Data-Driven Change Order Management

BY LISA COOLEY, LEED AP

DIRECTOR OF FEDERAL SOLUTIONS

One of the major areas of focus in the evolution of innovative project delivery methods like design-build and integrated project delivery (IPD) is the elimination or mitigation of change orders and their disruptive effects on projects. However, unforeseen conditions, changing owner needs, and other uncontrollable factors mean that change orders will never be entirely eliminated.

The reality is that more effective ways of managing change on projects are needed. As the construction industry explores new ways of leveraging data and analytics, the question we ought to be asking is "In what ways can data help us with change order management?"

LIFE THROUGH A DIFFERENT LENS

Contractors and owners will inevitably see project changes through a different lens. In Broken Buildings, Busted Budgets, Barry LePatner, Esq. asserts a common owner perception, namely that the contractor is a "monopolist" after contract award, taking advantage of asymmetrical information and the owner’s lesser expertise, sometimes holding the project hostage and always denying the owner any competitive pricing advantages on changed work.

A more balanced viewpoint is offered by Barbara White Bryson in The Owner’s Dilemma, emphasizing the owner’s responsibility for effective project leadership and timely decision-making, along with the value of a collaborative relationship with the contractor team. Yet, even with best practice owner management, change orders can still cause significant delays and cost overruns on otherwise sound projects.

Unfortunately, the history of change order management was born in a less collaborative era. We have a legacy of efforts to shift risk and recover damages on both sides, which has resulted in increasingly narrow and restrictive contract clauses, and a corresponding library of case law and contract board decisions that must be navigated. These sometimes have had the unintended effect of magnifying the cost and impact of even small changes by slowing down and papering the approval process. The winner’s curse quickly morphs into choosing the lesser of two evils: continue work without required contractual paperwork and risk nonpayment, or wait until paperwork is complete and risk breaching the contract.

So prime contractors face their own monopolization scenario, stuck between their owner/clients on one side and subcontractors and suppliers on the other. Like owners, prime contractors struggle to ensure competitive pricing from subcontractors on change orders where they have effectively become the sole source. And when owners systemically fail to respond to change issues timely, the contractor is left to deal with the consequences of unproductive resources in both their own company and that of many subcontractors. The often inevitable result for owners is claims encompassing delays, lost productivity, and cumulative impacts in addition to the base cost of any added work.

The challenge faced is one of interrelated pricing and process. Uncertainty about pricing often slows down the process, so it makes sense to begin the search for a solution with pricing. Fortunately, construction cost data has recently entered a Renaissance in the Big Data era, and that opens up new potential solutions. This niche research industry has benefitted from recent advancements in data analytics and technology affording the opportunity for tailored, project- and location-specific data sets, effectively deployed in targeted technology platforms.

MANAGING THE COST DATA BEAST

Civil projects with limited scope of work often incorporate a contractor-driven unit-cost basis into the contract, which allows for easier addition and deletion of work. Commercial off-the-shelf (COTS) cost data has been used, especially by government owners, to provide a "reality check" on change order pricing for more complex and multi-trade scopes of work. But COTS products often lack necessary product and working conditions specificity to serve as an effective price basis. With the higher level of task and cost fidelity and analytics insights now available, cost data is set to play an even greater role in pricing of changed work, and more importantly, facilitating the negotiation process.

High-performance application of cost data for change order management requires planning in the design and acquisition phases. A cost data research team will typically be engaged in late design development to review plans and develop a detailed task-pricing catalog concurrently with the production of construction documents. This pricing catalog will typically be based on an industry standard or master database but will incorporate brand name or specifications standards (and pricing), as well as research on current local wage rates, labor conditions, and any current market factors affecting equipment costs.

The resulting construction task catalog can then be incorporated into the contract documents and serve as the price basis for straightforward changed work. Contractors have an opportunity to review the catalog prior to bidding or proposing

on the work, and a coefficient or adjustment factor can even be incorporated into contractor pricing and evaluation to ensure that contractors are confident in the fairness of the pricing mechanism. For projects spanning multiple years, pricing could be adjusted periodically based on a pre-determined methodology.

The contractual pricing basis speeds up the change order process. No longer are all parties 100 percent reliant on downstream pricing efforts. The scope of work can be defined, quantified, and priced independently by owners and contractors. With contractual flow-down clauses to subcontractors and suppliers, pricing is standardized and only quantities need be negotiated for straight-forward changes.

Embedding the task catalog database in a well-designed technology platform further facilitates and expedites the change order process, as well as assuring contractual compliance. In line with government’s move to cloud computing, owners and contractors can develop scope and pricing of change orders in individual secure environments, supporting the federal requirement for independent government estimates. The two estimates can then be automatically compared to serve as the basis for expedited negotiations. All cost data is self-validating within the system to ensure contract compliance and auditability. Where complex changes require a prolonged process, there is a contractual pricing basis to protect both owner and contractor and price front-end mitigation work.

"The potential of this type of system is to provide the owner with the data they need to justify changes to the project budget, and to provide the contractor with an expedited process to ensure contract modifications can be executed more timely," says Dirk Haire, partner, Fox Rothchild, LLP, a member of multiple AGC chapters. "The key is going to be to ensure that paperwork and prompt payment follows the expedited process. I’d like to see some sort of policy guidance that would guarantee contractors prompt payment when a contractual unit pricing structure is specified and used to price changes."

The technology platform can also provide analytical insights to owners about their change order management ecosystem. The ideal platform can be configured to categorize change order types, track current status in various phases against timelines, and other beneficial metrics that can be rolled up and reported through dashboards to analyze performance on a per project, per employee, per region, or enterprise-wide basis.

What about change order causation of delay, lost productivity, or even cumulative impacts? There is considerable industry research into the downstream impacts to projects caused by mismanaged or excessive change orders. Unfortunately, even a highly customized task catalog and pricing can’t by itself remedy account for those problems. By timely dealing with small, straightforward change orders, however, it is possible that some of these downstream impacts may be mitigated. There may also be value in the cost data for analyzing more complicated changes.

There may also be untapped value in this cost data for analyzing more complicated project changes.

"If reliable and transparent productivity data were to be embedded in the line items and made accessible, this approach might potentially provide an insightful benchmarking tool in the analysis of lost productivity, and even certain delays. This external source of data could prove especially useful in situations where contractors lack sophisticated internal data tracking systems to support a preferred claim quantification methodology, like Measure Mile or Earned Value," says Ken Baker, senior vice president, Hill International’s Construction Consulting and Claims practice.

The use of construction cost data to facilitate change order management is an emerging application of data and technology. It will certainly require the engagement and leadership of the contracting community as it is further developed and refined, but it holds great promise to address a perennial, vexing challenge to maintaining construction efficiency.

Lisa Cooley has 25 years of experience in the construction industry and has been an active participant in AGC almost as long, first as part of a family-owned general contracting firm and then running her own general contracting business. Ms. Cooley has served on the board of her local AGC chapter in New Mexico and been involved in many national AGC committees and initiatives over the years. You may contact her at 505-239-3446 or l.cooley@thegordiangroup.com.

AGC’S PERSPECTIVE AND ACTION

AGC contractors have expressed increasing frustration with the state of change order management in recent years. It has been the number one topic of discussion at the organization’s Federal Contractors Conference. "We have no choice but to continue work at our own expense and wait to see what you’re going to pay us when the project is finished," quipped one contractor in a forum with DOD. Some agencies are resorting to ‘settlement by determination’ to keep projects moving, but this may lead to an increase in downstream ‘requests for equitable adjustments’ (REAs) and claims.

AGC is leading the charge on addressing lengthy and bureaucratic change order processing and payment processes within federal agencies. "Change order delays can negatively impact the schedule, cost and ultimate delivery of the project," says Jimmy Christianson, director of the Federal & Heavy Construction Division, AGC of America. "These negative consequences go beyond the project, as contractors — small and large, prime and sub — must find ways to pay their employees on time, seek new work and balance all the other financial responsibilities. At a time when the president is

signing all these executive orders to ensure that federal contractors pay their employees and treat them fairly, the administration should be looking at the problems the government makes for federal contractors when it does not pay them in a timely fashion."

AGC is conducting a survey of contractors to gain more insight into the problem. Preliminary data from AGC contractors indicates that in many cases it takes more than six months for federal agencies to process and pay contractors for change order work; some contractors reported that it took agencies more than one year to do such. As a result, prime contractors and subcontractors are taking on greater financial risks when they work for federal agencies than for which they may have bargained.