Business Articles - Legal and Insurance

Understanding Contract Change Orders

One of the largest problems for contractors is the proper handling of contract change orders. In most instances, the contractor ends up 'reacting' to a change to the contract and is already caught flatfooted.

The underlying cause for this is the contractor's lack of having in place an adequate change order management system. This system consists of the following parts:

  • Review and research of the contract documents to uncover possible change orders that may crop up before the start of work and during the prosecution of the contract work.
  • Notification, documentation and discussion of these possible changes to the owner and the owner's representatives.
  • Agreement of the change orders required along with pricing and time to complete the additional work.
  • Training of the system to the company employees.

The first place to start with your change order management system is to take a hard look at your 'typical' contracts, along with your statutory rights afforded to you per your state contract statutes. Are you getting in the contract clauses all of your full rights under your state law? If the answer is yes, then you can start to build your system in accordance with your statutory rights. If not, you should become knowledgeable in the law and start insisting that your rights be properly included in all future contracts.

Next part of your contract management system is to develop a SOP (Standard Operating Procedure) for your people to follow from start to finish. This should include but not be limited to:

  • Reviewing and informing the client of your change order system and procedure, as well as, policy of how change order will be handled and what criteria must be agreed to before any change order work will commence. This is part of a system that starts before the client agrees to your pricing, during the proposal and contract stage and at the pre-construction meeting with the client.
  • Documentation of the change order and full agreement from the client on the work, price and payment.

One of the tools that can be used for this second part of your change order management system is a Contract Change Agreement form. This form allows you to document all changes, pricing, agreements in one easy format and also allows you to track up to four changes on one form.

By utilizing this Contract Change Agreement you will have implemented part of the documentation system into your change order management system.

The last peg for this system is the training of your people on using the system and working it properly with your clients. Take the time to build the systems, taking into consideration all of the problems and experiences from the past problems in handling the change to the contract work. By doing this, you'll guarantee yourself that your change order management system will work properly.

Henry Goudreau, C.S.L.
HG & Associates, Inc.

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