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Change orders in construction contracts.

No project is built according to the exact specifications set out by its designers. The best architects in the world cannot foresee every eventuality; the original design and scope of a project will often have to be tweaked for practicality's sake. Changes are inevitable.

Requests for such changes often originate from owners or consultants. It's generally assumed that altered orders are a source of additional revenue for contractors, but few understand the implications and potential risks associated with change orders. The uncertainty that stems from project alterations, however, makes planning for the future difficult.

According to international accounting standards, 'change' or 'variation orders' are defined as instances in which contractors receive instructions from owners that differ from those that were originally specified. In turn, the term 'claim' refers to the amount that a contractor seeks to collect to compensate for owner-caused delays, errors in design specifications, and disputed variations in contract work.

Such variations are only included in contract revenue when the amount can be measured reliably, and when it's probable that the owner will approve the change.

Changing an order might sound like a simple task, but getting these alterations processed and approved by owners can be a complex procedure. Key factors include the level of trust that exists between owners and contractors, and the dearth of experienced professionals and technical experts capable of negotiating changes requested by both parties.

Change orders have an even more pronounced impact when it comes to fixed-price, lump-sum contracts. While alterations to these projects clearly have tangible implications related to cost and schedule, it's the intangible consequences that cause the widest-reaching ripples.

Change orders can delay project completion, decrease productivity, increase project costs, hamper procurement, trigger lengthy and complex verification procedures, and stall final account releases and retention payments. In addition, contractors can miss opportunities to sign new projects as their resources have to be placed into ongoing project negotiations.

The causes of change orders and the effects that they have on project costs and schedules are influenced by a range of interrelated factors. However, the results of various studies indicate that owners are the primary source for such alterations.

Despite being involved during the design phase, due to a lack of detailed research and an inability to understand consultants' design documents, owners often request changes during the construction process when they realise that a project is not being built according to their vision.

Consultants, meanwhile, are the second-largest contributors when it comes to change orders. These instances usually arise because of incomplete designs or conflicting tender documents, and typically result in ambiguity over the scope of work.

Consultants who insist on the use of the latest products and technologies during the construction phase also contribute to claims, as contractors price their tenders based on the information contained within the initial documents.

Given the uncomfortable atmosphere that usually exists between stakeholders in the construction industry, change order management is crucial in minimising impacts to costs, schedules, and less tangible consequences.

In summary, although change orders originate from owners and consultants, contractors are the ones exposed to the risks. Changes are not only problematic for the programmes themselves, but also for a contractor's cash flow. Since alterations generate effects that stretch far beyond worksite activity, project owners and consultants should ensure that they are in full agreement over a project's design before its tender is released.

M. Vasanth Kumar is group CEO and board member of Al Malki Holding, Qatar

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Publication:Construction Week
Date:Sep 18, 2014
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