By: Tiffany C. Raush Associate, Jones Walker, LLP.
Accuracy, clarity, simplicity, and consistency. These are the four qualities of top-notch change order procedures. Yes, it matters what you say in your change order procedures—addressing deadlines, approval processes, cost calculations, as a start. But, it also matters how you say it.
Occasionally, there are no written change order procedures at all. But more often, we see in disputes that change orders fell through the cracks not because the contractor did not have procedures in place, but rather because those procedures were too difficult to use or too generic to be useful and ended up collecting dust. One of the key tools in effective change order management is having in place effective change order procedures from the start of the project. Confusing, complicated change order procedures are barely worse than no change order procedures at all.
It may seem a tedious, small thing to draft and consistently use change order procedures on every project. But this one small thing can save you from a gaping hole in your claim down the road. That hole may even be the complete waiver of your claim, depending on the contract language.
We know we need them, and yet …
According to a 2012 study, change orders typically increase project costs by 11-15% and increase project schedule by approximately 20%. (Evaluation of Change Management Efficiency of Construction Contractors, HBRC Journal (2013) 9, 77-85, available at http://ees.elsevier.com/jbrcj) Given the inevitability of change orders, all parties are incentivized to minimize their risk of absorbing such increased costs and schedule. For the owner, that means contract language that restricts change orders to limited circumstances and imposes strict notice requirements. For the contractor, that means effective change order management.
Yet, in that same 2012 Evaluation of Change Management Efficiency of Construction Contractors study, 43% of respondents stated that they do not have a well-defined change order management system and 76% of respondents stated that clear procedures for handling change orders from the beginning of the project were only “sometimes” or “seldom” in place.
Using Accuracy, Clarity, Simplicity, and Consistency to Create Effective Change Order Procedures
Producing effective procedures to manage change orders at the project level is not easy. If it were—as the saying goes—everyone would do it. Effective procedures require four things: (1) accuracy, (2) clarity, (3) simplicity, and (4) consistency. These four things are all designed to minimize behavioral risks inherent in the humans applying the procedures.
- Accuracy – Begin with the Contract in Mind.
In the 7 Habits of Highly Effective People, Steven Covey inspired countless millions with the phrase “Begin with the End in Mind” (Habit 2). To produce effective change order management procedures, we must “Begin with the Contract in Mind.”
The best written change order procedures (i.e., clear, simple, consistent procedures) will be worthless if they are not accurate based on the contract requirements. The first step in drafting change order procedures is a detailed review of the contract to identify the requirements that must go into the procedures. This is not accomplished by a simple review of the change order provision, but the whole contract.
For example, change order provisions invariably require “Notice” (capital “N”). Is this a defined term in the contract? What does it mean? Who has to receive the Notice? Is email sufficient? Is there a deadline (Hint: there is)? Is the deadline determined by when the owner has to receive the Notice? Or is the deadline determined by when the contractor must send the Notice? Do you calculate the deadline using calendar days or business days? Do holidays count? What constitutes a “holiday”? The answers to these questions are likely scattered throughout the contract in articles dealing with definitions, personnel, and notification in addition to the change order provision.
- Clarity – Say what now?
Clarity is probably the most elusive of all four requirements. Why? Two reasons.
First, the person drafting the procedures (hopefully) conducted the detailed review of the contract mentioned above. That person has a knowledge base when drafting the procedures. But the person using the procedures on the project maybe did not review the contract that closely. Unless the drafter prepares the procedures with the end user’s knowledge base in mind, the procedures are likely to be unclear.
Second, writing clearly is hard. Clarity means short sentences, bullet points, numbered steps, and only using words or acronyms the end user will know. Diagrams, flow charts, drawings, and figures can be great add-ons to ensure clarity. They should not be relied on exclusively, however. Rather, a simple (see point 3 below) flow-chart that reinforces the written procedure helps the end user visualize what he or she just read.
- Simplicity – K.I.S.S. is Still the Golden Rule.
Reportedly, K.I.S.S. – Keep It Simple, Stupid – was a phrase coined by Rear Admiral Paul D. Stroop, U.S. Navy, in the 1960s to increase reliability and reduce costs of military equipment produced by the Navy’s weapons bureau. While it may sound crass today, it is still the golden rule for drafting procedures.
While clarity and simplicity are related, they are not the same. Clarity asks: can the end user understand this? Simplicity asks: is this easy for the end user to use? For example, change orders typically must go through levels of approval. The 2012 study referenced earlier found most frequently change orders must go through two levels of approval. But, 20% of respondents said three levels of approval were required. And a full 7% of study participants said more than three levels of approval were required for change orders. While there may be reasons for requiring more than three levels of approval for a change order, that is going to be daunting at the project level to execute effectively.
- Consistency – Internal and Organizational Consistency Ties It All Together.
Consistency here is two parts: (1) internal consistency in the project change order procedures themselves and (2) organizational consistency in developing change order procedures across projects.
Internal consistency means using the same key words throughout the procedures. For example, if you refer to the OSBL on page 3, don’t call the same area the “Cooling Towers” on another page. Internal consistency also means using colors consistently in diagrams and flow-charts. If the color green indicates “Costs” in Figure 1, don’t use red to indicate “Costs” in Figure 10.
Organizational consistency, in a way, is the flipside of Begin with the Contract in Mind. Organization consistency means, to the extent possible while adhering to the specific contract requirements, maintain consistent change order procedures across the organization no matter the contract or the project. If you require two levels of approval for change orders across all projects, likely the end user of the change order procedures on any specific project will be familiar with that procedure from previous projects. If your organization’s change order procedures always address notice deadlines in “Section II” titled “Deadlines,” the end user will know just where to look for that information.
Give Them a Good Dust Off When Appropriate
The most eternal truth about procedures is that they can always be improved. Take the time to consider whether the procedures are working well. If not, where did they fail? Are there changes to the organization’s procedures that could be implemented going forward to improve?
A word of caution: it may tempting to engage in this review when a project is falling off the rails. Don’t. Many a well-intended “lessons learned” memo have become great fodder for uncomfortable depositions. Instead, wait until the fires have cooled and the review can be safely conducted on the other side.
To determine if change order procedures are “working well” necessarily requires that your project team is using the procedures. The goal is to have change order procedures that are so clear, simple, and consistent they are practically automatic for your team. Change order management software can be a useful tool. But even with change order management software, someone is getting information from somewhere and inputting it at some time. Getting that done right every time is critical to preserving your right to claims for time and compensation.
Concluding Remarks
Drafting effective change order procedures takes a little front end effort. But on a time-crunched, fast-paced, ever-changing construction project, change order procedures provide rules to live by. Make sure your procedures are accurate, clear to the end user, simple to use, and internally and organizationally consistent.
And last, but not least, make sure your team uses them.
The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.