Change Orders in Building Projects

Everyone familiar with planning, designing, and implementing a building plan – whether it’s for a 2,000 sf classroom addition or 100,000 sf auxiliary gymnasium or 400,000 intermediate school facility – knows that plans are well intentioned tools. But what happens when that well intentioned tool is missing a component, is in need of revising, or is just plan wrong? Those necessary modifications are captured as Change Orders. How do you manage them? Who is responsible for them? And, most importantly, how does it affect the project’s bottom line?

For example, in 1980, Ford Motor Company adopted new quality standards and gambled on developing a new vehicle from the ground up. They employed thousands of people, including designers, engineers, and other professionals to create the all-new Ford Taurus. Ford spent 3.5 billion dollars to design and launch the new space age vehicle, which rolled off the assembly lines as the 1986 Ford Taurus. The first-generation Ford Taurus included production model years of 1986-1991 before the first major redesign. With a total production of 2,030,791 of the first-generation units, it put Ford Motor Company back on the automotive map. Even after 3.5 billion dollars and almost five years of design, the company recalled millions of vehicles for corrections due to design errors and omissions.

Let's compare Ford's effort to a building project. Typically, planning, designing, and constructing a 50,000 square-foot building from the ground up is a two- to three-year process. Note, the planning and design schedule is approximately one year. The building project site is one of a kind on this earth; there is no other site that is like it on this earth, anywhere. Typically millions of components are used to assemble a building project. The design professionals document the assemblage of millions of building components to fit together like a puzzle. The history of the profession proves that the plans will not be perfect. As experienced and qualified professionals design complex structures, issues always arise during the construction of a building project.

Managing owners' expectations is a critical part of the project. Setting realistic expectations ensures a pragmatic approach and anticipation of the final product once the building design and construction is complete. We have classified change order as typically viewed by owners as the Good, the Bad, and the Ugly. Owners naturally welcome the Good change orders that unsurprisingly provide money back from project savings and unspent allowances and contingencies. The Bad change orders are required when there are unforeseen construction conditions; typical issues include unforeseen site issues, usually underground, construction material availability, and delivery problems. The Ugly change orders, attributed to the design professionals' errors and omissions, regularly upset clients.

So let's put this into perspective. Engineering Times published an article called "For the Client," which stated that the average percentage of change orders due to Architectural and Engineering (A/E), the design professionals, Errors and Omissions are 3-5% of the total construction budget. In other words, the design professionals are 95% to 97% perfect; therefore, having a project with 1% -2% Errors and Omissions would be considered an above-average project.

Change Order Classifications:

The GOOD

• Owner-Initiated Change of Scope

The BAD

• Unforeseen Site and Existing Building Conditions
• Code Authority Required Changes
• Contractor-initiated Design Modification

The UGLY

• Value-Added Field Modification (Omissions)
• Non-Value-Added Field Modification (Errors)

The project's contingency fund pays for Change Order types 1-6 because no set of drawings and specifications is perfect. To market architectural and engineering services, a professional license is required. Practicing architects and engineers provide a professional service based on years of education and experience. By entering into a contract with an Owner, the designer implies that they possess the "ordinary skill and ability" also known as "Standard of Care" noted in most professional services contracts, necessary to serve the Owner's needs. A/Es advise that when owners engage a licensed professional designer's services, they should hire someone well-versed in that type of project. In the early stages of a project, owners cannot always describe in detail what they need their agent, the designer, to perform or produce.

Instead, they look to the designer to provide professional guidance throughout the project's ensuing phases, culminating in a project that meets the Owner's needs.

Since building projects are paid for and owned by the client, to manage expectations, many Michigan school contracts have a provision to quantify the "Standard of Care." The Standard of Care establishes the expectation of the A/E to mitigate and share the risk of the project. For example, the national average percentage of change orders due to A/E Errors and Omissions is 3-5%. Many negotiated School contracts include a 2% "Standard of Care" or other percentage rates for change orders due to A/E Errors and Omissions. Expressed differently, the School has agreed to pay up to 2% of the total construction cost for change orders due to Errors and Omissions attributed to the A/E. If the amount of change orders due to Errors and Omissions exceeds 2%, the A/E will pay for the non-value-added portion of the School's expense.

Understanding the complexities of the Professional Service provider's services, a "Standard of Care" contract clause is a fair and equitable way to manage the Owner's expectations of the design professional's performance.

As noted earlier, Ford Motor Company, after spending 3.5 billion dollars and producing millions of the same vehicle, cannot get it perfect. Understanding and establishing realistic expectations with your A/E results in a better project and a trustworthy relationship.

Over the last three years, Wightman has maintained an above-average change order record of less than1/2% times the construction cost attributable to type 5 and 6 change orders, well below the national average.