Friday, May 23, 2014

Change Orders.

In many contracts, once you start with a supplier it is either difficult, costly, or impossible to change. Since you are locked into using them, you have little or no leverage to negotiate changes to the scope of the work that may be needed during the term of the contract. To protect against potential supplier abuse, and to make necessary changes quickly, I’ve always include the right to make unilateral changes to the scope of the work and include a price formula for establishing the cost of those changes. Those unilateral changes I refer to as change orders. In change orders the formula I include to price the change is either an amount mutually agreed or the actual cost of the work plus a percentage for contributions to their overhead and profit. The use of the cost plus a percentage approach does two things. First, it is intended to get the supplier to provide a reasonable cost initially, knowing that if they don’t, the buyer can require them to prove their actual cost. It also protects the supplier against the buyer being unreasonable, as they can wait for the actual cost to be determines.

Below is an example of a Change Order clause:

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.