Controlling Construction Change Orders
Change orders. The words are enough to send a chill up the spine of anyone who is about to build a hotel. Change orders often add unexpected construction costs and can create a precarious relationship among the project builder, designer and owner. Your best defense when building a hotel is to understand the potential for change orders and to focus your efforts on controlling the areas that put your project most at risk.
HOW MUCH DO CHANGE ORDERS COST?
There's always a cost when you alter the work outlined in construction contracts. To implement a change, you often need more equipment, material or labor. Overhead costs climb, as do the hidden costs associated with changing direction.
How great is the cost of change orders? Change orders typically average two to five percent of construction costs, but can easily soar to more than 10 percent, depending upon the degree of changes.
WHAT CAUSES CHANGE ORDERS?
Change orders can be grouped into three categories: unforeseen conditions, design issues and changes in scope.
Unforeseen conditions include such things as rock or unsuitable soils encountered during excavation, or surprises uncovered during the renovation of an existing facility. This category also includes change orders that involve time delays due to unexpected severe weather or changes in the building codes enacted after a project starts.
Design-related change orders can be more complicated than a simple human error. Interpretation of the building codes, accommodating changes from equipment manufacturers or utility companies, or modifying details to better suit field conditions all can result in change orders.
Changes in scope make up the third category. Most hotel owners don't dispute the fact that if they add something to a project, a corresponding change order will be generated. Unfortunately, not all scope changes gain the full consensus of the owner. Sometimes, the scope change relates to something that the owner “thought” he told the designer. Or perhaps the owner thought the builder “should have” anticipated expectations for a certain detail. Problems also arise when there are multiple individuals involved on behalf of a hotel owner, and each one adds input during the construction project.
Changes in scope requested by a hotel franchisor can also add significant cost, depending on how far along the construction has progressed. To avoid last-minute changes, hotel owners should verify with the franchisor during the buying process which version of prototype drawings is required and how soon the next version will be released.
CONTROLLING CHANGE ORDERS
While the total elimination of change orders may not be possible for most projects, you can take steps to minimize their potential disruption to a project. Any change order represents a risk to a project's schedule and financial performance.
Investing up front can eliminate some risks
Some unforeseen conditions are only unforeseen because no one took the time or invested the dollars to investigate thoroughly enough. Take rock as an example. There are techniques to test for the presence of rock beneath the surface. Something as simple as drilling holes on the site in a grid pattern can be very useful. A complete geotechnical report should be ordered for each project. These extra steps cost money, however. On a site where rock is not expected to be problematic based on past experience, these investigations may not be prudent.
Failing to invest properly in design also can add significantly to your risk of change orders. A poorly thought-out design, with insufficient detailing to direct the builder effectively, is a certain path to disaster. Most government agencies have long since learned this lesson, and exclude the purchase of design services from the competitive bidding process. There is no benefit in using the low-bid designer if it results in construction change orders down the road.
Keep the big picture in mind
The design cost is usually less than five percent of the total project cost. If a good design effort can reduce change orders by two percent of project cost, then it's worth paying up to an additional 40 percent of the design fee for those services.
Allocate risks where you need to
Certain risks can be “sold” on a construction project for a flat fee. For example, many excavators will provide alternative pricing to perform all excavation on an unclassified basis. That means that the materials they encounter during excavation are not classified as “rock” or “soil.” Whatever they encounter, they remove for one lump-sum price. To do so, those excavators will either rely on geotechnical reports produced by experts, or dig some test holes on the site.
Using the design-build contracting approach essentially sells the risk for any design errors or omissions to the design-builder.
Selling risk can effectively control the volatility of project costs for a hotel owner. The practice has a price, however. It may also reduce the number of builders willing to submit proposals for your project.
USE THE RIGHT CONTRACTING APPROACH
A well-written contract is the best way to minimize the impact of change orders. It is important to be clear about which risks you are willing to take, and which risks are to be borne by the builder. This is a matter of both what type of contracting method you chose (i.e., design-build to pass along risk of design errors) and the language in those contracts.
Sometimes, the right financial decision will be for the hotel owner to keep the risk because it would be too costly to identify all of the unknowns. That could be the case with a renovation project where the probability of unforeseen conditions is too great to sell at a feasible cost. In those cases, contract terms can focus on how the builder will be compensated for the inevitable surprises. By limiting disruption of the flow of the project, and pre-establishing the basis for compensation, the owner will minimize the total project cost. Construction management contracts are well-suited for this application.
Always have a contingency
Regardless of your approach, construction projects all carry some degree of risk for change orders, so be advised to carry a contingency on your project. How much depends on the nature of your project and your financial constraints.
Michel Gibeault, AIA, is vice president of business development for High Construction Company (www.HighConstruction.com), a construction firm serving Pennsylvania, Maryland, Delaware, and New Jersey. Contact him at (717) 390-4601 or email@example.com.
THE BIG IDEAS
Tips for controlling change orders:
Always keep a contingency for site work, even if the excavation is unclassified. There are many change order risks on the site that would be outside of that protection, such as finding unsuitable soils at the bottom of the excavation, or finding underground utilities that differ from what was expected.
Consider a geophysical investigation. The services are less expensive than in the past, and can be very useful in mapping underground rock formations. Today's GPS technology eliminates the need to have a survey crew pinpoint the grid points that can be mapped onto the site plans.
Ask for input from the designer and builder regarding contingencies. They are experienced with many projects, and can have valuable input regarding what risks there may be for your project.
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