Change Orders: Generate, Authenticate, Substantiate

Construction projects that proceed exactly as planned are rare.

Experienced contractors understand how to effectively generate, authenticate and substantiate change orders to avoid legal battles and be fully compensated for work performed.

Generate: Where it all begins

The challenge to achieving a successful change order starts with the original contract. Your attorney can assist by using language in the contract that clearly explains change orders that require additional compensation and assigns financial responsibility for those changes.

Or, your attorney should at least make sure that you understand how the contract treats change orders. For example, changes caused by unforeseen job-site conditions, such as soil problems, are usually the owner’s responsibility.

However, you will likely be responsible for paying for changes caused by work-related problems such as delays in material deliveries that create schedule changes.

To clarify these types of details, thoroughly review all bid documents, contracts, plans and specifications with the owner, architect and any other stakeholders prior to beginning the work for the job.

Clearly, you will not be able to anticipate each change order that will be necessary prior to beginning a job, but meeting with all the stakeholders in the project will help everyone recognize that it’s in their own best interest to work together when the inevitable changes to the contract occur.

Authenticate: Get it in writing

In a perfect world, you would identify the scope of each change and get orders for them in writing –with pricing – prior to performing the work.

Practically, you can’t bring the job to a grinding halt to hash out all details of a change order with all the stakeholders of a project before performing the change work.

However, you should be able to obtain an acknowledgment in writing that the work associated with the change order is not part of the original contract. If the owner will not provide such acknowledgment, you should go on record – in writing – that you are doing work that is not within the scope of the original contract.

An email is a quick and painless way to retain a written record of your change-related communications. It is also important to remember that change orders frequently are not 100 percent settled until many months after the work has been completed. This makes it unlikely that your memory, and just as importantly, your customer’s memory, will serve as a solid reference for the details of the change order.

Let’s say bad weather conditions make it impossible for you to work an extended period, and initially the owner agrees to shut down the job site until conditions improve. What if the delay lingers on longer than either you or the owner had imagined?

Suppose the owner suddenly insists that a lengthy extension was never agreed upon? Without any written acknowledgment of the agreed-upon delay, you could easily end up paying a hefty penalty for missing the original contractual deadline.

Situations like this can be avoided with proper daily documentation procedures. Require your project managers to keep daily logs of job progress, particularly noting any occurrences that could lead to the need for a change order.

Review these logs regularly, and when the work being performed is not consistent with the contract, contact the owner as soon as possible.

Substantiate: Documentation is key

If all stakeholders agree that a change order is necessary – document it.

The documentation should be comprehensive. Again, you probably will have a difficult time remembering all of the details several months down the road, so commit it to writing as it occurs. If the documentation comes from another stakeholder, correct all errors or omissions in writing as soon as possible.

Update your own schedules on a regular basis. If a change affects the job schedule, you will need documented evidence of how and when it occurred and what the result of the change was.

One common weakness in change resolution involves contractors who cannot prove there was a link between the change requested and increased costs from the change. To connect the two, you should keep a detailed history using your own project documents, job logs and correspondence.

This meticulous record keeping will not only help ensure that disputes are settled in your favor but will also assist in accelerating – or ending before it begins – the dispute resolution process. It is a rare owner who will continue to pursue litigation or arbitration when faced with a stack of evidence supporting the contractor’s position.

Losing out on change orders can not only make or break an individual project but over the long haul potentially make or break an entire business. That is why making the effort to prepare for and carry out a successful change-order process is so vital to your business. – Katy McFalls, CPA, VonLehman, a member of CPAmerica International