controlled to preserve profits. This means that if a contractor is going to win a bid and earn a profit, the contract documents must be interpreted in a lean fashion. There is no longer any room in a contractor's vocabulary for the concepts of "contingency" or "absorbed costs." As a matter of survival, contractors have had to become intimately familiar with contracts, their components, structure, meaning, and interpretation.

Contractors have now come to know their contracts better than the designers who produced them. They control their application more effectively. What the architect would have previously "clarified" is now a change order for which the contractor will get paid.

1.2.2 Claims Consciousness

Many contractors became very good at getting what they were after. When necessary, they recovered damages through a "claims" procedure that introduced damages through the courts or arbitration. These became hot news items, often because the dollars won in many of the awards were very large. The concept of being paid for a time delay, for example, was much more attractive than the historic "granted time extension." Contractors became very interested in developing these techniques. Some even began to look upon the whole idea as a profit center in itself.

The courts became inundated with construction claims. The American Arbitration Association (AAA) became a more visible, prominent force in the contracting legal environment. The AAA began accepting construction cases for arbitration in 1966, but didn't begin to maintain comprehensive records until 1973. From that point, as Figure 1-1 presents, the number of construction arbitration cases submitted per year nationally doubled in the decade that followed, and continues to increase at the same rate.

Even if a contracting company is not particularly interested in pursuing an aggressive claims posture, a responsiveness to the system has now become absolutely necessary to at least maintain an ability to accurately operating problems as they occur. An intimate awareness options has now become the most fundamental prerequisite for responsible contracting management.

Claims consciousness is a matter of prevention. Many problems in construction although varying widely in their specific composition, fall within common recurring categories. Errors and omissions, acceleration, delay,interference and latent conditions will make most lists. It is, therefore, necessary to develop coordinated systems for their prevention, early detection, prompt resolution, and defense before these activities actually become necessary.

STOP PROFIT-ROBBING CONSTRUCTION
CONTRACT DISPUTES BEFORE THEY START

With this expanded new edition of Contractor's Guide to Change Orders in hand, contractors working on projects of any size - from remodeling jobs to skyscrapers - will have all the ammunition needed to:

  • Keep hidden construction delays and expenses from draining profit. (Only a fraction of chargeable amounts are ever identified by the owner or architects involved.)
  • Identify trouble spots in the contract, plans, specifications and site that are likely to result in added costs or delays.
  • Find, document and negotiate payment for every added delay and expense that slips past your "early warning system."
  • Negotiate and resolve change order disputes at every level so you are always a step ahead.
  • Put all the facts on your side so that, if all else fails, you have ironclad evidence to support your claim during arbitration or ligitation.
  • THIS BOOK IS LIKE HAVING A LAWYER ON CALL TO HELP YOU OUT AT A FRACTION OF THE COST

    Well-known in construction circles, author Andy Civitello draws on well over two decades of experience and shares literally dozens of timesaving tools tailored to the needs of busy contractors like you who don't have time or desire to wade through some academic textbook. In Contractor's Guide to Change Orders, you'll find:

  • Detailed checklists that help you prevent costly oversights, support change order prices, record actions taken, and much more.
  • Sample forms and worksheets that are job-tested on projects of nearly every size and type. You can reproduce and use these forms right away to simplify your job and save hours of time.
  • Model letters that are professionally written and handle nearly any situation, from assigning job responsibilities to warning notices or corresponding with architects and engineers.
  • And much more!

  • ABOUT THE AUTHORS

    Andy Civitello has managed construction projects of all types and sizes, for a wide variety of clients. He is a nationally recognized project management specialist and construction claims consultant skilled in contract management, claims entitlement and valuation. A "shirt-sleeve" veteran, clients include owners, contractors, design professionals, and attorneys on a wide variety of public, institutional and private projects. He is an active panelist for the American Arbitration Association and author of bestselling construction books.

    William D. Locher, J.D., is senior partner with Gibbs, Giden, Locher & Turner, a Los Angeles law firm. He has represented owners, contractors and material suppliers in construction and related matters and disputes for over 20 years. He lectures regularly on contract law issues including administration, change orders and construction contract claims.