Model for Quantifying the Impact of Change Orders on Project Cost for U.S. Roadwork Construction

Change orders are very common in almost every construction project nowadays, often resulting in increases of 5–10% in the contract price. Understanding the consequences of such trends, several studies have attempted to quantify the impact of change orders on the project cost. Most of the studies aimed at the quantification of the change orders were sponsored by contractors’ organizations, where statistical models used to quantify the impact of the change orders on the project cost were based on data supplied by the contractors; a situation that can lead to owner-contractor disagreements related to the quantification method used. In addition, most of the studies tackled commercial and electromechanical work, and very rare studies tackled the field of heavy construction; a field that suffers from change orders because of errors and omissions, scope of work changes, or changes because of unforeseen conditions. This study addresses the need for a statistical model to quantify the increase of the contract price due to change orders in heavy construction projects in Florida. The model is based on data collected from 16 Florida DOT projects with contract values that ranged between $10–$25 million, and that encountered an increase in the contract price from 0.01 to 15%. Eleven variables were analyzed to test their impact on the cost of the change orders. The study concluded that most significant variables that impact the value of the change order, which are (1) the timing of the change order and (2) when the reason for issuing the change order is unforeseen conditions. Two regression models are developed and validated as follows: (1) a model to quantify the percentage increase in the contract price due to the change orders that increase the contract price from 0.01 to 5% and (2) a model to quantify the percentage increase in the contract price due to the change orders that increase the contract price from 5 to 15%. Those models will provide the owner with a retrospective or forward pricing of the change orders, and hence, allow the owner to estimate and utilize contingency amounts.     

Risk Allocation by Law—Cumulative Impact of Change Orders

Change, defined as any event that results in a modification of the original scope, execution time, or cost of work, is inevitable on most construction projects due to the uniqueness of each project and the limited resources of time and money available for planning. There are many factors that may cause a change such as design errors, design changes, additions to the scope, or unknown conditions in the field. For each change, contractors are entitled to an equitable adjustment to the base contract price and schedule for all productivity impacts associated with the change. The focus of this paper is to outline the types of changes that can occur on a construction project and also to spell out the financial recovery possibilities that exist for the contractor for each type of change. There are many historical and current court decisions that shape the outcomes of such claims and determine who holds the risks associated with various project changes. Also, an effective cumulative impact claim contains certain vital elements upon which the final outcome will be determined by the legal system. Last, there are certain actions that a contractor and owner can do to either enhance or mitigate the effectiveness of a potential cumulative impact claim.     

Quantitative Definition of Projects Impacted by Change Orders

Change, defined as any event that results in a modification of the original scope, execution time, or cost of work, is inevitable on most construction projects due to the uniqueness of each project and the limited resources of time and money available for planning. Change may occur on a project for a number of reasons, such as design errors, design changes, additions to the scope, or unknown conditions. For each change, contractors are entitled to an equitable adjustment to the base contract price and schedule for all productivity impacts associated with the change. Changes may or may not have an impact on labor productivity. Existing literature uses subjective evaluation to determine whether the project is impacted. Projects impacted by change cause the contractor to achieve a lower productivity level than planned. The focus of this paper is to quantify whether an electrical or mechanical project is impacted by a change order. Through statistical hypothesis testing, groups of factors that correlate with whether a project is impacted by change orders were identified and used to develop a quantitative definition of impact. Logistic regression techniques were used to develop models that predict the probability of a project being impacted. The results of this research show that percent change, type of trade, estimated and actual peak manpower, processing time of change, overtime, overmanning, and percent change related to design issues are the main factors contributing to the project impact.     

Reconciliation of Owner and Contractor Views in Heavy Construction Projects

Delay and loss of productivity are the two main types of damage experienced by the contractor when the owner issues a change order. Courts have recognized critical path method schedule analysis as the preferred method of identifying and quantifying critical delays. As for the inefficiency damages, there is no direct way of measuring inefficiency due to its qualitative nature and the difficulty of linking the cause of the productivity loss to the damage. Most of the scholarly work published in this area was based on data supplied by the contractors; and that explains why there are discrepancies between what the contractor asks for and what the owner believes the contractor is entitled to. This study addresses the need for a statistical model to quantify the productivity loss from verifiable site data such as owner’s daily reports, change orders, drawings, and specifications, rather than rely solely on contractor surveys. A model is developed and validated to quantify the productivity loss in pipe work in roadway projects due to the change orders. The productivity loss study analyzed two sets of data that include: (1) variables that predict which of the two parties, the owner and the contractor, contributed to the productivity loss; and (2) variables that predict, from the legal viewpoint, productivity losses which only the owner is responsible for. The study showed the difference between what the contractor asked for and what he/she is actually entitled to. This model can be used by both the owner and the contractor to quantify the productivity loss due to change orders, and to offer an objective approach to reconcile their differences. This study concludes with an example to demonstrate the use of the model.     

Contractor’s Opportunistic Bidding Behavior and Equilibrium Price Level in the Construction Market

The competitive bidding system has been to blame for abnormally low bids, which are considered as one of the main causes of poor project quality. Previous studies have regarded the pricing of bidders as an optimum decision based on contractor’s cost and market competition level. However, the sell to produce characteristic of construction projects may induce contractors to offer a low bid and then make up the amount initially sacrificed from beyond-contractual reward (BCR) gained through cutting corners and claims. System dynamics was adopted in this study to develop a contractor’s pricing model with consideration of the dimensions of cost, market competition, and BCR. The model was then examined by statistical analysis of data collected from 44 highway projects in Taiwan. It was found that the equilibrium market price is significantly associated with BCR, which is assumed to be determined by the strictness of the owner’s construction management, including both soundness of contract and tightness in construction supervision. Research results suggest that contractors divide the market into different segments according to the owner’s strictness of construction management and the equilibrium price level of each market segment varies. The price level for projects with a strict owner is remarkably higher than for those with relatively less strict owners. Improvement in the construction management system of projects is crucial to lower the possibility that contractors gain BCR and do opportunistic bidding, and to further enhance project quality.     

Impact of Change Orders on Small Labor-Intensive Projects

In today’s construction, small projects can be just as important if not more important than the larger projects. However, small projects are usually fast track projects, which often involve overlapping design and construction time. Subsequent modifications may be required for the sections that are already under construction. These disruptions to the ongoing project are labeled as change orders. The impact due to changes has been described as the adverse effect upon the unchanged work due to changes in the contract. For this study, 34 projects were selected to develop a statistical model that estimates the amount of labor efficiency lost due to change orders for small projects. The variables in the final model are percent design related changes, percent owner initiated changes, the ratio of actual peak labor to estimated peak labor, the ratio of actual project duration to estimated project duration, and project manager’s percent time on the project. The results of this paper are of value to owners, electrical and mechanical contractors, and construction managers. The model quantifies the impact of change orders by introducing the most important variables that bring the largest disruptions.     

Estimation of Minimum Working Capital for Construction Projects in Malaysia

Forecasting cash requirements is essential for all contractors during the tendering stage since cash flow at the beginning of the project is a major cause of construction companies’ failure. Unfortunately, estimating minimum working capital (MWC) is not the mainstream practice of the majority of contractors in Malaysia, who find that the present models for estimating MWC are cumbersome and seldom give an accurate estimate. Therefore estimates of MWC made during the tendering stage need to be simplified so they can be prepared quickly with minimum input. It is important for the developer or owner to select a qualified contractor with competent financial backing. This paper establishes the relationship among the factors that contribute to MWC requirements and presents a simple model that could be used as a guide to estimate MWC for housing construction projects in Malaysia. The estimation is based on percentages of variables of contract value based on the historical data that influence MWC; the MWC obtained is then expressed in terms of percentage of contract value.     

Impact of Change Orders on Labor Efficiency for Mechanical Construction

Change orders have become an everyday occurrence in construction. It is widely accepted by both owners and contractors that change orders have an effect on the labor efficiency, but these effects are difficult to quantify and frequently lead to disputes. Data from 61 mechanical construction projects were collected to develop a statistical model that estimates the actual amount of labor efficiency lost due to the change orders. The input variables needed in the model are as follows: (1) The original estimated labor hours; (2) impact classification; (3) total estimated change hours; (4) number of change orders; and (5) the timing of changes. The results of this study show that impacted projects have a larger decrease in labor efficiency than unimpacted projects. Additionally, the later a change order occurs in the life of a project the more impact it will have on the labor efficiency. The results appear to be consistent with the intuition of experienced professionals. Although each project has unique characteristics, the resultant model provides owners and contractors with a baseline measure of lost labor efficiency.     

Impact of Change Orders on Labor Efficiency for Electrical Construction

Change orders are a source of many disputes in today's construction industry. The issue at hand is whether or not the execution of change orders work has a negative impact on overall labor efficiency on a construction project. Previous literature demonstrates evidence that change orders affect labor efficiency. Attempts have been made to quantify these impacts by many researchers, with limited success. Using the electrical construction industry, a research study has been conducted to quantify the impacts of change orders on labor efficiency. In this paper, results of hypothesis testing and regression analysis are presented. A linear regression model that estimates the loss of efficiency, based on a number of independent variables, is also presented. The independent variables used in this model are (1) qualitative and quantitative criteria used to determine whether projects are impacted by changes or not; (2) the estimate of change order hours for the project as a percentage of the original estimate of work hours; (3) the estimate of change order hours for the project; and (4) the total number of years that the project manager had worked in the construction industry. Additional projects were used to validate the model, with an average error rate of 5%. The results of this research study are useful for owners, construction managers, general contractors, and electrical specialty contractors, because they provide a means to estimate the impact of a change order under certain project conditions. This research also identifies factors, which, when understood and effectively managed, may be used to mitigate the impact of a change order on project costs and efficiency.     

Causes of Delay in Building Construction Projects in Egypt

Delay in construction projects is considered one of the most common problems causing a multitude of negative effects on the project and its participating parties. This paper aims to identify the main causes of delay in construction projects in Egypt from the point of view of contractors, consultants, and owners. A literature review was conducted to compile a list of delay causes that was purged based on appropriateness to Egypt in seven semistructured interviews. The resulting list of delay causes was subjected to a questionnaire survey for quantitative confirmation and identification of the most important causes of delay. The overall results indicated that the most important causes are: financing by contractor during construction, delays in contractor’s payment by owner, design changes by owner or his agent during construction, partial payments during construction, and nonutilization of professional construction/contractual management. The contractor and owner were found to have opposing views, mostly blaming one another for delays, while the consultant was seen as having a more intermediate view. Results’ analyses suggest that in order to significantly reduce delay a joint effort based on teamwork is required. Furthermore, causes of project delay were discussed based on the type and size of the project.     

A Fuzzy Decision Framework for Contractor Selection

Contractor selection is the process of selecting the most appropriate contractor to deliver the project as specified so that the achievement of the best value for money is ensured. Construction clients are becoming more aware of the fact that selection of a contractor based on tender price alone is quite risky and may lead to the failure of the project in terms of time delay and poor quality standards. Evaluation of contractors based on multiple criteria is, therefore, becoming more popular. Contractor selection in a multicriteria environment is, in essence, largely dependent on the uncertainty inherent in the nature of construction projects and subjective judgment of decision makers (DMs). This paper presents a systematic procedure based on fuzzy set theory to evaluate the capability of a contractor to deliver the project as per the owner’s requirements. The notion of Shapley value is used to determine the global value or relative importance of each criterion in accomplishing the overall objective of the decision-making process. The research reported upon forms part of a larger study that aims to develop a fuzzy decision model for construction contractor selection involving investigating multiple criteria selection tendencies of construction clients, relationship among decision criteria, and construction clients’ preferences of criteria in the contractor selection process. An illustration with a bid evaluation exercise is presented to demonstrate the data requirements and the application of the method in selecting the most appropriate contractor for the project under uncertainty. The proposed model is not intended to supplant the work of decision-making teams in the contractor selection process, but rather to help them make quality evaluations of the available candidate contractors. One major advantage of the proposed method is that it makes the selection process more systematic and realistic as the use of fuzzy set theory allows the DMs to express their assessment of contractors’ performance on decision criteria in linguistic terms rather than as crisp values.     

Profit Measures for Construction Projects

The basic issues related to profit measures of a construction project for the contractor are presented. Specifically, the problem of measuring gross operating profit and financing costs under fluctuating economic environments which has been heretofore inadequately treated in the literature of construction management is addressed. A framework for analyzing financing costs under different financial mechanisms, including the effects of overdraft and other borrowing arrangements, is presented. The general procedure is also applicable to the analysis of the effects of inflation and of work stoppages on profit. Finally, the cost of a project to the owner and the relationship between uncertainty and contract price from the views of both the owner and the contractor are considered.     

Owner–Contractor Work Structures: Process Approach

This paper describes a process to assist project managers, within owner companies, define work relationships between owners and their contractors for capital project development, and execution. The owner–contractor work structure process was developed by the Construction Industry Institute as a step-by-step process for making rational decisions about the most appropriate owner–contractor work structure for capital projects. A work structure is described by a set of project competencies and the extent of involvement of the owner and contractor in performing, leading, and/or providing input with respect to those project competencies. The process is described using a formal process modeling technique. Three case studies, conducted to validate the owner–contractor work structure process, are discussed. The results from these case studies suggested some basic changes to the process that would enhance its use in practice. A modified owner–contractor work structure process is then presented.     

Collaborative Negotiation Behaviors in Thai Construction Projects

When construction contractors encounter difficulties and changes from what was originally stated in contract documents, fair and equitable adjustments are required. Owners use construction management (CM) consultants to act as primary negotiators on their behalf. Throughout project execution, seamless negotiations take place that are intended to improve the relationships that are critical to successful project delivery. This study investigates the collaborative behaviors between CM consultants and contractors acting as negotiators in adverse situations. Characteristics of collaborative negotiations are identified as being rational, goal-oriented, reactive, cooperative, and adaptive. Four negotiable situations were investigated: change orders, errors in drawings and specifications, differing site conditions, and delayed progress payments. The research for this study used a questionnaire survey of 83 project managers from 51 CM consultants and 32 contractor companies focused on building construction in Thailand. The results show significant differences in collaborative behavior between CM consultants and contractors. Contractors were much more aware of the outcome of negotiations, which could lead them to be less collaborative. Both parties strongly regarded rationality as normal practice. Adaptability to new approaches proved difficult in negotiations. This study also proposes strategies and tactics for better collaboration to achieve win-win results in negotiations.     

Contractual Incentives

Contract incentives are the means by which an owner intends to secure certain project goals through the contracting process. Incentive contracting is designed primarily to reduce cost in negotiated contracts through profit sharing ratios, which should improve on the efficiency of cost reimbursable contracts. In the process, financial risk and control are shared by the owner and contractor, according to a ratio which is established in the early stages of project design. Contractual incentives are used frequently in construction to reduce overall project time. However, there is a lack of published research on the theory and consequences of the use of incentives in construction. Studies in government research and development contracts using incentives shows that contractors may not always behave in the fashion intended by owners designing such contracts. The apparent reason is that the risk a contractor assumes under conditions of limited scope and design information biases the setting of targets, so that overruns∕underruns are more dependent on where targets are set, rather than on sharing ratios. In the construction industry this is apparently recognized, and targets are not fixed until design is approximately 40%–60% complete. Moreover, as the contractor and owner attain more knowledge of the project, both parties should attempt to reduce owner risk and control.     

Quantifying the Impact of Schedule Compression on Labor Productivity for Mechanical and Sheet Metal Contractor

In a typical construction project, a contractor may often find that the time originally allotted to perform the work has been severely reduced. The reduction of time available to complete a project is commonly known throughout the construction industry as schedule compression. Schedule compression negatively impacts labor productivity and consequently becomes a source of dispute between owners and contractors. This paper examines how schedule compression affects construction labor productivity and provides a model quantifying the impact of schedule compression on labor productivity based on data collected from 66 mechanical and 37 sheet metal projects across the United States. The model can be used in a proactive manner to reduce productivity losses by managing the factors affecting productivity under the situation of schedule compression. Another useful application of the model is its use as a litigation avoidance tool after the completion of a project.     

Performance Modeling for Contractor Selection

This paper proposes a contractor selection system that incorporates the contractor’s performance prediction as one of the criteria for selection. This research was developed working with an owner organization that was interested in developing a framework for evaluating contractors for future work. A modeling framework, developed in previous research, was used to develop a conceptual model of a project that depicts a causal structure of the variables, risks, and interactions that affect a contractor’s performance for a specific project from the owner’s point of view. The conceptual model helps to identify information needed for a comprehensive evaluation; some information can be readily available from historical records, while other can be unavailable and can be replaced by estimates based on experience. Ideally, over time, the owner should collect most of the information required for future evaluations. A mathematical component of the model can generate predictions of multiple project performance outcomes for each contractor under evaluation; these predictions and a contractors’ bid prices are then used for contractor evaluation purposes.     

Risk Allocation and Risk Handling of Highway Projects in Taiwan

Risks always exist in construction projects and often cause schedule delay or cost overrun. Risk management is a key issue in project management. The first step of risk management is risk identification. It includes the recognition of potential risk event conditions in the project and the clarification of risk responsibilities. We conducted multiple-case studies using a systematic analytical procedure to identify risks in highway projects in Taiwan, to recognize risk allocation by contract clauses, and to analyze the influence of risk allocation on the contractor’s risk handling strategies. The results show that the owner allocates risks by stipulating specific contract clauses into five kinds of risk allocation conditions. If a risk is more controllable by the contractor, the owner has a greater tendency to allocate the risk to the contractor. Risk allocation determines which kinds of risks the contractor would take and influences the contractor’s risk handling decisions. The analysis furthermore indicates that, if the probability of a certain risk event condition is uncontrollable, then with the increasing possibility of taking the risk, the contractor’s tendency of risk handling changes from actively transferring the risk to passively retaining the risk. In contrast, if a risk is controllable and certainly allocated to the contractor, the contractor tends to take the initiative to reduce the impact caused by the risk event rather than retain the risk.     

Contractor Not Entitled to Recover for Extra Work in Absence of Written Authorization

Virtually every construction contract contains a changes clause that permits an owner to make changes to the work or accommodate unanticipated changes and provides a mechanism for the contractor to be paid for such changes. Usually, the changes provision requires the contractor to receive a written change order, or at least written authorization, prior to proceeding with the work or risk not being paid for that extra work. Likewise, bid documents usually require any interpretations be in writing in order for them to be binding. Unfortunately, far too often contractors bid on a job or perform extra work without first obtaining the written clarification or authorization. While some owners may pay for the work anyway, they are usually not required to do so in the absence of a waiver of the contract requirement. In Seneca Valley, Inc. v. Village of Caldwell, a contractor who did not receive the appropriate written authorization prior to performing extra work was denied recovery for that work.     

Effects of Delivery Systems on Change Order Size and Frequency in Mechanical Construction

Change orders represent one of the largest sources of cost growth on building construction projects. Field generated, or “unforeseen” change orders can also be highly disruptive to field productivity. Design-build delivery methods can potentially help minimize change orders on construction projects. This study was performed to closely examine the effects of delivery methods on the frequency and magnitude of change orders in mechanical construction, and how design-build business practices can be used to minimize the frequency of field generated chance orders. In a study of 598 change orders occurring on 120 construction projects performed by the same contractor, the total number of change orders was found to be close to the same on design-build and design-bid-build projects, however an 87% decrease in the average number of unforeseen change orders was observed on design-build projects versus design-bid-build projects. In addition, the average size of unforeseen change orders was 86% smaller on design-build projects. A detailed and qualified presentation of the research methodology and resulting data is provided. Key attributes and business practices leading to the results are discussed and practical applications of this research for owners and contractors are provided.