GUIDELINES FOR CHANGE ORDERS

Prepared under the supervision and editorial guidance of the

SMACNA Change Order Task Force

Mark C. Watson, Chairman Bridgette L. Bienacker, Staff Liaison

Climate Engineers, Inc. SMACNA, Inc.
P.O. Box 401 4201 Lafayette Center Drive
Cedar Rapids, Iowa 52406-0401 Chantilly, Virginia 20151

James L. Asbury Thomas J. Soles, Jr., Staff Liaison

Bell Products, Inc. SMACNA, Inc.
P.O. 296 4201 Lafayette Center Drive
722 Soscol Avenue Chantilly, Virginia 20151
Napa, California 94559-3014

Kenneth H. Senteney
Superior Air Handling Corporation
P.O. Box 710
Clearfield, UT 84089

Authored and edited by:

David M. Cremons, Consultant

225 South Sixth Street, Suite 4200
Minneapolis, MN 55402-4302

Copyright 2003 SMACNA

Sheet Metal and Air Conditioning Contractors National Association, Inc.
4201 Lafayette Center Drive
Chantilly, Virginia 20151-1209

Printed in the U.S.A.

 SMACNA GUIDELINES FOR CHANGE ORDERS

TABLE OF CONTENTS
Page

Disclaimer iii

Introduction 1

Chapter I Scenario The New Project 3

Topic: The Need for A New Approach 5
A. General Definitions
B. Construction Trends

Chapter II Scenario The Initial Delay 10

Topic: Common Triggers for Change Orders 12
A. Scope of Work Changes
B. Job Condition Changes
C. Schedule Changes

Chapter III Scenario Sorting Out the Immediate Mess 16

Topic: Classifying Changes 17
A. General Categories of Changes
B. How Will the Cost be Determined?

Chapter IV Scenario Reviewing the Contract 21

Topic: Understanding Contract Change Provisions 23
A. AIA Document A201 General Conditions
B. Federal Acquisition Regulation Change Provisions
C. Proprietary Contract Language
D. Other Contract Clauses

Chapter V Scenario Seeing Through the Fog 36

Topic: Assessing the Risk 37

Chapter VI Scenario Assembling the Package 42

Topic: Documenting and Pricing the Change 44
A. Compiling Required Documentation
B. Providing a Price

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Chapter VII Scenario The Checklist 53
Topic: Benefits of a Standardized Approach 55
A. Field Installation Condition Form
B. Notice of Conflict Form
C. Notice of Delay Form
D. Subcontractor Field Originated Change Order Form
E. Change Authorization Form
F. Lump Sum Change Order Proposal Form
G. Owner/Contractor Field Authorized Change Order Contract

Chapter VIII Scenario The Summit Meeting 62

Topic: Presenting the Change Proposal 64
A. Negotiations
B. Preserving the Subcontractors Rights

Supplementary Documents:
1. Section from 2002 SMACNA Financial Survey Report 68
2. Field Installation Condition Form 70
3. Notice of Conflict Form 71
4. Notice of Delay Form 72
5. Subcontractor Field Originated Change Order Form 73
6. Change Authorization Form 74
7. Lump Sum Change Order Proposal 75
8. Owner/Contractor Field Authorized Change Order Contract 87
9. Summary of Factors Affecting Productivity 88

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 DISCLAIMER

THE SHEET METAL AND AIR CONDITIONING CONTRACTORS NATIONAL

ASSOCIATION, INC. (SMACNA) PROVIDES NO GUARANTEES OR WARRANTIES,
EITHER EXPRESS OR IMPLIED WITH RESPECT TO THE ACCURACY AND
SUFFICIENCY OF THE DATA, INFORMATION OR FORMS PUBLISHED IN THE
SMACNA GUIDELINES FOR CHANGE ORDERS. IN PARTICULAR, SMACNA
DISCLAIMS ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR
PARTICULAR PURPOSE. SMACNA MAKES NO WARRANTY REGARDING THE
RESULTS OF USE OF THIS PUBLICATION. SMACNA HEREBY DISCLAIMS ALL
RESPONSIBILITY AND LIABILITY FOR ANY LOSS OR DAMAGE THAT MAY ARISE
FROM THE USE OF THE DATA OR METHODS USED IN THESE GUIDELINES. UNDER
NO CIRCUMSTANCES SHALL SMACNA BE LIABLE FOR INCIDENTAL OR
CONSEQUENTIAL DAMAGES.

This publication does not represent legal advice. The laws applicable to contract interpretation,
contractor compensation, lien rights, contract claims and other relevant matters vary from state to
state. Individual circumstances also vary widely and readers should consult their attorneys as to
their legal rights in any particular circumstance. Subcontractors should also not agree among
themselves as to the form of contract terms they will use. Such agreements may violate antitrust
laws and could result in the imposition of civil or criminal penalties.

No part of this publication may be reproduced, stored in a retrieval system or transmitted in any
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prior written permission of the publisher.

Copyright SMACNA 2003. ALL RIGHTS RESERVED.

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MPLS-Word 16234.3
 INTRODUCTION

As a construction project moves from planning to implementation, the owner and its
architect or construction manager develop the scope of work for the overall project. The
scope of work describes the overall job to be done, as well as the work to be performed by
each discipline or trade. That scope, as embodied in the plans and specifications, is then used
by the general contractor and upper tier subcontractors to define the nature of the work at the
lower tier levels. It is a rare project that comes in on time and on budget without a well-defined
scope of work.

As the construction industry has evolved, the methods of design and construction have
also changed. Along with the traditional approach of bidding on detailed plans and
specifications, there has been increasing reliance on design/build methodology, as well as on
fast track construction methods. The use of a single general contractor has been supplanted, in
many cases, by the bidding of major components of a project directly to the owner, who then
employs a construction manager to coordinate the overall effort. Each of these approaches raises
distinct issues in defining the scope of work and how scope-related matters are to be addressed.
However, any contractors biggest challenge with regard to scope remains the inevitability of
changes to the work.

Many factors can result in changes during a project. A poorly-defined scope of work or
gaps in the scope may mandate corrective changes. Unforeseen conditions or delays related to
the conduct of other parties may trigger significant changes in schedule or cost. A re-design may
radically impact the scope. A subcontractor may go bankrupt and its work be reassigned to other
project participants. The only certainty is that contractors and subcontractors must deal
effectively with change in order to survive and be profitable.

The purpose of these Guidelines is to raise awareness of the factors that increase the
likelihood of significant changes and to provide tools that will allow SMACNA members to
effectively manage project changes. The management of change on each project is a process that
begins at the bid preparation phase and continues until final close-out and payment. It requires a
constant awareness of current project developments and the ability to anticipate future problems.
It tests the capabilities of the subcontractor as a problem-solver, record-keeper, communicator,
and negotiator. The trends in the construction industry (particularly the decline in the quality of
plans and specifications) will only increase the challenge to subcontractors in effectively
managing change.

It has long been reported by SMACNA members that, in the performance of changed
work, they incur significant costs that are not compensated. It is the goal of these Guidelines to
assist the SMACNA member in effectively pursuing compensation for all of the costs incurred in
performing a change to the initially-contemplated work. Such costs may be directly related only
to the changed work, but often are the result of the impact or ripple effect of a change, where
the real cost includes the effect of the change on unchanged work. The forms and procedures

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recommended in these Guidelines will, if carefully and pragmatically applied to individual
project circumstances, put the SMACNA member in a favorable position to pursue fair
compensation for changes that are mandated by the owner or its representatives or by the
circumstances of the project.

These Guidelines focus primarily on the position of the subcontractor in dealing with the
higher tiers on a construction project. Those interactions will inherently involve some give-and-
take. The HVAC/sheet metal contractor will be staking a claim to dollars that the higher tiers
would prefer to keep. However, the need to resolve change issues does not have to translate to
legal conflict. In fact, the timely and effective resolution of change-related issues can be a key
factor in achieving the cooperative approach to construction that SMACNA has endorsed.

Each chapter of these materials begins with a scenario. The fictional company in the
scenarios, ZZZ Sheet Metal, has been featured in SMACNAs Contract Bulletins for a number of
years. These scenarios are intended to illustrate the various principles that are discussed in each
chapter. For the benefit of SMACNA members, there are also links to various Contract Bulletins
on particular topics. Finally, these Guidelines include forms and references to other industry
resources that go into greater detail on issues related to changes and change compensation.
Hopefully, these Guidelines will be both a useful reference for the experienced contractor and a
training tool for those still learning how the construction industry functions.

SMACNA CHANGE ORDER TASK FORCE

JULY, 2003

Acknowledgment

These Guidelines for Change Orders were the result of considerable work by all members of the
Task Force and by Bridgette Bienacker and Tom Soles on behalf of SMACNA. Also to be
acknowledged is the contribution of Jeff Busley, President of Contractor Consultants, whose
1981 publication Change Orders was a valuable resource in the preparation of these Guidelines.

David M. Cremons, Consultant

Author and Editor

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 CHAPTER I SCENARIO

THE NEW PROJECT

ZZZ Sheet Metal is a successful HVAC contracting firm with an expanding presence in its home
market. Over the years, the subcontractor had worked on increasingly large and complex
commercial projects, including manufacturing facilities, office buildings, shopping centers,
airports and hotels. The subcontractor has a good working relationship with a number of general
contractors and is on the bid list for most significant projects in the metropolitan area where it is
headquartered.

When ZZZ was approached to work with a large, national construction firm on a major retail
mall project, the subcontractor was pleased, but also somewhat reluctant. The developer of the
mall project had a reputation for being very aggressive and hard-nosed. The general contractor
was closely aligned with the developer and performed construction all over the country on the
developers behalf. The president of ZZZ made some phone calls to friends in the industry to
ask about the developer and general contractor. The responses were amazingly similar. They
could be best summarized by the phrase Take the work if you can get it, but be extremely
careful. None of the comments were particularly comforting. However, the ZZZ president
decided to proceed.

Once the subcontractor had indicated that it would bid the job, plans and specifications were
promptly delivered. The deadline for bid submission was only three weeks away and the project
was large and complicated. The ZZZ president told his estimators to drop everything and to
focus only on putting the bid together. The president told his staff that they should work around-
the-clock if necessary in finalizing the bid proposal. Meetings were scheduled every other day to
review the progress of the bid preparation.

Walking into the first review meeting, the ZZZ president found himself looking at some very
tired and frustrated employees. They had clearly been arguing with each other and were also
complaining bitterly about the quality of the plans and specifications. One of the estimators
stated, These plans are worthless. How can we bid when the design is full of gaps, errors and
inconsistencies? I doubt that the system shown on the plans with the specified equipment will
even work. How can they expect us to put together a meaningful bid in three weeks?

The ZZZ president recognized that the bid preparation team had been under a lot of pressure and
assumed that they were overreacting because of stress. He attempted to calm them down and
emphasized the need to put together as accurate a bid as possible based upon the plans and
specifications. If time permitted, the president encouraged the bid team to forward requests for
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MPLS-Word 16234.3
information to the general contractor to seek answers to their questions. Major items that were
missing from the plans could be identified as alternates in the bid. However, the message was
clear: put the bid together and get it in on time. No excuses would be accepted and no delays
would be tolerated.

The subsequent meetings of the bid preparation team and the president were more orderly and
focused. The bid was coming together quickly and the timeline would be met. There had not
been time for delivery of requests for information and only a few items were considered
sufficiently large and important to be identified as alternates. The president of ZZZ was proud
of the job his employees had done when the bid was delivered on the final day. Obviously, any
issues with the plans and specifications could get resolved as the work began. The president
looked forward to a successful project.

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 CHAPTER I
THE NEED FOR A NEW APPROACH

Change orders are an increasingly significant factor in the construction industry. Many jobs are
turned from profit-makers into losers solely due to changes in the work and the inability of the
contractors and subcontractors to recover substantially all of the costs associated with the
changes. As the costs of design and construction increase, owners are putting contracts out to bid
sooner, with less time for planning and design and less time for bidding. Through change orders,
owners are able to continue refining their building plans throughout the construction process and
thereby make certain that the ultimate project will be best suited for its intended use. Change
orders also permit owners to cover items that were missed during the initial project design.

One of the most important functions of a modern construction contract is to provide an effective
mechanism for addressing changes. Besides allowing the owner to make revisions to a project
design, the change order provisions should serve as a mechanism by which contractors may be
compensated not only for additional work, but also for the effect of constructive changes, such
as those arising out of contract drawing errors and omissions, or even delay damages.
Contractors can only be expected to bid on what is shown in the drawings and specifications.
Change clauses should address the issue of payment for additional work required to make the
project complete. Add a method to determine reasonable compensation for each change and that
would seem to take care of it.

However, the reality is not so simple. As an example, contractors may be confronted with
scope language that can have the effect of eliminating the right to compensation for additional
work. Such clauses may require the contractor to produce a completed product, furnishing
whatever may be needed, even if not shown on the drawings. These clauses are frequently
referred to as exculpatory clauses. Such clauses, at a minimum, require the contractor to show
that the missing work was not trivial and could not have been anticipated by a prudent
contractor. While such clauses have generally been viewed with skepticism by the courts
(except where the contractor is performing under a design-build contract or a performance or
schematic set of drawings and specifications), such provisions are a good example of how
scope language in a contract can have the effect of depriving the contractor of payment for
additional work.

As an initial matter, the HVAC/sheet metal contractor must understand its rights and be prepared
to assert them. A contractors right to be paid for a change is never guaranteed, even though
most contracts and subcontracts address changes in some way. It is essential that the contractor
has a clear understanding of the change clauses in the contract, as well as change order pricing
methods. Improper handling of change orders can have disastrous financial consequences. By
failing to deal appropriately with the impact of a major change, a profitable job can quickly
become a losing proposition.

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MPLS-Word 16234.3
These Guidelines for Change Orders are not intended to provide instruction as to estimating the
cost of a change. This is not an estimating manual. The objective of these Guidelines is to assist
the HVAC/sheet metal contractor in seeking to be fairly compensated for all of the effects of a
change in the initially contemplated scope of work, beyond just the actual, direct costs related to
additional materials and labor. Such secondary effects are often referred to as indirect,
impact, ripple effects or productivity losses. These Guidelines will emphasize the need to
fully evaluate all of the effects of each significant change, as well as the need to pursue the
collection of both direct and indirect costs resulting from changed work.

Attached at the back of these Guidelines are certain forms, which are for illustrative purposes
only. The intent is to provide examples of documentation that might assist the HVAC/sheet
metal contractor in documenting its costs and pursuing payment of the costs resulting from a
change order. Any forms being used by a contractor or a subcontractor should be reviewed with
legal counsel for compliance with local law and should also be explained clearly and concisely to
the party from whom the contractor will be seeking payment.

A. General Definitions. Certain terms will be used repeatedly in these Guidelines. In

beginning a review of the causes and impact of changes, it is helpful to have a clear
understanding of these terms:

Change the difference between the situation contemplated by the plans, specifications and the
original contract and the actual situation encountered on a project.

Proposed Change Order a document typically generated by the contractor or subcontractor that
will be performing the changed work that includes a description of the changed work and
that also typically proposes an adjustment in compensation with regard to the change and
possible adjustment as to the schedule. Such documents are also sometimes referred to
as Change Estimates, Change Requests, or Change Proposals.

Change Order a document incorporating agreed-upon terms for the changed work and possibly
incorporating an adjustment in compensation and/or schedule. A change order, when
signed by both parties, constitutes an amendment to the construction contract or
subcontract. Such documents are also sometimes referred to as Contract
Modifications.

Construction Change Directive a document generated by the owner, architect, construction

manager, or general contractor that requires the party receiving the Construction Change
Directive to proceed with changed work even though the impact on pricing or the
schedule has not necessarily been agreed upon.

B. Construction Trends. Having defined some of the key terms, it is possible to look at
changes in the context of the modern construction industry. Change orders have certainly
existed since the first days of construction. Why is there a need for a new approach in
addressing the real costs of change orders? Such a need exists because the SMACNA member

6
confronts a dramatically different landscape than did those in the industry 40 or 50 years ago.
Consider the following trends:

1. Extensive use of disclaimer clauses - Many modern contract documents contain

disclaimer clauses that attempt to relieve the higher tiers of responsibility for the
sufficiency and accuracy of the information contained in the plans and specifications.
Frequently, disclaimer clauses include provisions: (i) which tell the subcontractor not to
rely on the information contained in the contract specifications, (ii) which refer to the
drawings as schematic and not specific in nature, or (iii) that tell the subcontractor that
it is responsible for seeing that all work is installed in accordance with local codes,
regardless of what is shown in the contract documents. There are clauses which attempt
to disclaim the responsibility of the owner and architect for the completeness of the
drawings. There are provisions which tell the subcontractor that it will not be entitled to
additional compensation if it is delayed, if the work is hindered, or if other subcontractors
on the project prevent the subcontractor from performing its work in an economical and
cost-effective manner. Over the years these disclaimer clauses have been reviewed by
various courts and arbitration panels and have frequently not been accepted or enforced.
Nevertheless, such clauses continue to be included in many contract and subcontract
documents. Due to the mere presence of such language in a subcontract, some
subcontractors will fail to pursue legitimate compensation claims, simply because these
clauses state that the subcontractor is not entitled to payment.

2. Decreased quality of design drawings - Substantially all experienced field

personnel will attest to the continuing erosion in the quality and completeness of design
drawings. This situation seriously affects the bid preparation process, as well as the
performance of field crews. Today it is uncommon for a HVAC/sheet metal contractor to
start work with a set of contract documents that has been fully and properly coordinated
with all other aspects of a construction project. As a result, there is often a need to
immediately confront changes in resolving conflicts and interferences that, for
construction efficiency, should have been eliminated during the design phase. Some
contract documents are also vague in their intent or contain errors or omissions which
may seriously add to the cost of the subcontractors work. If the HVAC/sheet metal
contractor was fully compensated for the impact of such deficiencies under the contract
documents, this would not be a problem. However, the owner or general contractor is
often unwilling to fully compensate the subcontractor for the changes, particularly the
less obvious ripple, impact, or lost productivity effects.

3. Shortened construction duration - Owners, developers and investors have

recognized the benefit of a shortened construction schedule. The cost of money is always
a factor and rapidly changing markets require developers to move quickly in seizing
competitive advantage. As a result, contract drawings are often sent out for bid before
they are properly coordinated and details are fully worked out. In many cases, the
schedule mandated by the owner or general contractor proves to be unrealistic,
particularly when an attempt is made to insert the activities of the subcontractors into the

7
 schedule. One impact of a shortened construction duration is that the subcontractor will
likely face working conditions which stack the trades into areas, causing the job
conditions to be inherently inefficient.

4. Prolonged construction duration An HVAC/sheet metal contractor frequently

encounters jobs that are not completed within the time frame called for in the original
schedule or contract documents. As a result, the subcontractor is forced to remain on the
job longer than it had originally planned. The cost of the additional field and home office
overhead during such an extended construction period is real, but difficult to recover, and
was almost certainly not anticipated in the original bid. It is a major challenge to
convince an owner of a subcontractors right to additional compensation for such costs.

5. Increased risk - All parties to a construction contract accept a certain amount of

project risk in performing the work. If the economic and market conditions allow the
subcontractor to include sufficient contingency amounts in its bid to cover these risks, the
subcontractor can reasonably be deemed to have accepted the risks. However, in todays
highly competitive construction market, it is unlikely that an HVAC/sheet metal
contractor will be able to negotiate sufficient contingencies to cover the risks associated
with delays, poor quality drawings, or other adverse conditions. On the other hand,
those projects that are most difficult to accurately bid (due to incomplete or
ambiguous plans and specifications) are also the projects with the highest risk of
major change-related disputes and resulting financial exposure for the
subcontractor.

In addition to the conditions discussed above, there is one other dynamic condition which affects
HVAC/sheet metal contractors and change order compensation. This condition relates to the
restrictions on the availability of financing and the desire of owners and their lenders or
investors, to carefully manage their cash. Under such circumstances, there is a clear incentive
for an owner to process change orders in a manner that will allow the owner to withhold the
subcontractors retainage for the longest possible period of time and to delay payment for
changes. It is, in essence, free financing, since the owner has the use of the money and the
subcontractor is not receiving any interest on the withheld funds.

It should also be emphasized that, due to the costs of operating an off-site fabricating facility, the
overhead for an HVAC or sheet metal contractor is typically considerably higher than the
overhead for most of the other construction trades. (The HVAC/sheet metal contractor may find
the Shop Burden Manual and Cost Reference Manual published by SMACNA to be of particular
value in obtaining a better understanding of its actual overhead structure). Because of the impact
of shop burden, it is particularly important that an HVAC/sheet metal contractor has a detailed
understanding of its overhead cost structure and takes this factor into account in seeking change
order compensation.

In summary, the difficult issues posed by changes have been made even more challenging by the
trends in the construction industry. Survival and success now require that the subcontractor

8
anticipate the risk of changes on each project and plan accordingly. These Guidelines are
intended to assist the SMACNA member in that effort.

For Additional Information See the Following SMACNA Contract Bulletins:

Contracts Bulletin #37, On The Fast Track (June 23, 2000)

Contracts Bulletin #54, The Endless Project (March 8, 2002)

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 CHAPTER II SCENARIO

THE INITIAL DELAY

As ZZZ Sheet Metal prepared for its work on the large mall project, it became apparent that the
project would severely test the capabilities and resources of the subcontractor. It was ordering
materials and equipment in unprecedented quantities. The companys fabrication shop was on a
twelve-hour-per-day schedule. Several other projects were at a very active phase and obtaining
qualified workers was going to be a major challenge. Employees in the office were pulled off of
other projects and assigned solely to the mall project. The company also took its best project
manager off of another job to direct the work on the mall. The subcontractors headquarters was
a scene of frantic activity as ZZZ prepared for its first installations at the mall.

While the situation at ZZZ was somewhat chaotic, the circumstances at the mall project were
approaching total mayhem. The excavation process had led to the discovery of an old dumpsite
near the center of the proposed mall structure. Among the items found were dozens of old
leaking batteries and 55-gallon drums, some of which contained solvents. Other drums were
empty and the area around the dumpsite was clearly contaminated. The project stopped while
the state environmental division investigated the site. Eventually, a plan was developed and
implemented to excavate and remove most of the dump material and related contamination, but
five months were lost on the project schedule.

The lending consortium providing funding for the project was extremely disturbed by the
discovery of the contamination. The lenders requested that the contaminated piece not be part
of the building site, notwithstanding the clean-up effort. The mall was to be reconfigured so that
the contaminated area would be used only for surface parking. The reconfiguration required a
radical redesign of two wings of the mall and the removal of one anchor store. By the time the
revised plans were approved by the building authorities and the lenders, another two months had
been lost. ZZZ was aware of the delays, but only realized the direct impact when revised plans
and specifications were delivered showing major changes and significant deductions regarding
its work. The delays had already impacted ZZZ, which had turned down other work and
temporarily shuffled its workforce so that it would be prepared when the project got going again.
Huge stacks of materials and fabricated ductwork sat in the companys warehouse.

One final impact of the delays related to the working conditions. ZZZs work would now begin
in November rather than April. Winter conditions would clearly affect the delivery and storage
of equipment and materials. The developer was putting extreme pressure on the general
contractor to get back on schedule, so that the mall would be ready to open on a September 1

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date less than twenty-two months after the commencement of construction. If the developer
could not open the mall on that date, it would suffer severe penalties under its major tenant leases
and might even lose some key tenants. The general contractor informed all of the subcontractors
that they would be expected to do whatever was necessary to get the project back on schedule
without any significant overtime. As the general contractors project manager told the
subcontractor: There was plenty of float in the original schedule and that float is now gone.
Every subcontractor will be expected to do whatever it takes to get this project in on schedule. I
do not want any excuses and I do not want any delay claims. Just get the job done.

ZZZs project manager returned to the company in a state of shock. An already tough job had
just become impossible. The ZZZ project team met with the president of the company to discuss
what the firm should do. In all respects, the mall project bore little resemblance to the project
that had been originally bid.

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 CHAPTER II

COMMON TRIGGERS FOR CHANGE ORDERS

It is an owners or general contractors right to implement changes in pursuing completion of a

construction project. It is also true that, despite the most careful preparation and best drafted
scope of work, the reality of a construction process will almost always differ from the plan. It is
each contractors right to obtain reasonable adjustments in its compensation due to changes the
contractor must implement (and which were not caused by the contractor). Any effective effort
to pursue such compensation requires that the subcontractor first be alert to those elements of a
project most likely to lead to changes and additional or deducted work.

Common Triggers for Changes.

Change orders typically result from three broad categories of causes:

A. Scope of Work Changes;

B. Job Condition Changes;

C. Schedule Changes.

A. Scope of Work Changes.

Scope changes can have any number of causes. The scope may change due to design defects or
deficiencies or gaps in the plans and specifications. Correcting those defects or filling those gaps
may impose additional work on the subcontractor. The plans and specifications may be
incomplete at the time of bidding and the continuing design process may result in an increased or
changed scope of work. The owner may wish to add or delete various work elements which will
affect the construction cost. Budgetary constraints may trigger a wholesale re-design. Fire or
building code changes may mandate changes to the plans. Even matters such as increased
sensitivity to security risks, legal risks or environmental conditions ( i.e. terrorism, mold, etc.)
may impact the scope of work for a subcontractor. Financial conditions, insurance conditions,
economic cycles and changing design trends can all materially affect scope from the time a
project is originally conceived.

The initial step in managing scope-related changes is documenting as clearly as possible

what constitutes the scope of work at the beginning of the job.

Without a clear definition of the original scope and appropriate documentation of that scope,
there is an unlimited potential for dispute over whether any particular item was included within
the original scope or constitutes a change. The subcontractor can begin the process of protecting
itself at the bid stage. The bid process can be used to point out gaps in the scope, to identify

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items as additional work or alternates, and to state expectations as to items that are not clear.
For example, if the plans and specifications do not indicate which party is responsible for the
cutting and patching of wall openings, the subcontractor can identify the work as an additional
service or add the work to a list of items that are excluded from the scope the subcontractor is
offering to perform.

Scope changes can both add and subtract work from the contract. Each of the alternatives can
have an impact on the subcontractors cost. For that reason, a deletion of work from the contract
must be tracked as carefully as an addition.

B. Job Condition Changes.

Job condition changes are more difficult to pin down than scope changes. While there may be a
general expectation as to what conditions will exist on the job site, there is usually not a clearly
documented set of criteria or expectations. The subcontractor certainly anticipates that there will
be reasonable access to the job site, the ability to store materials and equipment, and necessary
and timely access to the areas in which the work is to be performed. The subcontractor could
reasonably expect that its workers will not be stacked on top of other trades fighting for access to
the work, use of the loading docks, use of hoisting equipment, etc. It would seem a reasonable
expectation that necessary utility services will be available, that the work site will be heated in
winter conditions and that job site safety rules will be enforced. The subcontractor may
reasonably expect that a site will be free of hazardous substances and that its employees will be
able to work without a concern for exposure to asbestos or other dangerous substances. When
these expectations, expressed or implied, do not reflect the reality of the job site, the nature of the
work can be changed as clearly and materially as if a significant change to the scope had been
implemented. If the subcontractor cannot perform the work as efficiently and effectively as it
anticipated at the time of bid submission, the subcontractors costs will be higher than it had
anticipated. Job condition-related changes can be subtle and it is essential that the project
manager be alert to unexpected conditions that can impact the work. Such conditions should be
documented from day one and notice provided to the general contractor.

C. Schedule Changes.

Schedule changes are usually determinable, but often difficult to price. Most projects start with a
detailed schedule, often using a critical path method. The interaction of the various trades is
reflected on the schedule and the subcontractor (at least initially) has a clear understanding of
approximately when and for how long its crew is expected to be on the job site. If there is no
schedule, the subcontractor must recognize that it will be at a severe disadvantage in any
attempts to claim that the work was delayed or the anticipated time line altered. On the other
hand, many proposed project schedules are unrealistic from the date the project begins and
schedules often become as much a work in process as the plans and specifications. It is almost
always to the benefit of the subcontractor that a project schedule be part of the initial contract.
Such a schedule forms the base line for any future change order request related to schedule or
as to claims for delay compensation, if no change order is approved.

13
Each cause presents a different challenge for the subcontractor. Within each category of causes,
there are also subcategories that may impact the subcontracts approach. A scope change
initiated by the owners architect will almost certainly trigger a request for a change order and
additional compensation. Scope changes proposed by the general contractor may be viewed in
the context of potential trade offs, since the relationship between the general contractor and the
subcontractor is much more direct and requires daily interaction. The potential for claims related
to job conditions may be greatly impacted by the type of project. For example, the remodeling
of any existing facility will almost certainly have a higher risk of job condition problems than
new construction from detailed plans and specifications.

The first steps for a subcontractor in getting compensated for changes are establishing and
documenting a clear base line for the work through the bid submittal and then being attuned to
circumstances that will likely trigger the need for changed work and additional compensation.
Watching scope changes, job condition changes and schedule changes is essential. Remember,
a change undetected will be a change uncompensated.

A modern construction project is an intricate web of expectations, obligations and dependencies.

The outcome of a project depends on the competence of those who plan, as well as those who
implement, the work. The weather, strikes, supply shortages, changes in the laws and other
factors can all lead to changes from the perspective of the subcontractor.

Change order avoidance is a worthwhile goal for a subcontractor. While some would argue that
changes can be a profit center, that is rarely the reality from the standpoint of a subcontractor.
In fact, many subcontractors believe that the ideal job would be one with no change orders.
Although avoiding changes to the work resulting from the owners design decisions may not be
possible, changes due to job conditions and schedule can often be avoided or at least minimized.
Change order avoidance involves taking a project leadership role and communicating effectively
with higher tiers. The subcontractor must, in effect, pre-plan the entire job to determine how the
work can be performed as initially proposed (to the extent that is possible). A spirit of teamwork
and cooperation among the various tiers from the bid phase forward will not only reduce the
likelihood of significant change orders, but also increase the likelihood of reasonable
compensation when changes are necessary. The construction process works best for all parties
when the parties work effectively together, and that is particularly true in the area of change
orders.

One key to change order avoidance is anticipation. Changes related to gaps or defects in the
plans and specifications may be avoided through use of the request for information (RFI)
process at the bid stage. Missing items can also be characterized at the bid stage as alternates
or additions. The subcontractor may identify elements of the critical path schedule that are
likely to lead to inefficiencies or stacking of the trades. Problems with the quality or timeliness
of work of another subcontractor can be brought to the attention of the general contractor before
the problems begin delaying the entire project. The key to change order avoidance is looking
carefully at what exists and what lies ahead. Attention to detail, effective communications, and
experience all play a role in that process.

14
Dealing effectively with changes on a project also requires that the subcontractor exercise some
judgment and restraint. Submitting a change order proposal for every unanticipated duct hanger
or single linear foot of duct work will most likely irritate the general contractor to the point
where legitimate and substantial change order proposals may be set aside simply because of the
volume of previous nit-picky requests. The subcontractor has to keep in mind that serious
consideration of a change order proposal consumes time and attention on the part of the
general contractor and that the time and attention of the general contractor are both
limited commodities that the subcontractor must consume wisely.

For Additional Information See the Following SMACNA Contract Bulletins:

Contracts Bulletin #2, Scope of Work (October 20, 1995)

Contracts Bulletin #3, Changes in the Scope of Work (November 22, 1995)
Contracts Bulletin #49, We Built What You Asked For (July 27, 2001)

15
 CHAPTER III SCENARIO

SORTING OUT THE IMMEDIATE MESS

ZZZs project manager and several foremen walked the mall project site in early November. The
project looked nothing like what was shown on the original plans. What had been a conventional
looking mall now looked like a structure that had suffered a bite from the worlds largest shark.
A significant chunk of the mall was simply gone. The ZZZ project manager immediately knew
that a huge challenge faced the subcontractor. Approximately, 20% of the originally specified
duct work was no longer needed. The ducts would have to be reconfigured in multiple locations
and the relocation of a number of the air handlers would require longer runs and additional fans.
Reconfiguration of interior space would also require the subcontractor to relocate numerous
VAV boxes, diffusers, and controls. The project manager decided that the first step should be
compiling a list of all of the changes.

A review of the revised plans and the attempt to compile the list of changes also brought to light
the numerous gaps and inconsistencies in the original and revised plans. There was no indication
of which party was responsible for the supply or installation of a number of the controls.
Installation of the duct work would require working around the structural hodgepodge created by
the elimination of the large section of the mall, but the plans did not accurately reflect the new
structure. Entire sections of the duct work were not shown. It was obvious that wall openings
would have to be created and patched, but that work was also unspecified. The electrical wiring
to the HVAC fans and controls was indicated at some points and absent at others. The plans did
not indicate which subcontractor was to be performing the wiring of the controls. The revised
plans also specified large quantities of duct work with unusual dimensions and joints. Many of
the problems were carryovers from the original plan and some were the result of the re-design.
However, all were clearly problems.

The project manager decided to categorize the changed work by whether:

1. It was needed because of problems with the original plans;

2. It was needed to comply with the re-designed plans; or
3. It was needed to correct new gaps or inconsistencies under the re-designed plans.

The estimators were put to work on pricing and were asked to keep in mind that the schedule
would be pretty tight. The ZZZ project manager mentioned to a representative of the general
contractor that a change order proposal was coming. The response was disturbing: You had
better keep it short and sweet if you want to get paid this century! The ZZZ project manager
started to wonder whether the company would survive long enough to get paid.

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MPLS-Word 16234.3
 CHAPTER III

CLASSIFYING CHANGES

Each change on a construction project should be evaluated by the subcontractor based upon the
answers to the following questions:

Who asked for the change?

Why is the changed work necessary?

Will the change impact the schedule of the work?

Will the change impact the cost of the work?

Does the contract resolve how the cost issues will be addressed?

These are questions that must be asked and answered for every change that a subcontractor
confronts, if it expects to obtain fair compensation. With the answers to these questions in hand,
the subcontractor will have the initial information necessary to begin developing a plan for
getting paid or obtaining a required adjustment to its schedule.

This Chapter will focus primarily on two of the topics covered by the five questions listed above:

(i) Who Wants to Change the Contract?

(ii) How Will the Cost be Determined?

A. General Categories of Changes

Changes generally fall into two broad categories: Owner-Initiated Changes and Contractor -
Initiated Changes.

An Owner-Initiated Change is a pretty clear concept. The subcontractor is issued a written

directive which acknowledges that a change to the contract is appropriate and that requests the
subcontractor to respond with a Proposed Change Order. The directive orders the subcontractor
to perform work that was not originally part of the contract, or to perform the work differently
than what was originally specified. In either case, the subcontractors rights are fairly well-
defined. Generally, the subcontractor will be entitled to some amount of additional payment if
work is added. If the work is reduced as a result of a directive, the subcontractor may owe a
credit. Normally, the primary disputes arising from an Owner-Initiated Change relate to the
amount of compensation which the subcontractor is due, or the duration of the time extension to
which the subcontractor is entitled. Occasionally, a delay claim may also arise as a result of an
Owner- Initiated Change.
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MPLS-Word 16234.3
A Contractor-Initiated Change is the other primary type of change and usually arises in a more
subtle way. A subcontractor may believe that a change has occurred, but the change has not
been acknowledged by the higher tiers. For example, the owner or general contractor may issue
a clarification which is not to be considered a change. The subcontractor, which furnished a
firm price for its work, prepared its bid based on the drawings furnished by the owner or
architect and interprets the clarification to involve extra work. The owner or general
contractor may also direct the subcontractor to perform the work during or over a different time
period than was originally anticipated. Constructive acceleration is a directive to complete a
project on the original schedule when there have been excusable delays that should entitle the
subcontractor to a time extension. Constructive acceleration can constitute a very real change to
the work. In such a case, the subcontractor initiates a Proposed Change Order.

A Contractor-Initiated Change may also come about due to the fact that the work cannot be
performed completely based upon the information given at the time of the bid. If the omission is
latent (or hidden) - difficult to detect by a reasonable and prudent bidding contractor under the
time constraints of normal bid preparation - the subcontractor may be entitled to additional
payment for furnishing the unspecified item. On the other hand, if the omission in the bidding
documents is patent (or obvious) - something that a knowledgeable contractor should have
known would be required - it will face the response that the subcontractor should have inquired
about the omission or provided an allowance in the bid submittal for the omission. A contractor
is rarely compensated for a patent omission under any contract form. Therefore, the bid
preparation process must be more than a pricing exercise. The subcontractors personnel
must be on the lookout for obviously missing items. These items should be called to the
attention of the general contractor in the bid response and scheduled as alternates or additional
items.

There is a potential issue with Contractor-Initiated Changes that rarely exists with Owner-
Initiated Changes. A Contractor-Initiated Change can only be acted upon if it is passed up to the
appropriate higher tiers for approval. If no response is being received to subcontractor proposals
for changed work, there is at least the possibility that such proposals are being side-tracked
before reaching the appropriate tier. To protect itself, the subcontractor should attempt to
establish effective communications and a working relationship with each of the upper tiers.
Based upon such lines of communication, the subcontractor should have the ability to figure out
whether its change order proposals are being duly considered or are sitting in a drawer gathering
dust.

Within the two broad classifications of changes, the following situations are most likely to
produce conditions to which the subcontractor must respond:

1. Owner or Designer-Initiated Major Changes

The owner or its agent may require a major change for a variety of reasons. There is
seldom any argument over the subcontractors entitlement to some additional
compensation for added work under that circumstance. The greatest difficulty arises in

18
 preventing the change from producing undesirable effects upon the unchanged work or
recovering unavoidable impact costs as a part of the change compensation.

2. Field Originated Minor Changes

As interferences or obstructions are encountered in the field, it is essential that the

subcontractor bring the interferences or obstructions to the attention of the general
contractor or project manager along with a request for additional compensation for added
or delayed work. These situations do not normally involve large sums as to any
individual incident, but they may become so frequent that the cumulative effect is
very significant. One primary objective in notifying the higher tiers of this type of
change and the right to compensation is to establish a clear and firm position, early in the
job, and to let the owner and its agents know that the subcontractor will not absorb the
impact of multiple minor changes as part of the original bid.

B. How Will the Cost be Determined?

There are several methods by which the amount of compensation to be paid for a change can be
derived. In order of preference from the perspective of the subcontractor, these methods are:

1. Lump Sum, with an itemization of the basis for the price

2. Time and Materials
3. Unit Pricing
4. Determined by owner or general contractor

1. Lump Sum

This is the method that most clearly protects the subcontractor in attempting to recover
both its direct and indirect costs. It is discussed in detail in Chapter VI of these
Guidelines.

2. Time and Materials

Using a time and material approach can be very costly to the subcontractor. This
approach also presents a significant documentation and management challenge. If the
time and materials devoted to changed work cannot be tracked and documented
separately from the base contract work, the subcontractor will have little chance of
effectively pursuing compensation. Field personnel must be carefully instructed on
tracking time and material changes and the subcontractors cost accounting system must
maintain that information in a manageable and retrievable form.

3. Unit Pricing

Obviously, a unit price that is quoted at the time of the bid must take into account the fact
that the cost for added work is typically greater than the savings from deducted work.

19
 Unit pricing included in the original bid documents must also take into account the
impact of large changes as opposed to small and occasional modifications. Due to these
factors, it is appropriate that the subcontractor limit, in its bid, the magnitude of changes
that it will accept under either unit pricing or a structured cost formula.

4. Owner or General Contractor Determination

The determination of the owner or general contractor is unlikely to result in a reasonable

recovery of costs by the subcontractor. The subcontractor should make every effort to
avoid having its compensation be dictated by the owner or general contractor through
promptly responding to requests for the pricing of changes.

As just one example of a frequently encountered pricing issue, a sheet metal contractor
should not offer a full refund of costs for deductive changes. A deductive change order
should entitle the owner or general contractor to receive a refund of the direct costs
involved in the change, but not a refund of the overhead costs that the subcontractor will
still incur. The subcontractor will still have to supervise the work, administer the
contract and remain on site even though there may be somewhat less work to be
performed. For this reason, deductive changes or deductive unit prices should be less
than additive changes and additive unit prices. No owner or general contractor should
reasonably expect a sheet metal contractor to offer the same credit on deductive changes
as it requests for additive changes. However, a subcontractor must be careful in
considering how it will address overhead with regard to changes on a particular project.
The argument that overhead costs should not reduced by a deductive change order can
also be turned to the subcontractors disadvantage on an additive change order. The
general contractor may see the opportunity to argue that the subcontractor would have to
be on site supervising and administering the overall work in any case and will not,
therefore, be incurring additional overhead on the additive change. (See Chapter VI for
an extensive discussion of overhead cost recovery).

The subcontractors objective in pricing any change order should be to include all of the
applicable costs incurred. Owners and general contractors may try to get a bargain on
changes by negotiating change order pricing that does not fully compensate the
subcontractor for the changed work - particularly the Indirect Costs, Impact, and
Loss of Productivity that can result from the change. These will be discussed further in
Chapter VI.

For Additional Information See the Following SMACNA Contract Bulletins:

Contract Bulletin #2, Scope of Work (October 20, 1995)

Contract Bulletin #3, Changes in the Scope of Work (November 22, 1995)

20
 CHAPTER IV SCENARIO

REVIEWING THE CONTRACT

As ZZZs estimators worked through the enormous task of pricing page after page of changes,
the president of ZZZ asked for a copy of the contract. As he began to review the document, he
recalled the day that it first arrived in the subcontractors office, delivered by Federal Express.
It was the thickest contract he had ever seen. The print was tiny, but the contract had the bulk of
a small phone book. His instructions to the project manager were to have someone read the
contract and to red flag anything out of the ordinary.

The ZZZ employee reviewing the contract had read dozens of AIA, AGC, government and
proprietary contracts, but found this subcontract to be a whole new experience. Many sections
seemed to cover the same topic as other sections, but the terms were not the same in each
section. Some of the sentences went on for 15 or 20 lines and included multiple subsections,
exclusions, and exclusions to exclusions. The ZZZ employee found the experience to be much
like reading a roadmap printed in a foreign language. He had a vague sense of discomfort with
the terms, but the contract was so confusing and lengthy that the notion of red flagging items
of concern was meaningless. He was tempted to draw a large red flag on the front of the form
and write This contract should never be signed!. However, time pressure was intense and it
was obvious that ZZZ wanted the new work badly.

The employee performing the contract review had finally given up after reading half of the
contract, tossed onto the project managers desk and stated simply: It looks pretty standard.
Having that assurance, the project manager immediately had the contract signed by the president
of ZZZ and returned it to the general contractor.

As the president of ZZZ worked his way through the maze-like contract, the last phrase that
came to mind was pretty standard. Given what was occurring, he focused particularly on the
change provisions and found the following:

General Contractor, at any time during the progress of the Work, may
require any changes to the Work (including, but not limited to, deviation
from, addition or deduction from the Work, even if not required by the
Owner, the General Contract Documents or this Subcontract. Such
changes shall not impair, affect or void this Subcontract, regardless of the
nature or extent of such changes.

21
MPLS-Word 16234.3
 The Subcontractor shall execute the changed Work at the discretion of
and as directed by the General Contractor. To the extent that (i) any such
changes are not required under the General Contract or the Owner has not
directed the same (ii) such changes materially increase the Scope of the
Work and (iii) the Subcontractor does not believe that it can complete the
Work pursuant to the Project Schedule, it shall provide written notice to
the General Contractor within 48 hours of such determination by
Subcontractor. Absent such notice, the Subcontractor shall not be entitled
to any changes to the schedule. If the Subcontractor has provided timely
notice, the Subcontractor shall propose and General Contractor may
approve or reject, modifications of the Scope of Work to provide for
changes that the Subcontractor can accomplish in a timely manner or to
modify the schedule, but only to the extent that such changes will not
impact the timely completion of General Contractors work on the Project.
Subcontractor specifically waives any right to claim for compensation
related to any delay in the Work.

The Subcontractor also agreed to expressly waive any and all right to
claim for damages arising from the Subcontractors misinterpretation or
misunderstanding of the Subcontract Documents.

The 48-hour notice requirement seemed absurd under the circumstances. The scarcity of
references to additional compensation for changed work was even more frightening. It appeared
that the general contractor could force ZZZ not only to cut and patch the wall openings, but also
to wire the controls and to connect the various controls to the control panels. Would the ZZZ
employees find themselves putting up drywall? Would they be installing toilets in the
bathrooms? Would the subcontractor be paid for any of the additional work? Emotions of
anger, frustration and panic competed for priority in the presidents mind. Panic seemed the
clear early favorite.

22
 CHAPTER IV
UNDERSTANDING CONTRACT CHANGE PROVISIONS

In Chapter III, these Guidelines presented a review of the general categories of changes.
Managing changes on a project also requires that the subcontractor understand the specific
contract provisions that apply to changes. This Chapter will review some of the most commonly
encountered change clauses and sample language from proprietary contracts. It is only through
understanding how these clauses work that a subcontractor can effectively protect itself from a
compensation and schedule standpoint.

A. AIA DOCUMENT A201 GENERAL CONDITIONS

The change of work provision that is the most frequently encountered on non-federal
government jobs is Article 7 in AIA Document A201 (General Conditions of the Contract for
Construction)1. The provisions most relevant to changes read as follows:

ARTICLE 7 CHANGES IN THE WORK

7.1 GENERAL

7.1.1 Changes in the Work may be accomplished after execution of the Contract, and
without invalidating the Contract, by Change Order, Construction Change Directive or
order for a minor change in the Work, subject to the limitations stated in this Article 7
and elsewhere in the Contract Documents.

7.1.2 A Change Order shall be based upon agreement among the Owner, Contractor
and Architect; a Construction Change Directive requires agreement by the Owner and
Architect and may or may not be agreed to by the Contractor; an order for a minor
change in the Work may be issued by the Architect alone.

7.1.3 Changes in the Work shall be performed under applicable provisions of the
Contract Documents, and the Contractor shall proceed promptly, unless otherwise
provided in the Change Order, Construction Change Directive or order for a minor
change in the Work.

1
AIA Document A201. General Conditions of the Contract for Construction, Fifteenth Edition, AIA, 1997
The American Institute of Architects, 1735 New York Avenue, N.W., Washington, D.C. 20006-5292.

23
MPLS-Word 16234.3
7.2 CHANGE ORDERS

7.2.1 A Change Order is a written instrument prepared by the Architect and signed by
the Owner, Contractor and Architect, stating their agreement upon all of the following:

.1 a change in the Work;

.2 the amount of the adjustment, if any, in the Contract Sum; and

.3 the extent of the adjustment, if any, in the Contract Time.

7.2.2 Methods used in determining adjustments to the Contract Sum may include those
listed in Subparagraph 7.3.3.

7.3 CONSTRUCTION CHANGE DIRECTIVES

7.3.1 A Construction Change Directive is a written order prepared by the Architect and
signed by the Owner and Architect, directing a change in the Work prior to agreement on
adjustment, if any, in the Contract Sum or Contract Time, or both. The Owner may by
Construction Change Directive, without invalidating the Contract, order changes in the
Work within the general scope of the Contract consisting of additions, deletions or other
revisions, the Contract Sum and Contract Time being adjusted accordingly.

7.3.2 A Construction Change Directive shall be used in the absence of total agreement
on the terms of a Change Order.

7.3.3 If the Construction Change Directive provides for an adjustment to the Contract
Sum, the adjustment shall be based on one of the following methods:

.1 mutual acceptance of a lump sum properly itemized and supported by

sufficient substantiating data to permit evaluation;

.2 unit prices stated in the Contract Documents or subsequently agreed upon;

.3 cost to be determined in a manner agreed upon by the parties and a mutually

acceptable fixed or percentage fee; or

.4 as provided in Subparagraph 7.3.6.

7.3.4 Upon receipt of a Construction Change Directive, the Contractor shall promptly
proceed with the change in the Work involved and advise the Architect of the
Contractors agreement or disagreement with the method, if any, provided in the
Construction Change Directive for determining the proposed adjustment in the Contract
Sum or Contract Time.

24
7.3.5 A Construction Change Directive signed by the Contractor indicates the
agreement of the Contractor therewith, including adjustment in Contract Sum and
Contract Time or the method for determining them. Such agreement shall be effective
immediately and shall be recorded as a Change Order.

7.3.6 If the Contractor does not respond promptly or disagrees with the method for
adjustment in the Contract Sum, the method and the adjustment shall be determined by
the Architect on the basis of reasonable expenditures and savings of those performing the
Work attributable to the change, including, in case of an increase in the Contract Sum, a
reasonable allowance for overhead and profit. In such case, and also under Clause
7.3.3.3, the Contractor shall keep and present, in such form as the Architect may
prescribe, an itemized accounting together with appropriate supporting data. Unless
otherwise provided in the Contract Documents, costs for the purposes of this
Subparagraph 7.3.6 shall be limited to the following:

.1 costs of labor, including social security, old age and unemployment insurance,
fringe benefits required by agreement or custom, and workers compensation
insurance;

.2 costs of materials, supplies and equipment, including cost of transportation,

whether incorporated or consumed;

.3 rental costs of machinery and equipment, exclusive of hand tools, whether

rented from the Contractor or others;

.4 costs of premiums for all bonds and insurance, permit fees, and sales, use or
similar taxes related to the Work; and

.5 additional costs of supervision and field office personnel directly attributable

to the change.

7.3.7 The amount of credit to be allowed by the Contractor to the Owner for a deletion
or change which results in a net decrease in the Contract Sum shall be actual net cost as
confirmed by the Architect. When both additions and credits covering related Work or
substitutions are involved in a change, the allowance for overhead and profit shall be
figured on the basis of net increase, if any, with respect to that change.

7.3.8 Pending final determination of the total cost of a Construction Change Directive
to the Owner, amounts not in dispute for such changes in the Work shall be included in
Applications for Payment accompanied by a Change Order indicating the parties
agreement with part or all for such costs. For any portion of such cost that remains in
dispute, the Architect will make an interim determination for purposes of monthly
certification for payment of those costs. That determination of cost shall adjust the
Contract Sum on the same basis as a Change Order, subject to the right of either party to
disagree and assert a claim in accordance with Article 4.

25
 7.3.9 When the Owner and Contractor agree with the determination made by the
Architect concerning the adjustments in the Contract Sum and Contract Time, or
otherwise reach agreement upon the adjustments, such agreement shall be effective
immediately and shall be recorded by preparation and execution of an appropriate
Change Order.

7.4 MINOR CHANGES IN THE WORK

7.4.1 The Architect will have authority to order minor changes in the Work not
involving adjustment in the Contract Sum or extension of the Contract Time and not
inconsistent with the intent of the Contract Documents. Such changes shall be effected
by written order and shall be binding on the Owner and Contractor. The Contractor shall
carry out such written orders promptly.

The A201 provisions are among the most clear and reasonable contract terms in dealing with
change issues. Due to the concept of flow down in construction contracting, all of the tiers can
approach changes under a uniform set of rules and procedures as dictated by the A201 terms. As
long as the parties to the contract interpret the provisions in a reasonable manner, the A201
procedures should lead to equitable resolution concerning most changes in the work. However,
it is still possible for disputes to arise despite the language and intent of Article 7. For example,
Paragraph 7.2.1 defines a change order as a written order signed by the owner and architect
authorizing a change in the work or an adjustment in the contract value or duration time. It also
implies that a contractor can only be assured the benefit of a contract change including amount
or duration of time if that change is evidenced by a written change order.

Under these provisions, a subcontractor should be aware that it is greatly increasing the
likelihood that it will not be compensated for a change if it fails to insist that an order or
instruction be provided in writing.

For instance, an inspector on a project may say: I think that you should route this return air duct
over against that wall. It will be out of everybodys way and will look better. If the
subcontractor proceeds to route the duct as directed by that inspector and submits an invoice
three or four weeks later for the additional time and materials, the subcontractor should not be
surprised if the invoice is returned unapproved. First, the inspector likely had limited authority
and was probably not authorized to issue a change order. Second, the instruction was not in
writing, thereby making it difficult to ascertain whether it was, in fact, an order. Third, if the
subcontractor performs the work without giving advance notice to the general contractor that it is
to be considered an extra cost item under the contract and that additional compensation is
expected, the subcontractor will likely be denied payment. These three conditions, or most
combinations thereof, would most likely bar recovery under Article 7.2.1.

Article 7.3.5 goes on to state that if a contractor (or subcontractor) signs a Construction Change
Directive, it is thereby agreeing to the specified change - as to both time and money. This is a
very important point. Many contractors signing a Change Order or Construction Change
Directive later discover that they must perform the work under adverse conditions at reduced

26
productivity. Rarely, if ever, will an owner or general contractor issue a supplemental change
order to cover something the subcontractor initially overlooked. Once a change has been signed
off without reservation, it cannot be opened for reconsideration, unless conditions affecting the
change differ materially from those the subcontractor could have foreseen at the time the change
was approved. Such unforeseen conditions might entitle the subcontractor to additional
compensation - provided, that it gives timely notice of the unforeseen conditions and the need for
approval of a change.

The subcontractor seeking to avoid these difficulties will:

(i) Take the time to think through (foresee) the conditions under which it will have
to perform the changed work;

(ii) Respond to the Construction Change Directive with a Proposed Change Order
that includes those conditions; and

(iii) Sign the resulting Construction Change Directive or Change Order only if it
includes those conditions.

Article 7.3 is the A201 clause under which most disputes for directed changes originate.
Typically, the owner requests a lump sum price for a change. The owner has a right to review
supporting documents, as it deems necessary, to justify the price. After all, when the
subcontractor originally bid the project, it was competing with other subcontractors for the work.
This process, in effect, kept the subcontractor honest when computing the price. With a
change order, however, the owner or general contractor does not have other bids to compare to
the subcontractors price. Therefore, the general contractor (or architect) must be able to assure
both itself and the owner that the subcontractors price is reasonable and that the subcontractor,
for example, is not attempting to get paid for an extra 1000 pounds of sheet metal that were
deliberately or inadvertently left out of the bid. It is the owners right to have, and the
subcontractors obligation to provide, necessary substantiating documentation.

Therefore, the more details that are provided in the quotation when it is first submitted, the
more likely it is that the quotation will be approved with a minimum of difficulty.

Unit price contracts, or lump sum contracts with unit prices for changes, greatly simplify the
procedure for pricing changes that merely increase or decrease the quantity of a work item.
However, when the quantity changes so dramatically that it produces an unfair outcome for the
subcontractor using the unit pricing approach, disputes may still arise. A subcontractor must be
prepared to furnish supporting evidence necessary to convince the owner, the architect and the
general contractor that its position is reasonable. The pricing method a subcontractor should
attempt to avoid, if at all possible, is the method described in Article 7.3.6 - the straight time and
materials method (T&M). Rarely will T&M pricing methods equitably compensate a
subcontractor for all of the additional costs of extra work. Thus, it is almost always to the
subcontractors benefit to get a change order price resolved on the basis of a lump sum proposal,
rather than resorting to the T&M approach.

27
Article 4.3.4 of the AIA A201 addresses the issue of unforeseen conditions. The clause reads as
follows:

4.3.4 Claims for Concealed or Unknown Conditions. If conditions are encountered

at the site which are (1) subsurface or otherwise concealed physical conditions which
differ materially from those indicated in the Contract Documents or (2) unknown
physical conditions of an unusual nature, which differ materially from those ordinarily
found to exist and generally recognized as inherent in construction activities of the
character provided for in the Contract Documents, then notice by the observing party
shall be given to the other party promptly before conditions are disturbed and in no event
later than 21 days after first observance of the conditions. The Architect will promptly
investigate such conditions and, if they differ materially and cause an increase or
decrease in the Contractors cost of, or time required for, performance of any part of the
Work, will recommend an equitable adjustment in the Contract Sum or Contract Time, or
both. If the Architect determines that the conditions at the site are not materially different
from those indicated in the Contract Documents and that no change in the terms of the
Contract is justified, the Architect shall so notify the Owner and Contractor in writing,
stating the reasons. Claims by either party in opposition to such determination must be
made within 21 days after the Architect has given notice of the decision. If the
conditions encountered are materially different, the Contract Sum and Contract Time
shall be equitably adjusted, but if the Owner and Contractor cannot agree on an
adjustment in the Contract Sum or Contract Time, the adjustment shall be referred to the
Architect for initial determination, subject to further proceedings pursuant to Paragraph
4.4

This concealed condition clause is also referred to as a changed conditions or differing site
conditions provision. The purpose is to protect the contractor and subcontractor from the
possibility of being damaged by something that could not reasonably be foreseen at the time of
the bid. This clause entitles the subcontractor to the possibility of recovery when conditions not
depicted in the contract drawings exist in the field. This clause also protects the owner from
large contingencies in bids by pessimistic contractors. Interpretation of this clause is often very
subjective and disputes can still arise as to whether the condition was really a change. Disputes
may also arise as to whether the contractor could have, or should have, known that the conditions
existed.

For example, a contractor bidding on a remodeling project might note that a new doorway is to
be added in an existing wall. The plans do not show that there is a return air shaft in the center
of the proposed opening. If, despite a reasonable examination of the site, this shaft cannot be
seen, the contractor should clearly be entitled to additional compensation if required to relocate
the shaft or otherwise perform additional work because of the interference. If, on the other hand,
the shaft is exposed in the wall at the precise location where the door is to be installed, and the
contractor does not inquire about the shaft prior to submitting the bid, the contractor may be held
responsible for having not anticipated the additional work and included it in the bid. Also, the
contractor would clearly have a duty to inquire as to what was to become of the shaft, if it was

28
evident at the time of the bid that it would conflict with the installation as depicted on the plans.
Contractors are assumed to be reasonably experienced in such matters. By hiring an experienced
contractor, the owner anticipates that some of the errors that may be inherent in the plans and
specifications will be identified and resolved before construction begins.

As a general rule, if a subcontractor expects to successfully recover for a concealed

condition or differing site condition claim, it must notify the general contractor in
writing as soon as the problem is discovered.

An e-mail transmitted on the day of discovery of the concealed condition may suffice or the
subcontractor may want to deliver the notice by facsimile (depending upon the communication
protocol for the particular project). If the general contractor is not notified and the subcontractor
is ultimately prejudiced by the concealed condition, the subcontractor will almost certainly be
denied recovery.

The issue of concealed conditions also ties into what the contract states regarding site-related
due diligence for purposes of the bidding process. Many modern construction contracts impose a
duty on a subcontractor to inspect the site of the work and familiarize itself with the working
conditions. If the subcontractor does not do so and subsequently encounters a condition that
could have been discovered in an inspection of the job site, the subcontractor will have little
chance of recovering for additional work required because of the conditions.

Article 4.3.5 and 4.3.6 of A201 specifically address increases in cost:

4.3.5 Claims for Additional Cost. If the Contractor wishes to make Claim for an
increase in the Contract Sum, written notice as provided herein shall be given before
proceeding to execute the Work. Prior notice is not required for Claims relating to an
emergency endangering life or property arising under Paragraph 10.6.

4.3.6 If the Contractor believes additional cost is involved for reasons including but not
limited to (1) a written interpretation from the Architect, (2) an order by the Owner to
stop the Work where the Contractor was not at fault, (3) a written order for a minor
change in the Work issued by the Architect, (4) failure of payment by the Owner, (5)
termination of the Contract by the Owner, (6) Owners suspension or (7) other reasonable
grounds, Claim shall be filed in accordance with this Paragraph 4.3.

It is under these provisions, more than any other portion of the change clauses, that
subcontractors wind up in trouble.

If the subcontractor fails to notify the owner or general contractor that a certain act or condition
is considered a change, these provisions will likely bar recovery. When a subcontractor complies
with these clauses, it will at least have an opportunity to protect its rights under the contract.
Even if the owner or general contractor does not immediately acknowledge that there is an
additional obligation to the subcontractor, the subcontractor will still possess its right to pursue
compensation under the dispute resolution procedures in the contract.

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Government contracts are generally more equitable than private contracts, at least as between the
owner and the general contractor. However, the existence of an equitable contract between the
owner and the general contractor does not guaranty that the subcontractor will be provided with a
fair and reasonable contract. The subcontractor must understand that the terms applicable to its
work will likely be defined by both the general contract and its subcontract, but that it will likely
be bound to the strictest terms in either of the documents.

B. FEDERAL ACQUISITION REGULATIONS - CHANGE PROVISIONS

The Federal Acquisition Regulation 52.243-4, 48 C.F.R. Ch. 1 52.243-4 provides for the
following changes clause:

CHANGES

(a) The Contracting Officer may, at any time without notice to the sureties, if any, by
written order designated or indicated to be a change order, make changes in the work
within the general scope of the contract, including changes:

(1) In the specifications (including drawings and designs);

(2) In the method or manner of performance of the work;

(3) In the Government-furnished facilities, equipment, materials, services, or

site; or

(4) Directing acceleration in the performance of the work.

(b) Any other written order or oral order (which, as used in this paragraph (b),
includes direction, instruction, interpretation, or determination) from the Contracting
Officer, that causes a change shall be treated as a change order under this clause,
provided that the Contractor gives the Contracting Officer written notice stating

(1) the date, circumstances, and source of the order and

(2) that the Contractor regards the order as a change order.

(c) Except as provided in this clause, no order, statement, or conduct of the

Contracting Officer shall be treated as a change under this clause or entitle the Contractor
to an equitable adjustment.

(d) If any change under this clause causes an increase or decrease in the Contractors
cost of, or the time required for, the performance of any part of the work under this
contract, whether or not changed by any such order, the Contracting Officer shall make
an equitable adjustment and modify the contract in writing. However, except for an
adjustment based on defective specifications, no adjustment for any change under
paragraph (b) of this clause shall be made for any costs incurred more than 20 days
30
 before the Contractor gives written notice as required. In the case of defective
specifications for which the Government is responsible, the equitable adjustment shall
include any increased cost reasonably incurred by the Contractor in attempting to comply
with the defective specifications.

(e) The Contractor must assert the right to an adjustment under this clause within
thirty (30) days after (1) receipt of a written change order under paragraph (a) of this
clause or (2) the furnishing of a written notice under paragraph (b) of this clause, by
submitting to the Contracting Officer a written statement describing the general nature
and amount of proposal, unless this period is extended by the Government. The
statement of proposal for adjustment may be included in the notice under paragraph (b)
above.

(f) No proposal by the Contractor for an equitable adjustment shall be allowed if

asserted after final payment under this contract.

This clause is much like the AIA clause, except that it specifically defines the types of items that
the government might consider a change. It also specifically mentions directed acceleration and
defective specifications. Under the language of these provisions, the contractor has no more
rights than under the A201 General Conditions. However, when the FAR clauses are interpreted,
contracting officers may feel more inclined to compensate subcontractors for directed
acceleration, since the clauses specifically mention that item. Architects are sometimes reluctant
to direct acceleration, even when it is appropriate, because they do not want to be responsible for
the additional cost. On the other hand, when the government contracting officer determines that
acceleration is necessary, these contract provisions clearly authorize him to make that decision
and to compensate the contractor accordingly. The notice requirements still apply and the time
allowed for written notice is 20 days, which is quite reasonable and will usually be strictly
enforced. Time limits are also strictly defined for submitting the price proposal. This is only
logical, since every contractor knows that delays in submitting or approving change order pricing
can have a disastrous effect on the construction sequence. The government has recognized this
effect and has attempted in its contract language to place the contractor on notice that the time
line is important.

C. PROPRIETARY CONTRACT LANGUAGE

There are many other change clauses used in the construction industry. Many are less equitable
than those discussed above. The following is an example of a reasonably equitable change
clause:

ARTICLE 9. CHANGES IN THE WORK

9.01. GENERAL. The Owner, without invalidating the Contract and without affecting
the guarantees of the Contractor or the validity of his Bonds and without relieving or
releasing any surety of said Bonds, may order or authorize Changes in the Work
consisting of additions, deletions or other revisions or adjustments of the Contract Sum or

31
 the Contract Time. All such Changes in the Work shall be pursuant to Modifications
prepared by the Architect/Engineer and shall be executed in accordance with the
Contract. Project Record Documents which the Contractor is required to submit pursuant
to the Contract shall clearly show all Changes in the Work.

9.02. CHANGE IN SUM OR TIME. Change Orders will specify all changes in the
Contract Sum or Contract Time. Requests for proposed changes in the Contract shall be
made in writing to the Architect/Engineer or Construction Manager within 10 calendar
days after the occurrence of the event giving rise to the request. The Contractor shall not
perform any work on the proposed change unless it has an approved Change Order or a
written Proceed Order from the Architect/Engineer or Construction Manager, approved
by the Owner. No claim for an adjustment of the Contract Sum or Contract Time shall be
valid unless a Change Order or a Proceed Order has been issued.

This clause is reasonable, but it should be noted that the notice time line has been reduced to ten
(10) days.

The following is an excerpt from a considerably more severe change clause periodically
encountered in subcontract documentation:

ARTICLE 10. CHANGE ORDER ADDITIONS AND DEDUCTIONS

10.01. General Contractor may at any time during the progress of the Work require any
changes to the Work, even if not required by the Owner or the Contract Documents and
without an obligation to give notice to any surety. Such changes shall not impair, affect
or void this Subcontract regardless of the nature or extent of such changes. The
Subcontractor shall execute the changed Work as directed by General Contractor. In
addition, General Contractor can require or implement changes on the same basis as the
Owner. To the extent that: (i) any such changes are not required under the General
Contract or the Owner has not directed the same, (ii) said changes materially increase the
Scope of the Work, and (iii) the Subcontractor does not believe that it can complete the
Work pursuant to Project schedule, it shall provide written notice to that effect to General
Contractor. Under said conditions, the parties shall negotiate as to the Scope of Work to
provide for changes that the Subcontractor can accomplish in a timely manner or to
modify the schedule to permit completion of the additional work, to the extent that the
same will not impact the timely completion of General Contractors work on the Project.

10.02. The amount of any change to the Work scope shall be determined and applied to
the Subcontract Sum in accordance with applicable bid items or unit prices. If the
changed Work is not covered by such bid items or unit prices, the cost of the changed
Work shall be determined by General Contractor and the Subcontractor shall proceed on
the basis of such determination. If the Subcontractor disputes the General Contractors
determination of the cost, the Subcontractor shall proceed with the changed Work and the
amount shall be determined by the actual direct cost to the Subcontractor for the
materials, craft labor and equipment as required and approved for such additional Work,

32
 plus a percentage thereof determined by General Contractor as compensation for all other
items of overhead and profit. Under no circumstances shall the compensation to
Subcontractor for changed Work or the percentage of overhead and profit exceed that
permitted to General Contractor under the provisions of the General Contract, minus a
five percent (5%) allowance for General Contractors overhead cost.

These provisions have a number of defects from the standpoint of a subcontractor. The general
contractor is free to add any work to the subcontractor, whether or not consistent with the scope
of work the subcontractor has accepted. The subcontractor is not entitled to request a change
order if the changes do not materially increase the Scope of Work. The general contractor can
compel the subcontractor to perform the work on a straight time and materials basis if no bid or
unit price approach is acceptable to the parties. The general contractor can also determine what
percentage of overhead and profit should be assigned to the work. If a subcontract contains
provisions of this kind, the subcontractor will face a significant up-hill battle in obtaining fair
compensation for changes.

The following is an excerpt from another change clause which deals with field instructions:

6.1.3. Clarifications

6.1.3.1 During the life of the project, the Architect may issue bulletins, letters or other
instructions, which are meant to clarify the documents and are not intended to change the
contract amount of any contractor or contract completion time.

6.1.3.2 During the life of the project, the Construction Manager may issue field orders,
letters, or other instructions, which are meant to clarify the Work and are not intended to
change contract amounts or contract completion time.

Under these provisions, a subcontractor would clearly be obligated to file a written protest, if it
determines that a clarification, issued by either the architect or the construction manager, actually
constitutes a change to the contract. Failure to do so would likely bar recovery.

Most clauses in construction contracts and subcontracts contain similar definitions of what
constitutes a change and similar notice requirements. The chief differences between the various
contracts relate to the time required for notice (often as little as 48 hours) and the standard of
judgment to be applied to the review of a request for a change (for example, will it be
reasonably considered or in the general contractors sole discretion?).

In any event, the subcontractor must carefully read the contract documents, determine how
the change clauses in the contract may be applied and carefully observe all of the timely
notice and price provisions of the change clauses.

It is impossible to overemphasize the importance of timely written notice. Time line has
already been discussed. It is just as important that the notice be in writing. The subcontractor is
not adequately protecting itself if it simply raises a question with an inspector or a project

33
manager about an interpretation before proceeding with the requested work. It is also not
sufficient to write a multiple page letter outlining in great detail the conditions the subcontractor
considers to be a change and stating the complete cost breakdown for that change, if the letter is
submitted 45 days after the change occurs. Except in the case of defective specifications, it is
unlikely that a claim will be considered on its merits under those circumstances. It is much
easier to reject a claim for failure to meet a notice or submittal deadline than to dig into the
details of whether something constitutes a valid change. Failure to meet time lines or lack
of necessary written documentation provides an easy out for the owner or general
contractor in denying change compensation.

D. OTHER CONTRACT CLAUSES

Other clauses in a typical subcontract can act very much like change clauses and must also be
considered. As mentioned with regard to A201 General Conditions, the differing site
conditions clause and changed condition clause, in many respects, have the same implications
as a directed change clause. However, a contractor must be particularly careful concerning
compliance with the notice provisions, since the changed condition is as likely to come as
a surprise to the owner, the architect and general contractor, as it was to the subcontractor
when the condition was discovered.

If a subcontractor removes an obstruction without notifying the general contractor prior to its
removal, the general contractor may not even have known of, and will certainly be reluctant to
pay the subcontractor for, removal. For this reason, changed condition clauses require
particular attention to compliance with the notice provisions and full disclosure of the nature of
the changed condition. Once proper notice has been provided, the handling of the changed
condition should be similar to the handling of a directed change.

Other contract clauses may also be treated in a similar manner to change clauses. Some
provisions, such as time of performance clauses, make such statements as:

The contractor will be required to perform the work within the time
stipulated in the contract. In the event the contractor falls behind in the
work, the owner may direct the contractor to work such additional hours
or employ additional people as necessary to complete the work within the
required time frame. No additional compensation shall be provided for
overtime or additional labor costs under such circumstances.

Paragraphs such as this are inserted for the owners protection in the event that the contractor
fails to pursue the work according to the project schedule. On the other hand, the contractor will
often be faced with a notice directing it to make up for lost time when, in fact, the lost time was
due to circumstances beyond its control and for which it should be entitled to a time extension.
In such an event, the contractor may treat the acceleration as a directed change and the notice
provision of the change clauses will apply. The subcontractor must advise in writing that it
interprets this as a directed acceleration. If the subcontractor can prove that its work would have

34
completed on time had it not been for excusable delay, the subcontractor should be entitled to
additional compensation.

Clauses requiring the owner or general contractor to approve shop drawings provided by the
subcontractor in a timely manner may also come under the jurisdiction of the change clauses, if
the owner or general contractor fails to provide timely approval. Notice provisions may also
apply to issues arising out of delay in the architects review of shop drawings.

Carefully reviewing and understanding the contract terms applicable to changes is an essential
step for a subcontractor in attempting to protect its right to compensation. Before signing a
contract, the subcontractor should consider whether it should negotiate modifications to the
proposed contract that will assist it in obtaining fair compensation and provide it with sufficient
time and opportunity to deal with changes. The subcontractors leverage (however limited) is
greatest when its bid price has been accepted and the signing the contract form is all that
remains. If a subcontractor can obtain something like the A201 language, it will have a
reasonable prospect of recovery for changes.

For Additional Information See the Following SMACNA Contract Bulletins:

Contract Bulletin #6, Contract Document Review (March 15, 1996)

Contract Bulletin #18, The "Killer Contract" Part 1 (July 17, 1998)
Contract Bulletin #19, The "Killer" Contract Part 2 (August 17, 1998)
Contract Bulletin #20, The "Killer" Contract Part 3 (September 11, 1998)
Contract Bulletin #21, What is My Contract? (October 9, 1998)
Contract Bulletin #55, The Two "Contracts" (April 5, 2002)

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 CHAPTER V SCENARIO
SEEING THROUGH THE FOG

The estimators at ZZZ Sheet Metal were working on a preliminary assessment of the time and
materials that would be involved under the revised plans and specifications. The work had
changed radically, but the deducts were so substantial that the overall material cost appeared to
have dropped. The general contractor had been passing the word that it had expected substantial
savings under the re-design. On the other hand, there were an almost uncountable number of
variables at play. Could the material and the equipment required under the re-design be obtained
in time? Could the subcontractor obtain enough skilled workers under the accelerated time line?
How bad would the work site be with all of the subcontractors scrambling to get at their work?
Trying to see through the fog to the completion of the mall project was nearly impossible. The
date for substantial completion remained September 1.

Among other things, ZZZ now realized the dimensions of the error that it had made in submitting
its original bid. The president of the company instructed the project team to clean up this mess
and make sure that we are covered the rest of the way. Based upon that advice, the project
manager knew that the change order proposal would have to include a breakdown of materials,
time, pricing for deducts and extra and overtime labor, as well as additional shop burden due to
the custom duct work. The change order proposal would also have to clearly identify items that
ZZZ considered necessary, but which were not reflected on the revised plans. These would be
indicated as additional work with pricing. A productivity premium would have to be added
because of the accelerated schedule and the anticipated stacking of the trades. The deducted
work would reflect time and material deducts only.

At the bottom of the draft change order proposal, the project manager was sufficiently concerned
about timing that he proposed to include the phrase: The pricing reflected in this change order
proposal is valid for thirty days. Your prompt response is appreciated. The preliminary
numbers were coming together and it looked like the net number was going to be an additional
cost, not a deduct. The project manager passed along that information to management. The
president of ZZZ crossed his fingers. He had a new ability to relate to what it feels like jumping
out of a plane and not knowing whether the parachute will open.

36
MPLS-Word 16234.3
 CHAPTER V
ASSESSING THE RISK

A crucial step for a sheet metal contractor attempting to receive fair compensation for changed
work is accurately assessing the risk associated with performing the change. There is no such
thing as a no cost change order. At a minimum, all changes consume management time in
reviewing the changed work and there may also be significant effects on the unchanged, as well
as the changed, work.

When pricing a change, a subcontractor must be keenly aware of the effect the change will have
on the total project. A change may have already occurred and be carefully documented in daily
time cards and diaries. What may not be well-documented is the effect of that change on other
elements of the work. This is known as the impact or ripple effect and is often overlooked
when pricing change orders. Owners, sometimes unwittingly, compel contractors and
subcontractors to perform extra work without allowing for compensation that takes into account
all relevant factors . Owners seldom recognize the impact or ripple effect of a change in
advance and may not acknowledge it once the changed work is completed. The effect may be
obvious, but change orders are frequently written without any discussion of the impact that the
change will have on the total work. Frequently, contractors and subcontractors will sign a
change order without reserving the right to subsequently collect impact damages. This can be a
costly error. If a change order is determined to be an accord and satisfaction as to the changed
work, the subcontractor will have little success reopening it later due to impact or delay
damages.

Some change orders also contain language releasing and waiving any right to claim for future
compensation. Such language will be discussed below. The subcontractor would be well-
advised, if it has actual or potential claims that it wishes to preserve, to strike such release or
waiver language in responding to the change order.

In addition to the direct cost of performing the changed work, other factors must be considered
and priced into the change order. If an extra cost item is specifically identified in the
subcontractors change order proposal, but is excluded from the written change order issued by
the general contractor, the subcontractor may still be entitled to recover for that item at a later
time, if it has reserved that right in responding to the change order. However, if the
subcontractor accepts the change order as written and does not include a reservation as to the
additional cost item, it will likely be barred from further recovery. It is essential to consider
every foreseeable risk with regard to changed work and to construct the change order proposal
with such risks in mind.

Among the areas of risk that should be considered for every change are the following:

37
MPLS-Word 16234.3
Correctly Identifying the Extra Work When a request for changed work is issued,
the request may not be clear and precise. The general contractor may deliver revised
plans without making it clear which work has been changed. While it is a good practice
for changed work to be identified by a cloud on the plans, that is frequently not done.
As a result, an initial step for the subcontractor in evaluating changed work is to clearly
identify what it is being asked to do. If the subcontractor has questions about what is
being changed, it is essential that the subcontractor seek clarification before proceeding.
If changed items are hidden in a revised plan and the subcontractor accepts
responsibility for performing the work as reflected on the plan, the subcontractors
pricing will almost certainly not be adequate to compensate it for the work it actually has
to perform.

Time Frame for the Extra Work - When a change order is issued, a cost quotation will
usually be given to the owner or general contractor with no statement as to the time
during which the subcontractor expects the work to be performed, and no consideration
for the amount of time the owner or general contractor has to consider the change. This
is foolhardy. The time frame during which changed work will be performed is very
important. The changed work may come when other work is at a peak and labor is
scarce. It may require work to be done during the winter or during a period of high labor
cost. It may require the hiring of additional personnel with lower productivity or
experience than the regular crews on the job. It may even be necessary to implement the
changed work after the project should have been completed. Each of these factors will
affect the labor rates and/or productivity for purposes of change order pricing.

Effect on Project Completion Timing - When a request for changed work is issued, it
may seem like an minor matter. However, if the request comes when labor demands are
at a peak and additional manpower cannot be easily acquired, it may significantly impact
project completion. By consuming manpower that is needed for base contract work, the
changed work will almost certainly have an impact on overall contract completion. If a
change requires 1000 man hours and the subcontractor has 10 men on the job, working 8
hours per day, it is obvious that the completion time will be extended by 12.5 days, if no
more people are added and no overtime is worked. The recognition of the need for a time
extension is crucial. Keep in mind that simply getting an extension of time and payment
for labor and materials may not fully compensate a subcontractor. If a subcontractor gets
a substantial time extension without extended overhead recovery, it will be absorbing
the additional overhead costs without added compensation. As an initial matter, a
subcontractor must make certain that the subcontract it signs allows for both
additional time and additional money with regard to changes in the work.

A modern construction project is typically coordinated on the basis of the critical path
method. The critical path defines when each element of the work is to start and be
completed and how the work of the various trades will be coordinated to maximize
efficiency. A typical schedule will include some element of float, which provides
additional time to deal with the unexpected. As a project falls off its critical path, the

38
float is consumed and may not be available to the subcontractor when it starts its
work. Under that circumstance, changes in the work may result in a constructive
acceleration and have a dramatic impact on project labor costs, as well as the
completion timetable. Unless the subcontractor has a clear understanding of the
impact of proposed changes on all aspects of its schedule, it will not be in a position to
recover full compensation for the change.

Extra Workers or Overtime - Can the work be done during regular working hours or
will it have to be done on overtime? Can the work already under contract continue
without interruption while the extra work is being performed? Will the extra work
require crews that are not familiar with the project? Each of these factors will affect
productivity and must be priced into the change proposal before it is submitted for
approval.

Weather Problems - If the owner issues a change order requiring work to be performed
during the rainy season (or the snowy season) and the subcontractors crews will be
exposed to adverse weather, the estimate should take into account the additional cost
likely to be attributable to the adverse conditions.

Time Required to Process Change Orders - Change order proposals should always be
provided to the general contractor promptly upon request. The subcontractor can also
seek to protect itself by indicating that its change proposal must be accepted or rejected
within a limited period of time. If the owner does not respond within the prescribed time
frame and the delay affects the subcontractors costs, the subcontractor should consider
notifying the general contractor that it intends to rely upon the time limit qualification of
the proposal. It is not uncommon for change orders to be accepted, without protest, 90 or
120 days after the change order proposal was submitted and the subcontractor usually
suffers as a result. For a subcontractor quoting to an owner through a general
contractor, time limits are particularly important. Careless processing of paperwork by
the various parties that review the proposal is not only possible; it frequently occurs. The
result is likely to be a negative impact on project timing and work sequence. A
subcontractor must keep in mind that if it signs a change order and does not provide for
any time lines, the change order may be accepted far later than the subcontractor expects
and yet the subcontractor will have a difficult time re-opening it.

Change Order Language - The language of the change order documentation must be
read in conjunction with the contract or subcontract to which it applies. Many times, the
language of one document affects the other in a subtle way and a subcontractor may not
understand the problems that result until too late. For example, a subcontractor may end
up performing changed work without compensation if the scope language is broadly
drawn to potentially include all sorts of changes. Subcontractors often get tripped-up by
clauses in the subcontract that allow for the addition of items of work without such
additional work being considered a change. As just one example, the boilerplate
language of the contract may indicate that the subcontractor is responsible for all work

39
 implied under the plans and specifications with regard to its scope. The subcontractor
would be well-advised to change that word implied to indicated in responding to the
contract. A specific scope of work is always to the benefit of the subcontractor, as well
as the owner, both in the original contract and in any change order.

Signing the Change Order - When a subcontractor signs a change order, it is agreeing to
accept the provision as an amendment to its subcontract. On occasion, owners or general
contractors may attempt to add general exculpatory language to change orders and the
subcontractor may find itself bound to terms never considered as part of the specific
change. The following is an example of such a requirement: This change order
represents complete compensation for any and all changes that have occurred to date.
Such language can be used in an attempt to create an accord and satisfaction. A
subcontractor, realizing later that conditions occurring prior to the signing of the change
order will impact the ongoing work, may be prevented from recovery by such language.
Attempting to strike such language from the change order form is certainly worth the
effort.

Other Considerations - Dealing effectively with changes is a matter of anticipation.

The subcontractor must strive to take into account any event or occurrence relating to
changed work which may have some effect on the project, as well as on the
subcontractors pricing estimate. Failure to anticipate will likely mean failure to get
paid.

A change issued by a general contractor to one subcontractor may also affect another.
When a change is issued to more than one subcontractor without specifying which
subcontractor is to do the work, each subcontractor is bound to examine the change order
for whatever work might affect the crafts under its jurisdiction.

Clarifying Changes Where Ambiguities Exist - A subcontractor, when quoting a

change, is assumed to have understood the conditions of the change. If any direction
given in the change is not immediately clear or a question exists in the subcontractors
mind as to what is required, the subcontractor is bound to inquire prior to pricing the
change order. Failure to do so may leave the subcontractor quoting an item of work
different from that which the owner or general contractor contemplated. In such a case,
the consequences are the same as having bid the original contract without requesting
clarification of a patent (obvious) ambiguity.

Delays are one of the most frequent causes of major increases in construction costs. At a
minimum, additional field expenses and home office expenses are experienced when a
subcontractor is substantially delayed. Delays may also lead to the need to accelerate the work
by the addition of overtime. Along with cost, the subcontractor must always consider the
impact of time.

40
Extended periods of overtime also have hidden costs. It can, and usually does, reduce
productivity. The reader may refer to the following publications which further address the costs
of overtime:

Alliance Project Management Manual, published the Mechanical/Electrical/Sheet

Metal Alliance (3rd printing, March, 2003)

2002 SMACNA Financial Survey Report, published by SMACNA (2002)

Factors Affecting Labor Productivity, published by The Mechanical Contractors

Association of America, Inc. (1994)

Cost Reference Manual for Sheet Metal and HVAC, published by SMACNA
(1998)

Basic Sheet Metal Estimating Manual, published by SMACNA (2002)

This Chapter has emphasized the importance of time and the impact of changes on schedule and
coordination. Just as the plans and specifications must clearly establish a baseline for the type of
work to be performed, the original project schedule provides the baseline for the time element of
the project. It is absolutely essential that the subcontractor obtains and reviews the project
schedule at the beginning of the job. If the general contractor and architect are reluctant to
provide the schedule, insist upon obtaining it as a condition to accepting the work. Taking a job
without a clear understanding of the schedule is to take a totally irrational risk, whether or not the
project ultimately involves significant changes.

For Additional Information See the Following SMACNA Contract Bulletins:

Contract Bulletin #7, Delay Claims -- Part 1 (May 10, 1996)

Contract Bulletin #8, Delay Claims -- Part 2 (June 21, 1996)
Contract Bulletin #42, The Risk of Unforeseen Conditions (November 17, 2000)
Contract Bulletin #45, Delay Claims (April 6, 2001)

41
 CHAPTER VI SCENARIO

ASSEMBLING THE PACKAGE

The staff at ZZZ Sheet Metal had never faced a challenge as big as that presented by the Change
Order Proposal on the mall project. It was hard enough to pull together the quantities and pricing
on all of the materials. The labor cost element was an even bigger challenge, given the obvious
need for extensive overtime and the use of less experienced crews. The items required, but not
indicated on the plans, and the other alternates had to be broken out and separately priced from
a labor and materials standpoint. Additional supervision would be required due to the
accelerated schedule and the need to work around the clock at multiple locations within the
project at the same time. The number of office personnel committed to the project would be
increased and a premium would have to be paid on some of the newly specified equipment in
order to ensure expedited delivery.

The president of ZZZ and the project manager had met on a number of occasions to discuss the
strategy for submitting the crucial Change Order Proposal. The president was concerned that too
much detail might hurt the subcontractor. As he told the project manager: We know that they
are going to put the screws to us and we should throw out an inflated lump sum number to allow
for maximum bargaining room. The project manager agreed in theory, but was concerned that
the general contractor might simply reject an unsupported, inflated lump sum proposal. In that
case, the general contractor could demand that the work be done on a straight time and material
basis or even argue that much of the work was within the scope of the original subcontractor. As
the project manager told his boss: The general contractor does not understand how big a
problem we face with this work and these plans. We are also dealing with some suspicious,
hard-nosed people who are used to getting their way. I am concerned that they will hammer us
on a lump sum bid. Our best hope is to try to convince them that our proposal is legitimate and
to show them the detail.

The president and project manager finally agreed that it would be best to fully explain and
substantiate the schedule, scope, and pricing assumptions on which the change order proposal
would be based. Full itemization of detail on materials would be given. Labor and productivity
factors would be clearly indicated, along with extended overhead and home office expenses. As
the president of ZZZ put it: We will give them so much information that they wont know
where to start in challenging the proposal.

The package to be delivered to the general contractor (and by the general contractor to the
owner) would likely be almost as thick as the original contract. The overall proposal was to be
summarized on spreadsheets and broken down by component with well-organized pricing

42
MPLS-Word 16234.3
information provided for each component. The reservation language as to impact costs would
be included in the proposal. Putting the proposal together would take a huge commitment of
hours and the project manager was still skeptical about the response that would be received.
However, both the president and project manager agreed that ZZZ had to make its best case and
let the chips fall where they may.

43
 CHAPTER VI
DOCUMENTING AND PRICING THE CHANGE

A. COMPILING REQUIRED DOCUMENTATION

Careful documentation of changes is an absolute prerequisite to receiving fair compensation.

This is particularly true if the change is of a constructive nature (not a directed change). With
constructive changes, the subcontractor must document not only the direct impact on its work,
but also the other significant events supporting its case.

Documentation comes in many varieties. The communication revolution has only added to the
challenges of keeping proper documentation. Hand-delivered letters are rare and facsimiles
common. Even more common are e-mail communications between various participants on a job.
Keeping a record of all important communications, including electronic communications, is
essential for many reasons, including the proper pursuit of change order compensation. Along
with communications of all kinds between the subcontractor and the general contractor, the
construction manager and the architect, there are internally generated records of the
subcontractor that can have a huge impact in pursuing change order compensation. These
include:

Daily diaries
Meeting minutes
Notes of conversations
Sketches
Photographs and videos
Carefully documented estimates
Daily time cards
Accurate cost records
Construction Change Directives
Requests for Information

The absence of any of these items means that the others must be of that much better quality to
provide proper documentation. Achieving compensation for a change is ultimately a matter of
proof and persuasion. If the subcontractor cannot make an effective make a case to the general
contractor or the architect, the higher tiers will have less reason for concern that the
subcontractor will ultimately be able to make its case to an arbitrator or a judge. The
subcontracts leverage will be minimal and the potential for a successful negotiation will be low.
The subcontractor will be left with two lousy alternatives. It can walk away from the claim or
settle for an insufficient amount. On the other hand, it can pursue arbitration or litigation
knowing that its evidence is weak and the chances of recovery are slim. Avoiding that
circumstance should be every subcontractors goal.

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MPLS-Word 16234.3
Detailed and careful pricing in a change order is one critical element in selling the change
order to the owner and its representatives. Many change orders are rejected simply because
the subcontractor failed to thoroughly explain and itemize the anticipated costs. A detailed
breakdown also can make it considerably easier to re-open a change, if conditions change. It is
helpful to take another look at AIA - A201 with regard to pricing. A review of the change order
clause of the A201 reveals several important points:

1. The contractor may be directed to proceed with the work whether a price has been agreed
upon or not.

2. The architect has the right to demand such back-up material as it deems necessary to
enable it to properly evaluate the change order price.

3. If no price can be agreed upon, the architect may arbitrarily deduct an amount it considers
to be a reasonable value in the case of a deductive change order or direct that the work
proceed on a time and material basis for an additive change order.

These points, when considered together, should persuade any subcontractor that it is wise to
furnish pertinent backup material with the original change proposal. Some of the pricing data
will be fairly self-evident. It is the items that are not readily apparent as a part of the change that
must be most carefully documented.

B. PROVIDING A PRICE

1. Lump Sum Proposal Without Detail

A standard change order pricing proposal might run along the following lines:

Monstercorp Construction
Central City
U.S.A.

Attn: Mr. Joe Nopay, Project Manager

Gentlemen:

In response to Bulletin #27, we propose the following additional cost for our portion of the work:
Thirteen thousand nine hundred thirty-one dollars and eleven cents ($13,931.11). Thank you for
allowing us to quote this extra work.

Very truly yours,

Fred Workfree
ZZZ Sheet Metal, Inc.

45
The subcontractor has provided a price, but there are a number of potential defects in this change
order proposal. First, there is no definition of the work. The changed work may or may not be
well-described in the request for pricing, but if there is any question about what is included in the
subcontractors work, it must be clarified. This type of response also gives no weight to such
items as allocations of risk, impact on the construction schedule, etc. To be complete, a change
order proposal should describe, in reasonable detail, the assumptions upon which the proposed
cost is based. Without an adequate description of the inclusions and exceptions, this change
order proposal does nothing to protect the subcontractor from the type of risks described earlier
in these Guidelines.

Second, this type of response fails to flush out what may be misunderstandings between the
owner or general contractor and the subcontractor as to what is included in the work. If the
subcontractor is pricing something different from what the owner or general contractor expects,
the result may be either additional work for which the subcontractor is not paid or unnecessary
disputes as to what the change order covers. Either outcome is negative from the perspective of
a subcontractor.

When a change order is issued and no conditions are given with the quotation or the change
order proposal, it may be left up to the courts or an arbitration panel to decide what reasonably
should have been anticipated. It is rarely a good idea to place your fate in the hands of a judge or
arbitrator if there is a way to avoid the dispute altogether.

2. Direct Job Cost

As a general matter, it is preferable for a subcontractor to include as many costs as possible

within the category of direct costs and to break the direct costs down into the smallest
feasible pieces. General contractors and owners will almost always approach direct costs
that are clearly broken-out with less resistance than indirect or extended overhead-type
costs that require further explanation and justification.

46
Therefore, the first step to be considered in assembling a proper change order proposal should be
a breakdown of the direct costs. Compared with the previous example, the following response
would be far preferable:

Monstercorp Construction
Central City
U.S.A.

Attn: Mr. Joe Nopay, Project Manager

Gentlemen:

The following is a cost breakdown as to our Change Order Proposal for Bulletin #27:

Labor: $ 4,454.00
Material 4,642.00
Insulation Subcontract 1,578.00
Subtotal 10,674.00
Overhead* 2,134.80
Profit 1,099.00
______________________________________________________
Total Change Order Amount $13,907.80

Please advise the undersigned if we can be of any further assistance in this matter.

Very truly yours,

Mr. Fred Workfree

ZZZ Sheet Metal, Inc.

*Note: This overhead figure is based on 20% of the subtotal. Overhead cost may vary.

This is clearly a major improvement over the prior approach, but it is still not the type of
response that completely serves the interest of a subcontractor for a significant change in the
work. Building upon the information already reflected in this response (and perhaps spending an
extra 30 minutes in preparation of the proposal), the subcontractor could clearly define the work
that it is pricing and how it arrived at the price. When a change order deletes and adds work, a
priority consideration in the owners mind is whether it is getting adequate credit for the deleted
work, as well as being charged for the additional work. Therefore, an essential step in preparing
a price breakdown is to clearly identify the quantities assumed in the change order pricing. Until
both parties understand and agree upon the pricing quantities, neither party is in a position to

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MPLS-Word 16234.3
address the validity of the price itself. The parties to the change order will inevitably find
themselves comparing apples to oranges and both sides will experience frustration when they
cannot agree.

A subcontractor should include a material and labor take-off in its proposal, since such a take-off
must be prepared anyway. As the change order price is discussed, the exact scope of work will
be understood and both sides will understand what the change order is based upon, minimizing
the need for later disputes or claims.

Once the labor and material quantities have been identified, the next step is providing pricing
details. As to labor, this typically involves estimating the quantity of work, multiplying that
quantity by a production rate to get hours, and multiplying the number of hours by the labor
hourly rate. It is not uncommon for a subcontractor, early in a project, to write a letter to the
owner stating: Due to anticipated increases in labor rates during the life of this project, the
following are the labor rates we have proposed to use in pricing changed work during the time
periods shown. Along with that letter would typically be a tabulation of hourly labor cost, fringe
benefits, etc. This pro-active approach protects the subcontractor against getting locked into a
labor rate that may not reflect its actual cost structure if the work is delayed or the project is
prolonged. If the contract requires the contractor to furnish a labor cost breakdown, the
subcontractor should make certain that the breakdown includes the qualifications and
assumptions upon which it was based. If the breakdown is made assuming that the bulk of the
change order work will be done during a certain labor period and that the contract will be
completed by a certain date, then the response should indicate that the pricing will only be
effective until that given date. Open-ended unit pricing for labor costs can be a major problem
for a subcontractor in the event that the project completion date is significantly delayed. The
productivity assumptions used in the labor take-off must also account for factors such as the
weather conditions, whether there is enough supervision for the crews to maintain maximum
productivity, whether the quality of available labor is sufficient, etc.

The primary factors that can impact the cost of labor with regard to changed work are overtime
premium, crew mix, and the number of hours required to complete the work. The subcontractor
should always include rates for overtime in its labor rate table. If change order work requires
more foremen and fewer apprentices, the average hourly cost of the crew will be higher. The
subcontractor should consider whether it is more appropriate to submit the rates for all of the
labor classifications or to negotiate the rate for a single typical crew. Since work will vary in
complexity and difficulty, the subcontractor would be well-advised to propose its per crew rate
based upon the necessary level of skill and experience. Obviously, the hours on any changed
work will be dictated by the circumstances. The larger the change and the more difficult the
circumstances, the greater will be the commitment of hours.

If labor contract negotiations will be occurring during the course of a project, the subcontractor
will likely not have the ability to predict the labor rates that will be in effect during the portion of
the job that is under the new labor contract. While the subcontractor can take an educated guess
at the rates that will apply under the new contract, there is a significant risk with that approach.

48
The preferred approach would be to indicate that the rates will be adjusted based upon the labor
negotiations and that, historically, increases from contract-to-contract have been in a range of x%
to y%.

In the event that anything other than straight labor costs per hour are to be used to price a change
order, the pricing should provide some detail as to how the productivity figures were derived.
For example, a change order price for work that must be performed outside in the winter will
have productivity rates significantly lower than for work in a heated, enclosed area. Owners may
be reluctant to allow such productivity adjustments without an adequate explanation. Since the
explanation must be given in any case, it may as well be included in the supporting documents
accompanying the change order proposal.

If material prices are dependent upon quotations from suppliers, then the supplier delivery
information might also be included in the proposal. Including such information at the time the
change is priced helps to more clearly define the scope of work that will be impacted by the
change. For example, if there is long delivery time line on a change order item, the quotation
should specify the anticipated delivery time line and warn the owner of what other work on the
project might be affected by that delayed delivery. This assists in protecting the subcontractor
from later repercussions when delays in delivery of a piece of equipment hold up other work.

3. Indirect Job Cost

The next item to be considered in change order pricing is indirect job cost. The contract
documents may define which costs may be included in a change order estimate, as well as those
costs that are to be included in the mark-up. Since contractors accounting methods vary, it is
important prior to signing the contract to consider negotiating clarifying language and to thereby
eliminate issues as to what will be included in each cost item, especially shop burden. Once the
contract is signed, the subcontractor has little recourse other than to follow the guidelines
contained in the contract.

It is proper to include as job costs any increased costs that will be encountered due to the
extension of the project time line or other changes in the project schedule. Indirect job cost can
be drastically affected by various risk factors. If the change order will extend the project
schedule, then the standard mark-up will likely provide inadequate compensation, since it does
not give any weight to indirect job costs. Indirect job costs, which may also be referred to as
field overhead, include items such as the cost of the superintendent, office manager, telephone,
office trailers, etc. If it is determined that a change order will extend the project completion date
and a time extension for that change order work is anticipated, the subcontractor should include
its indirect job costs in order to receive full compensation for all costs associated with the change
order. The job cost detail must describe the reason for including each item. Each item of
indirect cost must be also be priced with the same care and the same level of detail given to the
direct job cost portion of the proposal. The labor cost involved with preparing the change is a
legitimate item of recovery that may be included in the change order proposal.

49
One method of negotiating extended overhead is to tabulate all of the indirect job costs and list
the daily costs of each. For each day the project is extended, the subcontractor would add the
sum of these daily costs to the change order proposal. This approach has the benefit of
simplicity and can also be easily tracked (once the daily costs have been agreed upon).

In the event that the subcontractor must persuade the general contractor or owner that such costs
should be allowable, it is much easier to do so when the subcontractors cost accounting system
allocates indirect cost to each job. When the subcontractor, in its cost accounting system, lumps
all costs into its home office overhead budget, whether related to specific projects or not, it is
difficult to prove that any particular costs are attributable to one project. For this reason, it is
best that a subcontractors accounting system allocates all job costs to the responsible project,
and not to a home office general and administrative pool. Owners tend to feel they are paying
twice when they pay the standard mark-up on top of extended overhead cost. A change order
proposal must include sufficient detail to counter this argument.

4. Home Office General and Administrative Costs

In many subcontractors accounting systems, especially those of small specialty subcontractors,

no clear distinction is made between home office costs and field overhead costs. When such
information is not accounted for, it is difficult to apply anything other than a standard mark-up to
a change order. However, when a change order is expected to increase the length of time of a
project, the home office cost must be taken into account in the change order price, as it was in
the subcontractors original bid. Home office general and administrative expense is a real cost
and no subcontractor is in the business of subsidizing projects through its own operation. When
the subcontractor must remain on a project significantly longer than it anticipated, it should
receive additional compensation. If a change order is anticipated to significantly extend the
project time, the item that is a legitimate cost of doing business should be factored into the
calculation of home office cost apportioned to each project. (On government contracts, items
such as bad debt allowance or political campaign contributions must be deducted from the total
general and administrative expense to determine the amount that may be included in the change
price).

It is quite possible that the owner will disallow home office overhead as part of a subcontractors
change order cost and will argue that the mark-up included in the base contract pricing already
covers those costs. A subcontractors first step in that circumstance should be to document how
the mark-up was arrived at and that the subcontractors request is consistent with the approach
taken in the original bid. If the general contractor still refuses to address the cost, the
subcontractor may reserve the right to consider impact cost at a later date by so stipulating in the
change order. The subcontractor will then have at least protected its rights in the event that its
actual costs significantly exceed the mark-up. If the owner rejects any reservations to the change
order or rejects the extra costs that have been requested and the subcontractor accepts the change
order without reservations, it will likely have waived any right to claim these at a later date.

50
5. Assessing the Cost of Risk

When a change order is priced, the relevant elements of risk must be considered. Building
contingencies into the change order for risks as to time frame or working conditions will give the
subcontractor at least some protection as to these risks, at least to the extent that they are
foreseeable.

If the owner refuses to allow contingencies in the change order pricing, an alternative is to
reserve the right to claim for those extra costs at the time the change order is priced. If a
subcontractor removes contingencies from its change order proposal and does not reserve those
rights for future consideration, it will almost certainly not be allowed to re-visit those issues at a
later date.

For example, if the subcontractor anticipates that the change order work will be performed at a
time when its work force is fully deployed based upon a normal work day and that other skilled
workmen will not be available, it should price the change order based on overtime. If the owner
disallows the overtime, then it should reserve the right to claim for additional cost later, with
regard to overtime, or for extra time and cost due to the extended project time line. By doing so,
the subcontractor will have placed the owner or general contractor on notice that it is not
accepting the risk of whatever cost impact the change order will have on the project.

If the owner refuses to allow the subcontractor to include contingencies for risk and at the same
time refuses to allow reservations in the change order, the subcontractor will likely not recover
those costs. Its choice would be to sign the change order and accept the risk without
compensation or to refuse the change order. If the subcontractor refuses the change order, it can
be directed to proceed with the work anyway. In that event, it will have protected its legal rights
to pursue those extra costs later. This is always a difficult judgment call for a subcontractor.

6. Structuring the Cost Proposal

The structure of a cost proposal is not as important as the content, but it is still something to
consider in making the proposal more palatable to the general contractor and owner. If the cost
proposal is clear, concise and easy to review, the general contractor and owner will be more
likely to accept the costs than if the proposal is presented in a jumbled mass of worksheets which
are difficult to follow. The person pricing the change proposal for the subcontractor should not
only be familiar with the project and its inherent problems, but also adept at conveying
information clearly. The estimate must be understandable to anyone who must reviews it. Just as
important as considering all job factors in pricing a proposal is compiling and presenting the
proposal in such a way that the reviewer can easily understand the basis for the extra costs the
subcontractor is requesting.

7. Other Cost Factors

The question any subcontractor should ask when pricing a change proposal is: Have I
considered all of the extra costs associated with this change? Are there some peculiar testing-

51
requirements involved? Is there some element of the work with which our company is not
familiar? Has the estimate included proper contingencies? If a subcontractor quotes a change
without considering all reasonable eventualities that may occur in the performance of the
changed work, especially if the change order is dealing with specialty items, the subcontractor
may find a profitable job converted into a losing preposition.

If a contractor submits a change order proposal and feels that there are some risk factors which
cannot be properly assessed, it can use a reservation clause to preserve its right to raise the issues
at a later date. An example of such a reservation clause, which has been included for illustrative
purposes only, is:

You are hereby notified that the payment requested by this proposed
change order does not include any amounts for changes in the work
sequence, delays, disruptions, consequential cost impacts and/or impact
costs due to the accumulative effect of this change with other changes or
other reasons. The right of Subcontractor is expressly reserved to make
claim for any and all of these related items of cost prior to final payment
under the Subcontract.

Obviously, a paragraph such as this is intended to protect the subcontractor in the event of some
unforeseen circumstances. Accepting a change order with such a reservation of rights is not a
perfect solution, since it leaves potential pricing issues open. However, it is far superior to being
locked into a price that does not reflect the reality of the subcontractors anticipated costs.

8. Direct Costs vs. Overhead

A common mistake made by specialty contractors is ignoring the full range of direct or other
direct costs in the pricing of a change order. Frequently an owner or its agent is successful in
convincing a subcontractor that certain other direct costs should be absorbed in an overhead
allowance. Great care should be taken to assure the inclusion of all costs associated with making
a change. The forms provided with these Guidelines will help the subcontractor identify those
costs as to they apply to each change order. On projects with frequent and significant changes, it
becomes even more important to get all direct or other direct categories included in the
changes.

For Additional Information See the Following SMACNA Contract Bulletins:

Contract Bulletin #25, Recovering Of Subcontractor Costs (April 9, 1999)

52
 CHAPTER VII SCENARIO

THE CHECKLIST

Change orders were nothing new at ZZZ Sheet Metal. The office personnel and field supervisors
had developed a reasonably efficient system for communicating, pricing, and documenting
changes. However, that system had quickly broken down when confronted with the
overwhelming mall project changes.

At the beginning of the process, the project manager had assumed that one administrative
assistant and one estimator could pull together a rough draft, which could then be reviewed by
the project manager and the president of ZZZ. As the undertaking was explained to the two
employees, they came to assume a deer in the headlights facial expression. The project
manager then sent them off with orders to get the job done ASAP!.

The project manager checked with the two employees several days later and found that little
progress had been made. The revised plans were rolled out on a table and the first few sheets
contained some markings. Some preliminary calculations on the material cost for the specified
duct work had also been performed. However, it was obvious that the two individuals had barely
scratched the surface on what needed to be done in dealing this mind-boggling set of changes.
The president of ZZZ, the project manager and several of the firms most experienced
management personnel immediately met to figure out what they could do to get process moving
forward as quickly and efficiently as was needed.

The group made little progress in the first half hour of their discussions until one of the old
hands decided to speak up. He made the comment: This change order has to be handled the
same way that we would handle a new construction project. There has to be someone with
organizational skills and authority in charge. We have to make sure that we have assigned the
necessary manpower in terms of both numbers and skills. We need to break the project into its
components and to lay out a critical path for each of the components. Most importantly, we
need a detailed checklist of everything that we should be considering in dealing with this change.
This change order might be the most important project we have all year.

The president of ZZZ immediately appointed the old hand to manage the process. The
manager insisted that he have access to all of the ZZZ personnel that he needed and any outside
consultants whose advice might be required. He then put together a list of people and identified
the tasks for which each individual would be responsible. Finally, he began work on the project
checklist and schedule. Within a few hours after the end of the executive meeting, a second
meeting was convened of all personnel that would be working on the change order proposal.

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The challenge was explained to all of them. Each was assigned particular tasks and the
importance of the overall process was emphasized to all of them. The president of ZZZ assured
the employees that the process had his full support and that there was no higher priority in the
company.

The project checklist was finished late that night and handed out to all of the personnel the next
morning. Using the checklist, each of the personnel involved with the change order knew
exactly what he or she was supposed to do and when it had to be done in order for the next phase
of the work to proceed. With a clear delegation of authority, each individual knew how
questions could be addressed and decisions would be made. The checklist provided the
framework on which the proposal was constructed in a surprisingly efficient process. All
worked long hours and weekends, but the end product was a source of pride for the
subcontractors staff. No one knew how the project would turn out, but everyone felt that the
best possible effort had been made to protect the interests of the subcontractor.

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 CHAPTER VII
BENEFITS OF A STANDARDIZED APPROACH

The first change order submitted on a project is often the most important, regardless of its size.
That change order and the responsive proposal process will set a precedent for the remainder of
the job. It is almost always to the detriment of a subcontractor to make concessions regarding
structure, policy, or price in the earliest change orders on a project.

Dealing effectively with change orders is all about process. A careful and organized approach to
changes is most feasible when a subcontractor has standardized its process and properly trained
its staff. An effective process requires both technically skilled and experienced personnel. It
requires individuals who are capable of correctly assessing a situation and evaluating risks. It
involves having a cost accounting system that can effectively track and report on costs at a high
level of detail. It requires clear and timely communication. At its essence, the process all
revolves around three questions:

1. Did we include all of our costs?

2. Did we take into account all reasonably foreseeable risks?

3. Did we make our best case for the requested payment?

The process should start with a checklist and carefully developed forms. As an example, the
following table shows some Direct and Indirect Cost Categories that should be considered in
pricing change orders. The classification of these categories is consistent with normal
accounting and management practices and is in compliance with recommended SMACNA
policy.

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MPLS-Word 16234.3
 COST CATEGORIES

I. Direct Job Costs II. Other Direct Costs

A. Field Costs A. Testing & Cleanup
1. Labor (Including Fringe Benefits) B. Field Office Costs
a. Travel & or Subsistence 1 Labor & Expenses for Office Personnel
b. Payroll Taxes & Insurance 2. Trailer, Office Equipment & Supplies
c. Special Local Labor Costs 3. Telephone, Electricity, Water, etc.
2. Small Tools & Consumables C .Deliveries
3. Permanent Materials & Equipment 1. Company
a. Sales Tax (If Applicable) 2. Vendor
b. Freight & Other Delivery Charges D. Gas & Oil
c. Material Handling Costs E. Ice Water
B. Shop Costs* F. Field Engineering
1. Labor (Including Fringe Benefits) 1. Revising of As-Built & Shop Drawings
2. Payroll Taxes & Insurance 2. Scheduling
3. Small Tools & Expendables 3. Reproduction, Supplies, etc.
4. Raw Materials G. Progress Photos
5. Shop Burden H. Permits, License Fees, Dues
a. Shop Operating Costs I. Storage Facilities
b. Depreciation on Equipment J. Safety Barricades, etc.
c. Supervisory Labor K. Tools & Equipment Management Expense
d. Taxes & Insurance(Related to Shop) L. Inventory Management Expense
M. Equipment Rental
*This is a partial listing of shop costs. Other factors 1. Company
may increase costs and should also be included. 2. Vendor
N. Miscellaneous Expenses

One particular challenge in putting together the cost component of a change order proposal is
justifying the subcontractors applied rate for G & A (General and Administrative Expense).
The subcontractors financial statement, used in conjunction with the 2002 SMACNA Financial
Survey Report, can be a very valuable tool in providing such justification. Attached as
Supplementary Document #1 is a section from the 2002 SMACNA Financial Survey Report
showing cost breakdowns in an income statement format for all contractors, as well as
specifically for HVAC contractors. This type of reference tool can provide useful support for the
subcontractors overhead calculations.

A. Field Installation Condition Form

Attached as Supplementary Document #2 is a Field Installation Condition Form, which allows

the subcontractor to describe a particular situation encountered on a project, including additional
or changed work. Such a form is the beginning of the necessary paper trail that will allow for
complete and accurate documentation of changed work. The location of the changed work is
specifically identified, the date the work was performed is noted, and the trade responsible is also

56
indicated. The use of such a document is actually of benefit to the general contractor (in keeping
track of changed work), as well as to the subcontractor actually performing the work.

B. Notice of Conflict Form

Attached as Supplementary Document #3 is a Notice of Conflict Form. This form allows the
subcontractor to provide written notice to the general contractor of conflicts with the work of
other subcontractors. For example, if an installation by an electrical or a mechanical
subcontractor interferes with the installation of duct work in a specified location, the
subcontractor can note the conflict and create a record to support its claim for additional
compensation for the changed work.

C. Notice of Delay Form

Attached as Supplementary Document #4 is a Notice of Delay Form. This form is typically used
only when the subcontractor has encountered a significant delay in its work. Once again, the
subcontractor can use such forms not only to notify the general contractor of the impact of delays
on its work, but also to bolster its case for a change in schedule or an increase in compensation.

D. Subcontractor Field Originated Change Order Form

Attached as Supplementary Document #5 is a Field Originated Change Order form. It is

intended to serve as a communication between the job site and the general contractor, as well as
the subcontractors home office. Any significant change that must be made should be noted on
such a form. The form serves as a notice to the subcontractors home office, the general
contractor, and the owner that a change is being made which might involve additional cost.

The checklist on the right side of the page is intended for use by the subcontractors on-site
personnel in preparing a preliminary response to the proposed change. The checklist is intended
to advise the personnel estimating the change as to what items will likely involve an additional
cost. Some of the items, such as labor access, require some judgment and should involve a
discussion between the field and home office prior to the submission of a price for the change
order. These checklist items are primarily intended to call attention to specific problems and will
not necessarily define the extent of those problems.

This form may also be used by the foreman or superintendent in the field to suggest changes that
could simplify an installation and result in reduced costs, as well as to identify extra cost items.

E. Change Authorization Form

Attached as Supplementary Document #6 is a sample Change Authorization form that is

designed to protect the subcontractor from later disputes over whether work was authorized.
Every foreman, area foreman, general foreman or other subcontractors employee who may be
asked to perform a change should have some of these forms. When an owners or general
contractors representative requests that work be performed, and the subcontractor believes that

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the requested work is a change, it can be described in writing on this form and should then be
signed by the owners or general contractors representative prior to the commencement of work
on that change. This form documents the agreement of the parties that the particular work was,
in fact, a change. It also provides some protection to the subcontractor in avoiding changes
ordered by persons not authorized to make such a decision. If an owners or general contractors
representative is not authorized to make a change, the representative will presumably be
reluctant to sign one of these forms. In fact, it is important that the subcontractor have a clear
understanding at the beginning of the job as to which members of the general contractors staff
are authorized to direct the performance of changed work. Once such individuals have been
identified by the general contractor, the subcontractor should take the opportunity to confirm the
identity of those individuals in writing, including their names and positions.

The item toward the bottom of the page stating work to be done by: time and material, lump
sum, no change is extremely important. If the owners or general contractors representative
authorizes a time and material change and the subcontractor is willing to accept that approach to
compensation, then the work may begin immediately. If the change raises additional cost
considerations, and the owners or general contractors representative is not willing to authorize
the work on a time and material basis with a reservation for additional costs, then no check mark
should be made by a subcontractors foreman in the field until the foreman has given adequate
thought to the possible consequences of the described change. No work direction should be
accepted from an owners or general contractors representative without a signature authorizing
the work. If the work is to be paid for based upon time and materials, then the time and material
work authorization forms should be prepared on a timely basis and submitted as required under
the terms of the subcontract.

F. Lump Sum Change Order Proposal Form

Attached as Supplementary Document #7 is a Lump Sum Change Order Proposal form,

published as part of the Alliance Project Management Manual. When revised drawings are
issued, or when a change order is issued in writing by the owner or general contractor, this form
can be used to provide a proposal with supporting detail. Material quantity takeoffs can be
indicated on the subcontractors standard material estimating forms. Once the revised man hours
have been tabulated and the equipment and material increases or decreases have been accounted
for, they can be included on this form. This form summarizes virtually every direct job cost item
and mark-up that should be considered in pricing a change order. Not every item will apply to
every change order, but many of these items are often overlooked and should apply to nearly
every change order. Subcontractors should feel free to modify the form to suit their own
operations and the preferences of their customers.

The Lump Sum Change Order Proposal form is comprised of four major parts. The first page
summarizes the impact of the proposed change on the contract amount and schedule. Most
importantly, that page contains a reservation of rights as to changes in the sequence of work,
delays, disruptions or impact costs. By executing that page, the general contractor or project

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manager will be deemed to have accepted the terms of the proposal and ordered the
subcontractor to proceed.

The second page of the documentation sets out terms that apply to the performance of the
changed work. Among other things, these terms acknowledge that the subcontractor is obligated
to perform work only consistent with its base contract. In addition, the proposal must be
accepted within thirty (30) calendar days or will be subject to price adjustment or cancellation.
The subcontractor again reserves for the right to claim for potential impact costs. Finally, the
subcontractor specifically disclaims any design liability. By including such terms, the form
covers contractual matters beyond just pricing and schedule.

The third page of the Lump Sum Change Order Proposal form is a break-out of all of the costs
by category with a resulting total price. This page provides a useful reference for the general
contractor, construction manager, owner or architect in reviewing the proposal and forces the
subcontractor to provide significant detail as to the change order. This page also allows the
subcontractor to identify whether its work is being priced on a straight-time or overtime basis.

Finally, the form includes a number of pages on which the subcontractor can specify labor and
material costs, shop burden, extended overhead and other costs related to the change. Negative
productivity factors can also be set out for review.

Notice that there is room on the form for applying different mark-ups to different costs. This is
done to accommodate contract requirements that may dictate different mark-ups for different
types of change order costs. The extension of time item should be considered very carefully. If
an extension of time is requested, it must be supported by sufficient documentation to justify the
number of days requested. If the change order involves long lead-time material deliveries, for
example, the time extension requested should be for the total amount of time for the material
delivery, plus installation time. If the change order does not involve long lead-time material
deliveries, the time extension should be based upon the number of man hours involved with the
change. Obviously, a change order involving only a few man hours will likely not justify a
request for a time extension. On the other hand, a change order of many man hours should
entitle a contractor to a time extension. In such a case, the time extension may be calculated as
follows: Total number of man-hours in the change order average crew size in man-hours per
day = total days extension. To calculate the average crew size in man-hours per day, take the
size of crew x the average number of hours per day (including overtime if the crew is working an
extended shift). Be sure to include premium time in the labor calculation, if overtime is a factor.
The proposal must also take into account the impact of any change on the critical path and
whether the changed work will also impact the base contract work. If additional man hours must
be spent on the base contract work, that should also be included in the change proposal.

In using any form with regard to a change order proposal, the subcontractor must consider
whether the cost of the proposed change and its impact on other work will still be valid if the
proposal is not accepted within a reasonable period of time. Normally, a contract allows the
owner a certain amount of time to accept a change order proposal, usually 30 days. On some
projects of short duration, the time for accepting a change order can be less. The acceptable
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period for the owner or general contractor to approve a change proposal may also depend on the
conditions surrounding the change. If a subcontractor takes 30 days to submit the change and
requests the owners or general contractors approval in ten days, the responding party will not
be strongly inclined to comply. On the other hand, if the proposal is submitted within ten days
and the subcontractor needs approval immediately to avoid having the change impact other work,
the subcontractor may be able to obtain a more prompt response. As part of its submission, the
subcontractor should note that delay in accepting the proposal may cause the pricing or impact
on schedule to no longer be valid.

It is important that a subcontractor notes the times at which it starts and completes any change
order work. That information can be critical in establishing the impact of a change on the
optimal utilization of the subcontractors manpower and should not be overlooked in considering
the total impact of the change.

G. Owner/General Contractor Field Authorized Change Order Contract

Attached as Supplementary Document #8 is a sample Owner/General Contractor Field
Authorized Change Order Contract, published as part of the Alliance Project Management
Manual. This form, when signed by the general contractor and subcontractor, constitutes an
amendment to the subcontract, adjusting only the price. The form assumes that the general
contractor is accepting quotes provided by the subcontractor as to specific elements of the work.
This form does not address possible changes to the schedule. It also states: It is understood and
agreed that the acceptance of this modification by the subcontractor constitutes an accord and
satisfaction and represents payment in full (both time and money) for all costs and/or delay, if
any, arising out of, or incidental to, the work as herein revised and any impact that this change
may have upon the unaffected work. Upon accepting this accord and satisfaction language,
the subcontractor is acknowledging that the amount set out in the form will be its total
compensation for the change, notwithstanding its impact on the other work or the schedule. It
should also be noted that the subcontractor must sign and return the form within five days.
While this approach may be useful for smaller changes that are unlikely to trigger impact costs or
to affect the project schedule, use of this type of form by a subcontractor is not recommended on
more significant changes.

Productivity Factors Summary

Attached as Supplementary Document #9 is a summary of factors affecting productivity that

might be referred to by a subcontractor as a resource in addressing labor productivity issues on a
major change. This summary, published as part of the Alliance Project Management Manual,
breaks out different elements associated with stacking of the trades, crew size, ripple effects,
weather and other factors that detrimentally affect efficiency in the performance of work. On
change proposals that are likely to have productivity implications, using a resource of this type
can assist the subcontractor in effectively making its case for additional labor costs. Such a
summary could even be attached to the change order as a means of explaining the calculation of
labor cost.

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Record-Keeping Before Compensation Method Is Determined

A subcontractor should keep daily time and material cards on change order work from the time
the work is initiated, even if the subcontractor suspects that the change order may ultimately be
priced on a lump sum basis. This provides protection in the event that the parties cannot later
agree on a price and the subcontractor is forced to provide cost detail after the work has been
performed. When a work authorization is issued, the owners or general contractors
representative may direct the subcontractor to proceed with a change and request that it submit a
lump sum cost proposal later. It is a proper precaution to begin the changed work and to keep
track of the actual hours, materials, and equipment used on the work with daily time and material
cards, if there is any question as to how the subcontractor is to be paid.

A standardized approach using forms of this type will not only produce a more efficient system
of change order processing, but will also assist in effective training. Personnel processing
change orders will not have to reinvent the wheel each time they are presented with a
significant change. The process can be effectively coordinated from the beginning of the
estimating process through the submission of the final proposal. Besides adding efficiency and
encouraging thoroughness at the subcontractors end, the standardized approach should lead to a
proposal that is organized, detailed and understandable. The documentation a subcontractor
submits with regard to changes early in a project will convey a message to the general contractor
about the subcontractors professionalism and quality of organization. In fact, if circumstances
permit, the subcontractor should explain its system and documentation with regard to change
orders to the general contractor or construction manager at the beginning of the job. It is a
chance to be proactive and to show the higher tiers that the subcontractor will be an organized
and reliable partner in getting the work completed.

For Additional Information See the Following SMACNA Contract Bulletins:

Contracts Bulletin #48, The Change Order (June 29, 2001)

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 CHAPTER VIII SCENARIO

THE SUMMIT MEETING

Two weeks after the ZZZ change order proposal was submitted, the project manager was called
in to meet with representatives of the general contractor. There were no smiles on the faces in
that room. The ZZZ project manager was told: We want to meet with you the day after
tomorrow to discuss this change order proposal. We expected a reduced cost and you presented
us with a higher price. We have a lot of questions.

The project manager immediately called the ZZZ office and the president assembled a three
person presentation team. The team would consist of the project manager, the president of
ZZZ and the manager who had supervised the change order proposal process. The president felt
that his presence would lend some weight to the presentation and he would have authority to
make decisions for the subcontractor, if necessary. The project manager had on the ground
knowledge of what had occurred and what was to be expected under the accelerated project
schedule. The manager of the change order proposal process knew every detail of the proposal
and the analysis behind each component. The three individuals worked around the clock to
prepare for the meeting.

The meeting was held in the offices of a downtown law firm. In a large conference room were
assembled representatives of the developer, the general contractor, the architect and the
mechanical engineer that had put together the HVAC design. Each of the parties had a copy of
the ZZZ proposal in front of them with various pages tabbed.

The meeting was opened by the representative of the developer who emphasized the importance
of maintaining the original schedule. Surprisingly, he expressed some gratitude to ZZZ in not
demanding additional time to complete its work. He also spoke of the proposal as very detailed
and responsive.

The general contractors primary representative stated that he had been disappointed with the
pricing, but wanted to concentrate on certain specific questions raised by the proposal. The next
several hours were spent discussing items that ZZZ had identified as missing from the plans and
specifications and some productivity premium calculations and overtime costs. In each case, the
discussions were about very specific points in the proposal. The ZZZ personnel were able to
explain their rationale behind each of the specific points. Some concessions were made by each
party, but the discussion was very business-like and grew increasingly cooperative in tone. The
ZZZ project manager made some specific recommendations about coordination of the work to

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maximize efficiency, which resulted in appreciative nods from the general contractors
personnel.

In the course of the discussions, it became obvious that a number of the problems being
encountered by both the general contractor and ZZZ had arisen out of the plans and
specifications prepared by the architect and the mechanical engineer. The frustration of the
general contractors principal ultimately reached such a point that he stated: The next time we
will just have you guys design-build the system. You have basically had to do that anyway.

By the close of the meeting, ZZZ had made some concessions, but had obtained the agreement of
the general contractor on what work it was to do, how and when it would be paid, and when the
work would be performed. Productivity and impact costs were acknowledged in the pricing,
although there would remain some risk for the subcontractor if completing the project proved
worse than expected. The meeting ended with handshakes and a comment by the general
contractor that stunned the president of ZZZ: It is good to work with people who know what
they are doing. I hope that we have the chance to work together again.

The ZZZ presentation team returned to the companys offices. A confirming fax was sent to the
general contractor and owners representative summarizing what had been agreed upon. The
manager of the change order process immediately undertook to revise the proposal, so that it
could be re-submitted with the agreed-upon terms. Three days later, the proposal was submitted
and returned the following day with the signature of the general contractor.

The project was substantially completed on August 29 and the tenants began their move-in on
September 1. Getting the work completed had strained ZZZs workforce nearly to the breaking
point, but the work was completed on time. The representatives of the general contractor and
subcontractor made it a point to communicate constantly throughout the project and some
additional changes were handled smoothly and quickly. At the end of the job, the general
contractor went out of its way to see that ZZZs retainage was promptly released and that there
were no unexpected backcharges. Completing the project had required a team effort and the
general contractor had clearly acknowledged that ZZZ was part of the same team.

The subcontractor had survived and even made a profit.

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 CHAPTER VIII
PRESENTING THE CHANGE PROPOSAL

A written change proposal should be concise, but more importantly, should describe the scope of
work and special inclusions or exclusions considered in the price. There is nothing to be gained
from presenting the owner or general contractor with a long-winded proposal that only describes
what it already knows about the extra work. On the other hand, oversimplification can work
against the subcontractor by underselling the services the subcontractor is quoting. The written
proposal must be given the same care as the original bid proposal do not oversell, but do not
leave important details to chance.

In a change order proposal, it is very important that the subcontractor describes the risks it has
taken into account in its analysis. For example, it is not enough to include a 5% anticipated lost
time factor for winter weather when the subcontractor has not explained to the owner or general
contractor why the lost time is anticipated. Some of the additional costs may be, in the owners
or general contractors view, items which should be covered under the original contract.
However, due to changed circumstances, assumptions contained in the original contract may
have lost their validity. As a result, a subcontractor may be entitled to consideration for an item
that would otherwise be covered under the original contract. In order to sell this point, the
subcontractor must state its case carefully and convince the owner that its position has a factual
basis.

It is important to prepare a cost proposal that is justifiable and equitable. This will lead to
change order negotiations that can be conducted on a professional level.

Supporting a request for extra time to go along with the change order is sometimes more difficult
than supporting a request for additional payment. Owners are particularly reluctant to allow
additional time to perform a contract, since they realize that each day a contract deadline is
extended means an additional day that the project cannot be placed in service.

If a subcontractor can demonstrate that its work under a change order must be performed at a
time when work crews are at a peak demand and additional manpower may not be available, a
time extension should be approved. An alternative argument would be that adding more crews
would reduce the efficiency of the overall operation and would impact other work, affecting the
project completion date. In order to win either of these arguments, it is insufficient to merely ask
for a time extension without substantiating the facts. The subcontractor should spend the extra
time to research the arguments it will be making and support them in the written proposal. The
time the subcontractor spends will be well worth it when the time extension is granted.
Occasionally, at the time a change order is presented, it may not appear that a time extension is
required and the owner may be unable or unwilling to justify or grant a time extension. If the
subcontractor feels a time extension may be needed but is unable to get the owners or the

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general contractors confirmation of a time extension, the change order should be signed with a
reservation for a possible extension of time, if needed.

A. Negotiations

When a subcontractor enters into negotiations over a change order, the intent is to achieve the
best price possible for the work it is being required to or is proposing to perform. It is worth
remembering that reaching an agreement on the change order is generally as important to the
owner and general constructor as it is to the subcontractor. Therefore, the subcontractor must be
persuasive, persistent and credible. When the presentation is well thought-out and accompanied
by a well-documented change order, the owner or general contractor is more likely to give
reasonable consideration to the subcontractors arguments and grant the requested change. The
basic rules for negotiation are the same as for any important meeting with representatives of an
owner or general contractor:

1. You can never be too well-prepared. Use available outside resources to support your
position.

2. Have an open mind and be as eager to listen as to speak.

3. Remember, that the other side likes to win a few. It may be beneficial to make some
concessions in exchange for a written commitment on the most important points.

4. Maintain a professional demeanor. A hard-nosed and belligerent tone usually produces

the same response from the other party. A breakdown in negotiations may leave the
subcontractor with a unilateral change order and a straight time and material pricing
outcome.

5. Do not include any item that cannot be explained and justified. It is a simple thing to lose
credibility with the higher tiers on a construction project, but nearly impossible to regain
it once that credibility is lost.

Preparing the written change order document to be signed is just as important as preparing the
original quotation. Sometimes the change order document resulting from a negotiated agreement
does not accurately reflect the bargain struck at the negotiating table. When agreements are
made at the bargaining table, be certain that they are included in writing in the change order. It
is also a good practice to send a written communication immediately following the negotiations
to confirm the terms of the agreement that were made. Courts typically take the position that an
agreement made in writing is assumed to include all verbal agreements or discussions prior to the
writing. Courts and arbitrators will seldom consider additional verbal agreements made prior to
the written order. It is important that the final change order document be examined carefully to
verify that all appropriate reservations are written into the change order and that any time
extension or special conditions are also included. Failure to do so may, upon the subcontractors
signing of the change order, remove important rights that the subcontractor may have believed it
reserved during negotiations.

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B. Preserving the Subcontractors Rights

When concessions are made or reservations are granted during negotiations, they must be written
into the change order forms or they may not be reservations at all. As mentioned previously, the
written change order form must include everything that was agreed upon during negotiations. If
the change order form is written without agreed-upon reservations, that fact should be called to
the attention of the general contractor prior to signing. If the general contractor is unwilling to
make the corrections to the written change order, send it back with a letter documenting the
reasons for returning it and requesting that the reservations be reinstated in the change order. If
the subcontractor is directed to proceed on the changed work absent a signed change order, it
will have reserved the right to go back later with a claim for additional consideration, whether it
be for a time extension, damages for delay, or to enforce agreements made during negotiations.

When the change order has been carefully defined, documented and presented in writing, the
subcontractor will have performed all of the necessary steps to insure preservation of its
contractual rights. In the event of future disputes, it will not be denied consideration on the basis
of rights it may have unintentionally given up along the way.

It is important to follow the rules of the game as carefully as possible. These rules include
documenting problems as they arise, providing notice at the proper time and keeping accurate
cost records.

When a project appears to be headed into a situation where major changes will be occurring, it is
wise to immediately set up a procedure to separate and account for all costs incurred in the
performance of the changed work. By separating these costs from the base contract costs at the
start of the changed work, the subcontractor will be in the best possible position to prove
damages, impact, or unanticipated costs if they are incurred. It may, under certain
circumstances, be advantageous to have an entirely separate crew perform only change order
work. This is an excellent way of making certain that all of the costs of performing time and
materials work on a change are actually included the change order.

Unfortunately, not every change order, no matter how well-documented, will be given fair
consideration. In some instances, owners or general contractors may be unable or unwilling to
pay fair compensation for changed work or to recognize the impact of the changes. In such a
circumstance, the same process that allows the subcontractor to make its best possible case for
compensation (or adjustments to schedule) will also allow the subcontractor to make its best
possible case in court or arbitration. Proper documentation, communication and record-keeping
will not guarantee the subcontractor a total victory in the dispute resolution process. However,
failure to take these steps will greatly increase the likelihood of defeat.

Dealing with changes will always be a major challenge for subcontractors. Hopefully, these
Guidelines will be of assistance in improving the subcontractors financial outcome when it

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encounters significant changes. The entire process has two complementary goals. First, the
subcontractor should obtain fair compensation for all of its work, including compensation for
impacts on the base contract work. Second, the subcontractor should come out of the project
with its reputation intact and a good working relationship with the general contractor that will
lead to future work. The ability to achieve both goals may well determine whether or not the
subcontractor survives and thrives in what will always be a challenging industry.

For Additional Information See the Following SMACNA Contract Bulletins:

Contract Bulletin #12, Dispute Resolution (January 17, 1997)

Contract Bulletin #36, The Arbitration (May 26, 2000)

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