Wednesday, August 17, 2011


Like most topics that I write about the view of changes will depend upon whether you are the buyer or supplier and what you are procuring and where you sit in the world. For example in the UK and in other locations that follow the UK approach to construction contracting instead of calling them changes they are called variations.

Manufacturers of products want to be able to make any changes they want as long as the change does not change the form, fit or function of the product. In my March 16, 2011 post I discussed the perils of that and why production Buyers want to restrict or have approval over any changes.

If you are buying other products or services frequently any change requires a mutual agreement of the parties, or the supplier wants the right to make changes but not have to agree to buyer requested changes. The same usually applies to licensing software, the supplier will want the right to make changes, revisions or enhancements without any approval of the buyer and the buyer may request, but the supplier doesn’t have to agree to the change request.

If you were having a product, service or software developed especially for you, its not uncommon for the buyer to want to have the right to require certain changes as long as they fall within the general scope of the work. That of course is providing that the supplier is compensated for the costs associated with making the changes and the delivery schedule is adjusted to reflect the additional time the change will add to the performance of the work.

There are other activities where during the performance of the work changes may be required, and it’s not practical or cost effective to switch suppliers if they don’t agree or you may simply not have the time to seek agreement in advance and need to order changes. The construction industry is clearly one of those areas where the owner needs to be able to order immediate changes to the work as delays can create a huge amount of work that would need to be demolished and rebuilt according to the changed requirement.

In those situations where you need your contract to provide you that right and you need to address how the contractor will be reimbursed for those changes. In the British system of construction contracting where Quantity Surveyors are used to create detailed bills of materials its easy to determine the cost of the change as it gets measured. The problem with that system is frequently bills of materials are not done for electrical and mechanical systems of the building so changes or variations cannot be measured and you still need a formula or approach for items that don’t appear on the costed bill of materials. What does a clause that allows the owner to direct changes look like? Here’s an example.

1. A change order is a written order to the CONTRACTOR, signed by the OWNER, authorizing a change in the Work, the Contract Price or the final completion date.
2. The OWNER, without invalidating the Contract Documents, may issue orders making changes by altering, adding to, or deducting from the Scope of Work.A change in the Scope of Work may also necessitate an adjustment in the Contract Price or the final completion date. No change in the Scope of Work shall proceed and no claim for additional monies for such change or for any extra work, so-called, will be valid unless such work is done pursuant to a written order from the OWNER to the CONTRACTOR signed by an OWNER Representative. Advance approval is not necessary for extra work required to protect life or property under emergency conditions. The OWNER shall determine in each case whether the work done without written approval was of an emergency nature and whether it is to be reimbursed and a Change Order issued.
3. The cost of work for any change order shall be either a lump-sum agreed to by the OWNER or actual costs and a percentage fee for overhead and profit. Such percentage fee shall not exceed fifteen (15%) percent of actual costs for work performed by a CONTRACTOR alone. For work performed by a Subcontractor, the cost to the OWNER shall be determined by a lump sum agreed to by all parties or the actual costs to the Subcontractor, plus a percentage fee not to exceed ten (10%) percent for the Subcontractor's overhead and profit, plus a fee not exceed five (5%) percent for the CONTRACTOR'S overhead and profit.
4. If deductions are ordered, a credit shall be computed on the same basis as increases for extra work.

Note: the approach that allows either a lump-sum mutually agreed or actual cost plus a fixed percent is to try to influence the contractor to come in with a reasonable, realistic lump sum in the first place. If they don't they know they will have to prove their actual costs.

As changes are different between different types of purchases, terminology is different. In construction a Change Order has a specific meaning, It means they are ordered or directed by the Owner. In other areas the term “change order” is frequently used to refer to changes that are mutually agreed instead of directed.

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