Contractors and owners can quickly encounter many problems when change orders are not processed properly. We`ve already highlighted the legal and financial importance of change orders in construction, so let`s dive into some best practices for change orders! Despite the widespread recession, major private clubs, resorts and hotels are aware of the need to continue investing in their physical property to keep amenities and facilities cool and encourage repeated use and enjoyment by members and guests. While budgets and operating costs, service contracts, and individual orders and invoices are often subject to rigorous scrutiny, this is often less true for payments related to large cash expenses for construction projects. In fact, original construction contracts are too often made to look like a rubber dinghy next to a gigantic boat of modification orders, and clubs and hotels have little certainty that what has been paid is what has been received. Without a careful review of the documentation supporting the payment request, management must assume that what the CM charges on behalf of the subcontractors and what it charges for its own terms and conditions is correct and within the scope of the contract. Otherwise, there is no real certainty that what the CM charges that month will reflect exactly what the subcontractors invoiced the CM or what the CM incurred in general terms. This is especially true if a risky construction manager (âMC) model is used and the basis of payment is the cost of the work plus fees with a guaranteed maximum price (âGMPâ). These contracts are usually structured in such a way that a CM is responsible for managing the project on behalf of the owner, from pre-construction to construction and completion. The CM is only allowed to perform a small amount of actual work (e.B, storage, etc.). The main task of the CM is to manage the project, which can include up to 40 subcontractors depending on its size and complexity, with subcontractor costs accounting for the largest portion of total construction costs. The CM then charges the owner his fees and the fees agreed in the monthly application process. These general costs or conditions include items such as insurance, bonds and the direct cost of the CM for project management, such as: the work and workload of project staff, telephone, equipment rental, tools, computer equipment, landfill costs and trailer rental, to name a few. In addition to cm fees, the payment request also captures the costs incurred in relation to subcontractors.
There are construction projects that do not require change orders, but they are usually the exception. However, this is only half the truth about what these types of contracts say on a payment basis. The basis of payment is the cost of the work plus a fee with a guaranteed maximum price. In addition, such contracts show that the final total cost of the project for the owner: One of the simplest best practices for the change order is to include an “exclusion list” in the final contract. The owner asked them to carry out work in the courtyard of the building. After reviewing the designs and scope, the Contractor estimates that the yard will be completed twelve weeks after the originally scheduled completion date. This section mainly refers to management fees and overhead – link the change order to the calendar! That`s because in the latter scenario, you know exactly what you`re getting in that $40,000. The same applies to change orders. Change orders can occur in construction projects for many different reasons.
Here are some common scenarios in a construction project that result in the issuance of a change order by the client to a contractor: The initial contract was what was placed on the documents and then provided by the supplier (read as a contractor). When the owner received his boat, he realized that his initial wish was missing a lot and had to go through the process to get what he wanted, the change order boat. This photo, whose author is unknown, is really a great representation of the problems we face as a construction industry. First, the perception of most people (including the entrepreneur) is that it must be the greedy entrepreneur`s boat and his practices that make this possible. Second, it also shows the typical gap between an owner`s desire and ability to accurately share that information with designers, and then their ability to properly relay that information to contractors to ensure that the original intent is fulfilled. For contractors, change orders are an essential part of getting paid for the work you do. If you are doing additional work on a project that is not part of your basic contract, you should be paid for the time and cost of that work. Change orders submitted by contractors typically require more time AND costs – completion times should also be increased in many cases. On the construction site, no one wants to do work for which they are not paid! However, it is not so easy to simply send a change order to the owner and wait to get paid. In the following, we will discuss the details of the change order protocol for contractors.
The exercise of the right of recourse clause allows the owner to conduct a more detailed and complete review of the construction costs and charges charged and to confirm their eligibility and affordability in accordance with the terms of the contract and the assumptions and exclusions set out in the GMP. During an audit, they have access to all accounting documents and CM files related to the construction project. In addition, contractor reimbursements resulting from the audit process regularly exceed the direct costs associated with the audit. Even worse, basic contract work will suffer while the owner and contractor argue over the change order work! In general, the more complex, vaguely defined, and risky a project is, the more owners should expect to pay change orders early on. That being said. Last but not least. Document, document, document !! This, of course, happens after a change order has been officially executed. Myth #1 â No need; our annual financial statements are audited annually. A common misconception is that homeowners don`t have to worry because they are covered by the annual audit. In reality, legal controls have nothing to do with obtaining certainty about the costs charged for a project that a site manager or contractor includes in their monthly statements or payment claims. What is generally considered from the perspective of a final audit is as follows: Whether the client has asked their contractor to perform additional work, whether the contractor has discovered unforeseen conditions, or any other reason for a change order, it is best to review the work with the client before doing more.
Simply put, an exclusion list is a summary of everything the contract does NOT contain. This is an easy way to clarify whether or not a particular item is included in the order value. Some points that are often excluded from construction contracts are: This is a combination of many of the above points. A change order submitted by the contractor should contain the following: To date, most of us have seen the conversion order and photo of the contract boat that has been circulating on the Internet in recent years. The big boat is rightly called a modification order and the dirty small boat as the “original contract”. This raises a very interesting question about how people think. Looking at the picture, it comes to your mind that this must be the contractor`s setup and that he can only afford a very small boat with the profit made from the basic offer, and once he is done with the “typical” entrepreneur change orders, he could afford the largest boat with all these profits. If this is your thought, you are not alone, I have shown this photo to many people and universally it is the thought, but I offer a different perspective. Projects carried out on a time and material (T&M) basis are carried out on an “invoice as we go” basis.
For contractors, T&M projects present minimal risk of change orders – you charge the customer for the work they do as you do and don`t pay it at a fixed price in a lump sum contract scenario. Owners need to worry more in the service of change orders – if the contractor has not finished but has exceeded his initial budget, he will need more money! A brief warning: Although I have been working as a project manager in construction for many years, I am not a lawyer or some form of legal counsel. .