Change Order Management: Preserving the Value of Your Contracts During the Course of Performance

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Most commercial contracts that take place over a long period of time are susceptible to changes  during the course of performance. This is especially true on construction, repair, and maintenance type contracts, but it can be true of any commercial endeavor. During the course of performance,  the client might change their mind about what they want or need—or the realities of the job site or  available materials might make the plan unfeasible—and then you have to alter course. These sorts  of changes, whether it's one or two big changes or many small one, are going to expand your cost  basis in the project, and either way, the profit you built into your price.  

In our experience, the only way to deal with this situation effectively is to make sure that you are  generating notice-type paperwork during the course of performance as changes occur. Ideally, you  would even be negotiating a price change right away when the changes happen, but even if you  can't do that, generating the notice-type paperwork will enable you to recover your increased costs  at a later time.  

To do this, you must start thinking about change orders in a systematic way, and have a system in  place for identifying and submitting notice of changes. Every management person on the project  needs to get on the same page and embrace the system. This is the key to long-term profitability  on most government contracts. 

The sample forms we have included here are based on our work with construction and repair/maintenance operations, but if you ask us, we'll adjust the forms to fit your operation.

Basic System Overview

The change order process does not need to be complex, and consists of essentially two steps: 

(1) Propose elective change orders. This could be change orders that make the project better, or  less expensive, or more flexible, etc. You are basically doing this as a favor to your customer. You  don't have any obligation to do so in most cases. You're using your expertise to point out things  that could help the customer.

(2) Mandatory change orders occur where the job site is different than expected, the plans don't work, and/or the drawings are in error. These change orders also include situations where the customer is demanding more than the work scope you bid on. Those are mandatory changes – they must be submitted to the customer. If you don't propose them as changes, you'll pay the costs to perform the extra work and not be able to collect.

On both of these types of change orders, you must take the initiative—and if you don't, you're  wiping out your bottom line job profitability. 

Using a Form System

For mandatory change orders, you need a standard form with date, name, the signature of your  company and the government, as well as a description of the situation that you encountered on the  job site. You will also need a space for the government to respond. Give the form a standardized  name like "Condition Found Report." You can also attach supporting documents to these reports,  including reports from your subcontractors, photographs of the condition, in addition to cost and/or  pricing information, etc. 

For elective changes, an even simpler form called an "Engineering/Construction Improvement  Change Proposal" can be used to make your suggestions. 

Use This Changes Notification System to Maximize the Value of Your Contract

This is a remarkably effective tool for preserving the value of your contract. It has to become a  part of the culture of the whole company and you must be disciplined about submitting them. For  the most part you are just writing and collecting up these documents in real time and don't know  which ones are going to be important later on for recovering increased costs. 

Proper use of the change order processing system requires the right attitude. You want to help your  customer, but you didn't sign up to give them all sorts of free work. There is tension on most jobs  because the client wants to press for as much free work as they can. That must be diplomatically  resisted or your bottom line profitability will erode towards a loss. 

Change Order Accounting 

The contract gives the government the right to demand that you implement change order  accounting for any changed work that will cost more than $100,000. But the contracting officer  must order you to do it; otherwise, there is no obligation to produce segregated cost accounting in  order to get an equitable adjustment of the contract price or recover increased costs through a claim. 

Having said that, you must remember that even with informal and constructive changes the agency and DCAA will certainly take the position that they cannot make payment if you have not kept your changed costs separate.

This situation creates a business decision you must make during performance: many government  contractors, when required to perform a costly informal or constructive change, decide on their  own to open up new cost codes in their accounting system. This makes it easier to obtain adequate  payment later on if you must file a claim.

Overview 

There will be changes and there will be contract interpretation disputes during performance. A systematic and organized approach to handling changes and extra work is a critical component of managing federal contracts profitably.


Example 1: CONDITION FOUND REPORT 


[Individual company logo]  

Date: 

Job:  

Specification:  

Drawing item:  

CONDITION FOUND REPORT 

1. Item/subject: 

2. Description of condition found: 

3. Recommended action: 

4. Owner/prime contractor comment to date: 

5. Costs to implement (form attached): 

6. Change order requested: Yes ___ No ___ 


Issued by:  

__________________  Representative  

_________________  Date 

Received by:  

________________  Representative  

_________________  Date


Example 2: ENGINEERING/CONSTRUCTION IMPROVEMENT CHANGE PROPOSAL


[Individual company logo] 

Date: 

Job: 

Specification: 

Drawing item: 

ENGINEERING/CONSTRUCTION IMPROVEMENT CHANGE PROPOSAL

1. Area of job, drawings, specifications, affidavits? 

2. Specific improvement proposal? 

3. Cost or savings to implement? 

4. Schedule impact? 

Issued by:  

__________________  Representative  

_________________  Date 

Received by:  

________________  Representative  

_________________  Date