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.

Managing construction procurement:

Here are a few tips on successfully managing construction procurement and contracts.
1. Make sure that you hire the right Architect/Engineer or Engineer/Architect for the work and make sure they commit to a design team that you know will be successful. Having the right expertise for the type of construction you want built goes a long way towards success. Hiring someone that doesn’t or will learn at your expense always causes problems and adds to your cost.

Spend as much time as you can pre-qualifying contractors to make sure that
the Contractor, Contractors Office that will support the work and team that will be managing the work have both the experience and tools needed for the work. Offices in different locations can have different expertise and you want one that has the type of expertise you need.

See blogs on supplier qualification (August 8, 2011) and Supplier Surveys (August 12, 2011)

With both Contractors and Architects or Engineers the people you meet in the
interview you may never see again. Make sure that you identify and interview the actual team. If they or an individual on the team will be key to success, require your approval for any changes to the team. I always recommend that any internal individuals that need to work with the design team be part of that interview and that the design team be part of the contractor interviews. As a team they need to be able to work together.

See blog on interviewing (April 8, 2011)

4. Make sure that you have approval over all subcontractors and equipment
suppliers and weed out any bad apples. Just like any supply chain is only as strong as its weakest link, the same applies to construction. If you have one subcontractor not perform, it will interrupt the natural flow of the construction process as other subcontractors are dependent upon them to complete so they can commence their work. To manage against potential problem, prior to providing their bid you can have the potential contractors provide a list of subcontractors they want to use and advise them in advance if there are any that you object to and don't want bids from. Once it gets to the point where a party has actually bid on the work is when problems can arise. Subcontractors can claim that it was their bid that was used and they should get the work. If the contractor never invites them to bid or if they receive an unsolicited bid and they don't open it, that will usually eliminate the problem.

5. Use the right contracting approach for both the schedule you have and the
resources you have available to manage the activity and the risk you are prepared to assume. Each approach / strategy has different advantages and disadvantages. You can mix or switch strategies during the term of the project especially if you want to fast track a program. Each approach has different risks and management efforts required.

See the blog Contracting approaches (July 2, 2011)

6. Include terms in the contract to both drive the desired performance and have the tools you need to manage performance.

See blog on Managing Supplier Performance (February 25, 2011)

7.Have a good changes provision to deal with all the changes that will incur. As
changes in construction are more frequent the approach to changes is different. Unlike other forms of procurement where changes require mutual agreement between the parties, in construction both parties may request changes, but only the Buyer may order changes to occur. To do that you need a changes provision that identifies both the scope of the changes that you may order and a pre-agreed method to determine both the cost and schedule impact of those ordered changes. Cost is usually managed by a simple formula where the buyer agrees to reimburse the contractor that actual costs of the change (that the Supplier must prove) along with pre-agreed percentage contributions for overhead and profit. Changes will also address how deducts from the work will be calculated.For some work the Buyer may also have the supplier bid per unit costs for a variety of common items that could be changed which could also be used in calculating the cost of changes.

See blog on Changes also posted today.

Perform contract administration through out the work either directly or by using
3rd parties to ensure the contractors are performing to the specification. Don't rely only on the A/E or E/A as they may want to cover up their errors.

8. Maintain an excellent contract file with all documentation on amendments, changes to the drawings and specifications and when they were effective. Make sure a record copy of the drawings and specifications is being updated. Include all correspondence from your people, contractors, subcontractors, architects and third parties hired by you so you know at each point in time what the agreement was, and who did in preparation for potential claims / counterclaims.

See the blog Contract Administration / Contract Management (April 6, 2011)

If you need to fast track a program which happens frequently you can't do
things serially and may need to do advance procurement of long lead items and later assign those contracts to the Contractor. If you do, assign and novate those contracts to the contractor when they are hired.

See the blog on Assignment and Novation (April 11, 2011)

If you need enforce terms in the future primarily with a subcontractor, require
the Contractor to name you as a third party beneficiary in their contract with the

See the blog on Third Party Beneficiary (December 19, 2010)

11. Avoid interfering with the contractor / subcontractor relationship. Once the contract is in place the contractor should have total control over the subcontractors.