PURPOSE
The purpose of this Procedure is to provide a guideline for processing preliminary change orders. Three types of working documents are used by the Bureau to define the scope of the required change and to elicit from the Contractor a cost quotation and a Time Impact Analysis (TIA) for the proposed change: Preliminary Change Orders (PCOs), Emergency Change Orders (ECOs), and Time and Materials Change Orders (T&MCOs). Following is a brief description of each of these documents.
Preliminary Change Order (PCO): A PCO is used to request from the Contractor a cost quotation and a TIA for review and negotiation prior to the Contractor starting the required change order work.
Emergency Change Order (ECO): In order to avoid delays to the project, and when the scope of the change is easily defined, an ECO, with a specific not-to-exceed price limit, is used to direct the Contractor to start work prior to negotiating the lump-sum cost for the required change. If the cost of the change order work is estimated to exceed $100,000, authorization from both the Program Manager and the Board of Public Works is required prior to proceeding with the change.
Time and Materials (T&M) Change Order (T&MCO): When the scope of the change is not easily defined, a T&MCO, with a specific not-to-exceed price limit, is used to authorize the Contractor to proceed with the work while documenting daily labor, material and equipment costs.
The distinction between these documents and their proper use are further detailed in this Procedure. However, regardless of the type of change order document employed, the four key elements for processing a preliminary change order remain the same:
Issue the PCO, ECO or T&MCO.
Review the Contractor’s cost quotation and TIA.
Prepare an independent cost estimate.
Negotiate/reconcile all cost and time changes with the Contractor.
REFERENCES
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RESPONSIBILITIES
Project Manager (PM): The PM is responsible for monitoring both the frequency and scope of change orders and their impact on the project’s budget and schedule. In addition, the PM must approve all Owner-requested change orders and obtain authorization from the Owner’s Representative or Oversight Committee, as required by the Program, for any proposed change that exceeds the determined amount pre-established by the Committee or Owner. The PM must also brief the City Engineer and gain authority from the Board of Public Works for any change that is greater than $100,000, exceeds the remaining contingency limit for the project, or when cumulative changes exceed 25% of the original contract amount.
Note: For contracts not awarded by the Board of Public Works, the PM should verify the limits established by the Program.
Construction Manager (CM): It is the CM’s responsibility to ensure that change orders are processed in a timely, efficient, and proper manner. Specifically, the CM is responsible for preparing and issuing the appropriate type of change order with all the necessary supporting documents. The CM is also responsible for reviewing the Contractor’s cost quotation and TIA, obtaining the Bureau’s cost estimate and schedule analysis, negotiating the price and schedule adjustment for the change with the Contractor, and ensuring the appropriate documentation is included in the project file. For T&MCOs, the CM must monitor the cost of the T&M work to ensure that the “not-to-exceed” limit is not exceeded by the Contractor.
Project Engineer (PE): The PE is responsible for coordinating the interface between technical disciplines and for producing the necessary plan and specification revisions that may be required for the proposed change.
Contractor: The Contractor is responsible for promptly submitting to the CM a cost quotation and TIA and negotiating with the CM the price and schedule impacts for the change order. In addition, when directed by the Bureau via an ECO or T&MCO, the Contractor must immediately proceed with performing the required work. For T&M work, the Contractor is also responsible for notifying the Bureau of Contract Administration (BCA) Inspector when T&M work is to be performed; recording the daily labor, material and equipment utilized; and notifying the CM when T&M costs are approaching the “not-to-exceed” limit.
Estimator: The estimator supporting the Construction Management Team is responsible for preparing a cost estimate for the proposed change, reviewing the Contractor’s cost quotation, and assisting the CM in preparing for change order negotiations.
Scheduler: The scheduler supporting the Construction Management Team is responsible for conducting a preliminary schedule analysis for the proposed change, reviewing the Contractor’s TIA, and providing the CM with the proper recommendation.
Note: Depending on resources available to the project, the CM or the PM may assume the Estimator’s and Scheduler’s responsibilities.
Bureau of Contract Administration (BCA) Inspector: The BCA Inspector is responsible for monitoring the Contractor’s performance of T&M work and for approving the Contractor’s submittal of T&M daily labor, equipment, and material records. Work not substantiated by the BCA Inspector will be ineligible for payment.
PROCEDURE
Before preparing a change order document, the CM must determine the scope and estimated cost of the proposal change, and whether or not its impact to the construction schedule is critical. The CM must then select the most appropriate preliminary change order document to be issued to the Contractor. A detailed description of each type of change order document, and its proper use, follows.
Preliminary Change Order (PCO)
Preliminary Change Orders (PCOs) are the standard, most frequently issued type of change order. The PCO defines the required scope of the change and requests the Contractor to submit a lump-sum cost quotation and any schedule adjustments for the change (for samples, see Attachments 20.3-1 Preliminary Change Order Cover Letter, 20.3-2 Preliminary Change Order Instructions, and 20.3-3 Change Order Cost Summary Form). By using the PCO, the CM is able to negotiate with the Contractor and agree upon the price and schedule impact of the change prior to the Contractor’s start of the work. This approach provides the City and the Contractor with the most options, reduces potential risks to both parties, and therefore, is the Bureau’s preferred method for processing a change order.
However, if time does not permit negotiation of the change order price prior to starting the work, and the work must proceed immediately due to safety issues or schedule urgency, it is not practical to issue a PCO. Likewise, if the required change has an unknown or difficult to define scope, the PCO should not be used.
Before preparing and issuing a PCO, the CM must clearly define the scope of the proposed change and obtain from the PE any necessary drawing and/or specification revisions documenting the change. The scope of the work and supporting documentation must be clear and explicit. A clearly defined scope will enable both the Contractor and the CM to more accurately estimate the cost of the change, and may help the CM to control costs and expedite processing of the change order. Conversely, a vaguely worded scope may prompt the Contractor to prepare a higher cost estimate (as protection against undefined work) that may impede negotiations and prevent finalizing the change order.
The CM issues the PCO and supporting documentation to the Contractor, retains a copy in the project file, and distributes copies to the Estimator, Scheduler, and PM who monitors and tracks the change orders and their impact on the project’s budget and schedule. For projects using BOE’s construction management software (e2020), the CM attaches and/or links the supporting documentation to the built-in PCO form and distributes the PCO using e2020. (For detailed instructions on the use of e2020, refer to the “HELP” module in the following link: www.laboeprojects.com).
After issuance of the PCO and within the time allowed in the cover letter (typically two weeks), the Contractor must prepare and submit a lump-sum cost estimate and schedule adjustment, if any, for the proposed change. The Contractor should be encouraged to submit a detailed cost estimate since greater detail will enable the CM and/or Estimator to identify any inconsistencies, errors, or unreasonable costs. The CM should periodically review the project’s change order log for incomplete change orders. The Contractor should be notified if there are any outstanding cost proposals.
Upon receiving the Contractor’s cost and schedule proposal, the CM reviews the proposal to determine whether the full scope of the change was properly understood and incorporated into the Contractor’s proposal. At about the same time, the Estimator and Scheduler supporting the Construction Management Team should complete their independent cost estimate and schedule analysis. (It may be acceptable at times for the CM to prepare a cost estimate by analyzing the Contractor’s cost proposal and making the appropriate modifications to the scope, labor hours and rates, material quantities and cost, equipment rates, etc. The adjusted final cost then becomes the CM’s cost estimate). The Estimator’s cost estimate should be as detailed as possible and prepared in a format similar to the Contractor’s estimate in order to facilitate comparison of the estimates and identify any differences in cost, quantities, etc. Likewise, the Scheduler should identify any discrepancy with the Contractor’s estimate of any schedule adjustment required for the change. These differences will become the major topics of negotiation.
After collecting and reviewing this information, the CM is ready to proceed with negotiating the change order with the Contractor, if necessary. The object of the negotiation is to agree on a reasonable price that is acceptable to both the City and the Contractor. Contractors are entitled to adequate compensation for any additional work; and, the City is obligated to pay a fair amount and, when required, to allow a reasonable time extension for that work.
The following items represent a guideline for negotiating a change order and reaching an agreement with the Contractor:
Review and agree upon the scope of the change, including material quantities.
Review and agree upon material costs.
Review and agree upon required equipment and equipment costs.
Review and agree upon required labor hours and associated labor rates.
Review and agree upon any schedule impacts.
Arrive at a final agreement of the lump-sum cost and required time adjustment, if any.
A record of the cost and schedule aspects of the negotiations must be maintained by the CM and summarized on the Change Order Record of Negotiations (RON) form (Attachment 20.3-9), and shall describe how the agreed-upon price and any required time extension were reached. Upon successful completion of the negotiations, the CM may proceed with finalizing the change order. In the case of unsuccessful negotiations, all proposed but disputed costs and/or time extensions should be documented using the RON. The CM should then issue a Unilateral Change Order or a T&M Change Order for the Contractor to proceed with performing the required work (see Procedure 20.4 – Finalizing Change Orders).
Emergency Change Order (ECO)
Emergency Change Orders (ECOs) are to be used by the CM only when the work is urgent and must proceed immediately (e.g., when safety hazards must be corrected or the construction schedule must be maintained to avoid delaying the project) and only when the scope of work, including material quantities, may be easily defined. In such circumstances, it will be necessary to authorize the Contractor to proceed with the work prior to negotiating an agreed-upon price for the change. However, this authorization must be issued with a “not-to-exceed” price limit. (For samples, see Attachments 20.3-4 Emergency Change Order Cover Letter and 20.3-5 Emergency Change Order Instructions.)
The CM issues the ECO and supporting documentation to the Contractor; retains a copy in the project file; and distributes copies to the PM, who monitors and tracks the change orders and their impact on the project’s budget and schedule, and to the BCA Inspector, who observes the work.
As soon as possible after the ECO is issued, the Contractor shall prepare and submit a lump-sum cost estimate and schedule adjustment, if any, for the proposed change. The procedure for reviewing and negotiating the Contractor’s proposal is the same as that described for PCOs. If a Contractor fails to actively participate in negotiations, the PM may have to convert the change order to a T&M Change Order or a Unilateral Change Order.
It should be stressed that ECOs may expose the City and the Contractor to a potential dispute whenever the change order work is completed prior to negotiating an agreed upon cost and schedule impact for the work. For this reason, ECOs are to be issued by the CM only when absolutely necessary.
Time and Materials Change Order (T&MCO)
Time and Materials Change Orders (T&MCO) are primarily to be used by the CM when the required change is of an unknown or indefinable scope (such as removal of unsuitable materials found during excavation) and when the required work is easy to monitor and distinguish from the remaining contract work. In such circumstances, it will be necessary to authorize the Contractor to proceed with the work without negotiating a lump-sum price. Instead, the cost of the change is based on the Contractor’s actual labor, material, and equipment utilized to perform the work. However, this authorization must be issued with a “not-to-exceed” price limit. In unusual circumstances, if a Contractor fails to actively participate in ECO negotiations, the CM may have to convert the ECO to a T&MCO. (For samples, see Attachments 20.3-6 T&M Change Order Cover Letter and 20.3-7 T&M Change Order Instructions.)
The CM issues the T&MCO and supporting documentation to the Contractor; retains a copy in the project file; and distributes copies to the PM, who monitors and tracks the change orders and their impact on the project’s budget and schedule, and to the Inspector, who monitors the work. A copy of the T&MCO must also be distributed to the BCA Inspector so that he/she can provide the necessary resources to observe the work.
Once the T&MCO has been issued and the specified work begun, the Contractor shall account for all expenditures of labor, material, and equipment on a Time and Materials Daily Report form (Attachment 20.3-8). This form is to be completed by the Contractor and submitted to the BCA Inspector for approval on a daily basis. The BCA Inspector indicates approval by signing the form and then forwards copies to the Contractor and the CM. The CM must carefully monitor the cost of the T&M work to ensure that the “not-to-exceed” limit is not exceeded by the Contractor.
Upon completion of the change order work, all approved T&M charges are consolidated for payment. The Contractor submits an invoice for the total cost (including the signed Time and Materials Daily Report forms) and any schedule impact resulting from the change. The Estimator supporting the Construction Management Team then performs a comparison of the Contractor’s invoice and the signed Time and Materials Daily Report forms with those previously provided by the BCA Inspector. If any differences are discovered, the CM refers the Contractor to the BCA Inspector to resolve the discrepancy.
Upon reconciliation and approval of the Contractor’s invoice, the CM may proceed with finalizing the change order. If the discrepancies cannot be resolved, any disputed costs and/or time extensions must be documented by the CM and maintained in the project file. The CM must then issue a Unilateral Change Order for the price and time adjustment, if any, the CM determines to be fair and reasonable. (See Procedure 20.4 – Finalizing Change Orders.)
It should be stressed that T&MCOs require prudent management. Opportunities exist for abuse of the process if not monitored and managed effectively. All costs charged to the T&MCO must be supported by the Contractor’s invoices and verified by the BCA Inspector. In addition, labor and equipment usage must be verified in the field by the BCA Inspector who must view the work. However, because it may be difficult for the BCA Inspector to monitor every detail of the change order work, disputes may occur when the BCA Inspector refuses to verify work that they did not view.
In order to avoid such disputes, the CM should establish and maintain clear communication between the Project Delivery Team members and enforce the terms of the Contract Documents relative to T&M work. The CM should meet with the Contractor and BCA Inspector before the work starts to clarify scope and agree upon means and methods to be used. For example, the Contractor shall inform the BCA Inspector at the start of each workday of its plans to perform T&M work. The Contractor shall also notify the CM when T&M costs are approaching the “not-to-exceed” limit for the work. Finally, the CM must make every effort to develop a trustworthy relationship with the Contractor to encourage the Contractor to operate efficiently in performing T&M work and to minimize the potential abuses and difficulties inherent in executing T&MCOs.
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