Bidding Errors and Change Orders – Avoiding a Nightmare: Part One

On October 23, 2007 by

The goal in the design of any structure must be excellence, not perfection. Inevitably, there will be issues that reveal themselves during construction which are impossible to predict in the conception phase of any new project. Among the most common design alterations involve site conditions that differ from design expectations; an owner’s desire to alter the design in some way (“change in scope”); and the plans or specifications containing an inadvertent omission.

Owners, architects, and contractors approach this inevitability very differently. Owners prefer to have as little change as possible, unless they are requesting a design change, while architects have the overriding concern that the integrity of their design be protected. Meanwhile, experienced contractors know that refinements or minor adjustments will need to be made during the construction process to the design documents — even the highest quality drawings and specifications will need some tweaking as building progresses.

The inevitably of change during the course of construction does not mandate that major alterations to the initial schedule and design concepts should be expected. If all the participants do their parts well, the project should be completed with a minimum of change. Unfortunately, this is not always the case.

Bidding Errors

With any construction project, the owner and architect begin with a goal in mind. Once the design has evolved, and the initial drawings have been finalized, the general contractor enters the picture with the goal of turning the drawings into a three-dimensional reality. The owner may well have chosen both the architect and the contractor through a bidding process: here, several competitors compete for the work, and the owner chooses what appears to be the best bid for the job.

The general contractor will usually select the sub-contractors through a bidding process, as well. Additionally, the architect may use a bidding process to select engineers and other supporting professionals in the design phase.

Therefore, the owner choosing bids for both the architect and the general contractor may be deciding between bids that are built upon a prior bidding process. Bids upon bids are the underpinnings of the initial construction agreements.

It is here that bidding errors occur. In an attempt to land the contract, bids can be compiled too quickly, giving estimates without sufficient detail and cost support. Sometimes, bids are intentionally low-balled. The lowest bid may not be the best bid, and the owner that does not carefully study all the bids before him is inviting the aftermath of a sloppy bid: expensive and time-consuming bidding errors.

Bidding errors will require costly and preventable changes to be made during construction. The issue of which parties are to be held responsible for the cost in both time and money can also create expense: many lawsuits have resulted from disputes between owners, architects, and contractors over who pays what percentage of the costs caused by bidding errors.

Owner Abuse of Opportunity to Make Changes

Owners have the right to make changes to the project: it’s their property, after all, that’s being built. However, changes requested by an owner can skyrocket the costs of construction. What appears to be a simple request to change the size of a window or door may mean tremendous expense if framing has already occurred, for example.

Architect Administration, Design Error, and Changes to the Project

Architects usually administer the construction project. They oversee the building as it progresses, they answer any questions that the contractor may have regarding the plans and specifications, and they approve any changes made to the project. Architects can also make alterations to the design drawings as they view the site progression.

This may be a predictable addition: for example, not all the shop drawings and materials specifications are known when the work is bid. Sometimes, this is aesthetic. Occasionally, this is due to small or large errors in the design.

If the architect is not prompt in approving changes, or becomes excessive in the number of design changes he makes, then construction can be halted or delayed. Construction involves an inter-dependent relationship between many craftsmen, suppliers, tradesmen, and the like: an architect can effectively stop the job with excessive design changes, or tardy approvals to a requested change.

Contractor Changes to the Project

Contractors are usually responsible for most of the requested changes on a project. As building progresses, there will be discoveries on site of needed changes to the design documents. However, contractors who make changes without approval can cost time and money if their changes are faulty and need to be redone. Contractors who request excessive changes can also create tremendous expense: they may do so because of design error, but they may also be doing so to cover their own bidding errors or substandard performance.

The Change Order Process

In order to combat and control changes during the construction process, the construction industry has standardized the use of “change orders.” Change orders alter or modify the final documents upon which the construction contracts are based. They direct a change to the work plan which will impact the time and money needed to finish the project.

Usually, the change orders are written; however, some states – including Louisiana and Washington – allow for oral change orders. See, Cajun Contractors, Inc. v. Fleming Const. Co., Inc., 951 So.2d 208 (La.App 1 Cir. 2006), citing Pelican Electrical Contractors v. Neumeyer, 419 So.2d 1, 5 (La.App. 4 Cir.), writ denied, 423 So.2d 1150 (La.1982); CKP, Inc. v. GRS Const. Co., 63 Wash.App. 601 (1991); Bjerkeseth v. Lysnes 173 Wash 229 (Wash 1933).

In fact, change orders are so commonplace that they have become standardized. The form used most often has been provided by the American Institute of Architects, see “AIA Document G701™-2001, Change Order.”

RFIs

Requests for Information (“RFIs”) are not necessarily change orders. They are written communications between the contractor and the architect, where the contractor asks for information regarding the design documents. RFIs become change orders if they are properly approved as such by the architect, and sometimes, by the owner as well.

Since the owner usually has one contract with the architect, and a separate one with the contractor, the architect and the contractor need a method to communicate efficiently and fast, without the owner as a go-between, and the RFI has evolved to meet that need. The architect will provide a written form to the contractor to be used for all RFIs.

The American Institute of Architects describes this process in its section 3.2 of A201 the General Conditions for Construction (1997):

Before starting each portion of the Work, the Contractor shall carefully study and compare the various Drawings and other Contract Documents relative to that portion of the Work, as well as the information furnished by the Owner… These obligations are for the purpose of facilitating construction by the Contractor and are not for the purpose of discovering error, omissions, or inconsistencies in the Contract Documents; however, any errors, inconsistencies or omissions discovered by the Contractor shall be reported promptly to the Architect as a Request for Information in such form as the Architect may require.

RFIs are used by contractors when they find an omission in the documents, something unexpected is discovered on the site, or they meet with a discrepancy between various plans and specifications. RFIs also confirm information, gather notes from site visits and delineate meeting minutes.

Change Order Conflicts

Owners, particularly those building their new residential home, are suspicious of change orders as costing them money in the form of cost overruns and possibly even price gouging by the contractor, as well as causing delays in finishing the job. Owners want to avoid change orders.

Contractors, meanwhile, would prefer to maximize change orders on a project because they lose money with discounted change orders, as well as ones which are ignored, outright. Too often, they argue, the time and expense costs associated with a change are eaten by the general contractor or his subs.

Change Orders do solve issues. If everyone is cooperative, problems can be easily solved. However, when a change will impact either money or time, especially in significant amounts, controversies can result. This is particularly true when the change request contains ambiguities or unclear terms.

To avoid deadlocks, most construction contracts give detailed instructions on how change orders are to be written, including what steps must be undertaken before any change in work (more or less) is allowed. Change orders usually have to give the amount of dollars as well as the amount of time involved in the request. They usually have to be submitted within a certain number of days before the scheduled work, and signed by several designated individuals authorized in advance to approve or deny each change request.

Nevertheless, once construction begins and the number of RFIs escalates as well as the number of change orders, tempers may flare. Work stoppages may be threatened, termination of contracts may be considered, and heated arguments may arise if oral change orders are denied compensation because they weren’t put on paper. Delay damages can mount.

The construction project can become a nightmare as the necessity of requested changes is debated. The dispute can involve not only the need for the change, but who will bear the cost of the change.

Under the law, change orders are characterized as modifications to a written contract. Until a change order is valid, the old contract documents control. However, the legal determination of whether the change order is valid may necessitate the filing of lawsuits or the entering of dispute resolution forums that all the parties would be better off avoiding.

For example, contractors faced with time deadlines may proceed in good faith under oral change orders, only to have them later disputed because they were not put in writing. In some states, including Louisiana and Washington, oral change orders can exist under the contractual defenses of waiver, estoppel, and unjust enrichment. Unfortunately, that contractor may have to go to court to prove his point.

How to avoid this nightmare?

Over time, several methods for avoiding litigation and encouraging a smooth change process during construction have been advanced. For a discussion of these methods, see next month’s Bidding Errors and Change Orders – Avoiding a Nightmare: Part 2.

On Oct 23, 2007

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