The change order process – what goes wrong?
Subcontracts issued from the prime contractor (referred to as “contractor” in this article) contain very descriptive language regarding the change order process. The language clearly outlines the process for written direction to proceed and the process to be followed for the issuance of a change order document, required for the subcontractor to invoice and collect payment. Changes to the work can occur in several ways:
- Owner-initiated request for program change
- RFI response that results in a change
- Submittal response that results in a change
- Value engineering acceptance
- Contractor issues a change document (i.e., ASI, CCD, RFQ)
- Contractor directs work authorization by email
Changes can come rapidly and sometimes several in a day, especially for the contractor. The contractor’s goal is to protect its interest by managing the risk with an efficient method of change management, all the while continuing to perform work to prevent changes from affecting the schedule. The change order approval process and the progress billing process don’t occur as rapidly as the changes that must be put in place. Therefore, the contractor must establish the responsible party for the change, obtain and submit pricing as quickly as possible, and obtain owner approval if necessary. Then the contractor must direct the subcontractors per the terms of their agreement to perform the work with a promise of a subsequently-issued subcontract change order.
What goes wrong?
The problem with this process is the contractor many times can’t come to agreement with owners on the merits of a change. Relationship with the owner, delivery methods, personalities and experience all come into play. The quantity of changes can increase very rapidly, and if the onsite project team doesn’t have the experience or ability to follow the terms of its contract to protect itself and its subcontractors, the project team loses control. In its haste to keep the project on track, it tries different methods to get the subcontractors to proceed, which can effectively shift the risk of nonpayment to the subcontractor. These methods include: giving the subcontractor’s field foreman verbal vague authorization; not responding to written notifications of change; and giving an incomplete authorization to proceed while being very careful that entitlement or approval of the price or pricing method is not given.
The plan is to coerce the subcontractors into performing the changed work, so if the contractor can’t come to agreement on merit with the owner at a later date, it has effectively shifted the risk of nonpayment to the subcontractor. At that point the contractor can hide behind the actual change provisions of the contract to protect itself by stating that the terms and conditions of the contract were not followed.
Rather than sticking to the change provisions of the contract agreements, a weak project manager will try to be as vague as possible in his direction to proceed, making sure he is not giving direction per the subcontract agreement. That’s why contractors give indistinct responses to tile contractor change requests usually by email and sometimes even verbally stating things like:
- “Proceed on a T&M basis”
- “Proceed on your price not to exceed”
- “You are hereby directed to proceed”
- “We are directing you to proceed as required by the terms of the subcontract”
These directions are unclear at best and are attempts to get the subcontractor to proceed without agreeing on merit or cost. This allows the discussion on merit to occur after the work is complete. A simple direction such as described above may be a weak authorization to proceed, but it does not grant entitlement or approval of a price.
What should subcontractors do?
Read the subcontract change order terms very carefully and insist on following the process as described. Use these terms to your benefit if possible. Only proceed with a method allowed by the subcontract terms.
To be as successful as possible in collecting payment requires taking four steps:
- Giving proper notice of change to the contractor
- Receipt of direction to proceed as described in the subcontract
- Written agreement on entitlement to a change order
- Agreement on the price or pricing method
The steps do not always occur at the same time, but when subcontractors proceed and incur costs without all four steps being satisfied, they are at risk for nonpayment. Insisting on following the process as described in the agreement puts subcontractors in the best position to collect payment for the change.
When a contractor is unclear in responding to a request for change, a simple communication asking for clarification should be sent:
Thank you for the authorization to proceed on this Request for Change. It is our understanding that this work is a change to the subcontract and a Subcontract Change Order will be subsequently issued for the price quoted in our Request for Change dated ________. Please confirm that our understanding is correct so that we can proceed, or if we have misinterpreted your direction, please clarify.
With this response the contractor is forced to come clean with his intent and the subcontractor has solidified its position to collect payment. If a contractor will not confirm or becomes agitated in his position, there is a reason. Either he does not have the contractual authority to authorize the change, or has not received the approvals necessary to grant merit.
Remember, contractors’ project managers will often sway subcontractors to proceed prior to approaching the owner. Subcontractors will vastly improve their chances of collecting payment by understanding the contract, and being alert and disciplined in forcing the contractor to follow the agreement.