Change Orders and Consensus Contracts

Transcription

1 Change Orders and Consensus Contracts Change Orders and Consensus Contracts Greg Long Allen Estes Long Electric Company Gordon & Rees This session is eligible for 2 Continuing Education Hours. For these hours to appear on your certificate, you must: Have your badge scanned at the door Attend 90% of this presentation Fill out the online evaluation for this session: 2 Attendees Only 1

2 Purpose for this Session Present a systematic, standardized and fair process for the pricing of change orders Discuss opportunities to promote a standardized change order protocol that all Owners, Architects, Engineers, General Contractors and Subcontractors could adopt for all construction contracts through ConsensusDocs 3 Learning Objectives Learn how to determine direct job costs Review the components and calculations for overhead and profit Learn how to document consequential cost claims Know where to go to find the literature that supports your CO requests 4 Attendees Only 2

3 Change Order Protocol Greater Toronto Electrical Contractors Association The Master Insulator s Association of Ontario, Inc. Mechanical Contractors Association: British Columbia Canada Hamilton New Brunswick Ontario Saskatchewan, Inc. Toronto Ontario Refrigeration & Air Conditioning Contractors Association National Trade Contractors Coalition of Canada Toronto Construction Association Toronto Sheet Metal Contractors Association 5 Change Order Documents 6 Attendees Only 3

4 What is a Change Order? They are an essential part of every construction project They are typically issued by the owner or designer to the general contractor or construction manager to accommodate alterations to the original scope of work as defined in the contract documents. 7 What is a Change Order (contd.) A change order is defined as a written request, agreed to by the Architect, Owner and Contractor authorizing a change to the scope of work, contract sum and possible extension of time. 8 Attendees Only 4

5 What is a Change Directive According to clause of the AIA standard document A and clause 8.2 of the ConsensusDocs standard document , the owner may issue a written order directing a change in the work prior to agreement with the contractor on the adjustment, if any, in the contract price or the contract time or both. After a Change Directive has been issued, both parties must negotiate expeditiously and in good faith for adjustments to the contract price and/or the contract time, and then record this agreement in a Change Order. 9 Components of a Change Order Direct Costs Labor Material Equipment Direct CO related expenses Indirect Costs Overhead Profit Consequential Costs Lost Labor Productivity Project Delays Other Costs 10 Attendees Only 5

6 Direct Costs These are all of the costs that can be directly attributed to the change order request Direct Labor List in detail What productivity rates should apply? What is included in the hourly rate? 11 Direct Cost Labor= Labor rate x Labor hours Labor supervision= Foreman x GF Project supervision= Project managers, Project engineer, Superintendent Material Subcontractors Equipment 12 Attendees Only 6

7 13 Material & Equipment List in detail Price should be based on published trade prices or rental rate sheets 14 Attendees Only 7

8 Other Direct Job Expenses List in detail 15 Overhead & Profit Overhead is all the costs required to run your company even if you have no work Office rental, maintenance, utilities and expenses, office equipment and supplies Officer s and Office Salaries (estimators) Property taxes, business licenses and auto insurance Dues and subscriptions Advertising and telephones 16 Attendees Only 8

9 Sample Income Statement Percent Income (Contract Revenue) $ 1,295, % Cost of Construction Job Labor 426, % Job Material 264, % Job Sub Contract 117, % Job Misc. 28, % Job Burden 91, % Total Cost of Construction $ 930, % Gross Profit $ 365, % General & Administrative Office Rent 12, % Office Utilities 1, % Equipment Expense 4, % Property Taxes 9, % Dues & Subscriptions 1, % Postage % Advertising 2, % Legal & Accounting 1, % Office Salaries 125, % Estimators Salaries 87, % Total G & A 246, % Operating Profit 118, % 17 Overhead (contd.) What is your Overhead Percent? Overhead $ / Total Company Sales $ Company Revenue Overhead OH % $ 1,295,678 $ 246,435 19% In fact according to Electri-International research doc F3405a that took an average from (12) different studies and publications the average turned out to be 19.16% 18 Attendees Only 9

10 Now for the Quiz Overhead (contd.) What would you add as a percent to a Change Order that had a $15,000 cost of Labor, Material and Direct Cost to recover that 19% Overhead? All Direct Costs $ 15,000 OH % 19% $ 2,850 Total with OH $ 17,850 Overhead Recovery 16% 19 Overhead (contd.) What is the correct % when applying to all Direct Costs? OH % / (1- OH%) 0.19 / (1-0.19) 0.19 / % All Direct Costs $ 15,000 OH % 23.5% $ 3,525 Total with OH $ 18,525 Overhead Recovery 19.0% 20 Attendees Only 10

11 Profit Profit is generally defined as the amount of money a company makes after accounting for all costs and expenses (including overhead) What is a reasonable Profit Somewhere between 5% and 10%? 21 Profit (contd.) Using our overhead example the calculation for profit is: Profit % / (1- Profit %) 0.05 / % All Direct Costs $ 15,000 OH % 23.5% $ 3,525 Total with OH $ 18,525 Markup 5.3% $ 982 Total with Markup $ 19,507 Profit 5% 22 Attendees Only 11

12 Consequential Costs (Impact Factors) These costs are incurred due to time and scope changes, which may impact overall project costs or duration It is important to include these potential costs on the Change Order with quantification and documentation There is substantial literature and case studies available to backup these factors 23 What are these Factors? Labor productivity factors May decrease productivity or increase labor hours Added cost factors May increase change order costs Project & Field condition factors May cause project delays 24 Attendees Only 12

13 Stacking of Trades Labor Productivity Loss Operations take place within physically limited space with other contractors resulting in inability to locate tools, increased loss of tools and additional safety hazards Loss ranges 10% / 20% / 30% Overtime Lowers work output and efficiency through physical fatigue and poor mental attitude Loss ranges 10% / 15% / 20% 25 Impact Factors (contd.) 26 Attendees Only 13

14 27 Bringing it all Together We have taken off a complete list of material and labor that will be needed to complete the change request Priced the material and applied the appropriate labor productivity column Listed all of the other direct costs Applied the appropriate OH and MU Listed all of the appropriate Labor Factors and other consequential costs 28 Attendees Only 14

15 29 30 Attendees Only 15

16 Key Takeaways Owners are as unsure about change order related issues as are contractors Contractors should think of OH and Profit percentages as they relate to the total change order amount Most consequential / labor factor costs can either be included as part of directly recoverable costs or as a separate category The burden is on the contractor to detail and substantiate the calculations 31 Change Order Documents 32 Attendees Only 16

17 Change Order Reform Next Steps Collaborate with: National Electrical Contractors Association Sheet Metal & Air Contractors Association Mechanical Contractors Association American Subcontractors Association United Contractors Association Associated General Contractors of America American Institute of Architects Construction Financial Management Association (CFMA) Financial Accounting Standards Board (FASB) Share with Colleagues and Customers 33 Referenced Sources Electri-International publication F3405a Change Order Guidelines Electri-International publication F3405b Change Order Guidelines AIA A201 (2007) ConsensusDocs 200 (2012) EJCDC C-700 (2007) CCDC 2 (2008) CFMA (2013) RS Means (2013) FASB 34 Attendees Only 17

18 The ConsensusDocs Coalition 40 Construction Industry Associations 35 Why ConsensusDocs? Removes the perception of bias Favors interests of individual drafting association Contract modifications often exceed the original standard Parties often try to push risk away rather manage An industry trending towards collaboration 36 Attendees Only 18

19 ConsensusDocs Contract Drafting Principles Best Practices + Fair Risk = Better Projects Reduce transactional costs and inefficiencies Change zero-sum to win-win Empower owners Written in plain English 37 Does Your Contract Facilitate Success? It is ironic that the one industry in the country which more than all others depends upon coordination, cooperation and teamwork among multiple participants should be the country s most adversarial industry. Construction Industry Institute 38 Attendees Only 19

20 Contracts, Make Business Not War. A contract should clearly express the parties intentions obligations, responsibilities, and their respective rights Project success is a win for all A Bad Project is usually a failure for all Proven Results for St of Iowa Iowa DAS using AIA vs ConsensusDocs 40 Attendees Only 20

21 ConsensusDocs could be the vehicle our contractors need to make improvements to change order and payment language IF they are truly a Consensus Organization. Federal Work NECA ConsensusDocs Public Work NECA Contractor Input Private Industry 1. What is the Process for submitting proposed revisions. 2. Who approves the revisions to the contracts 3. How often can revisions be made Maybe a Future NECA Committee 41 ConsensusDocs Process Documents updated every five years Public comments reviewed by the Contract Content Advisory Council of which NECA is a member 75% of each stakeholder segment must vote to recommend the change All member organizations vote to adopt the contract 42 Attendees Only 21

22 8.1 CHANGE ORDER Constructor may request or Owner may order changes in the Work or the timing or sequencing of the Work that impact the Contract Price or the Contract Time. All such changes in the Work that affect Contract Time or Contract Price shall be formalized in a Change Order and processed in accordance with this article For changes in the Work, the Parties shall negotiate an appropriate adjustment to the Contract Price or the Contract Time in good faith and conclude negotiations as expeditiously as possible. Acceptance of the Change Order and any adjustment in the Contract Price or Contract Time shall not be unreasonably withheld NO OBLIGATION TO PERFORM Constructor shall not be obligated to perform changes in the Work without a Change Order or Interim Directive. 44 Attendees Only 22

23 8.2 INTERIM DIRECTIVES Owner may issue an Interim Directive directing a change in the Work before agreeing on an adjustment to Contract Price or Contract Time, or directing Constructor to perform Work that Owner believes is not a change. If the Parties disagree that the Interim Directed work is within the scope of the Work, Constructor shall perform the disputed Work and furnish Owner with an estimate of the costs to perform the disputed work in accordance with Owner's interpretations The Parties shall negotiate expeditiously and in good faith for appropriate adjustments, as applicable, to the Contract Price or the Contract Time arising out of an Interim Directive. As the directed Work is performed, Constructor shall submit its costs for such Work with its application for payment beginning with the next application for payment within thirty (30) Days of the issuance of the Interim Directive. If there is a dispute as to the cost to Owner, Owner shall pay Constructor fifty percent (50%) of its actual (incurred or committed) cost to perform such Work. 46 Attendees Only 23

24 8.3 DETERMINATION OF COST An increase or decrease in the Contract Price resulting from a change in the Work shall be determined by one or more of the following methods: unit prices set forth in this Agreement or as subsequently agreed; a mutually accepted, itemized lump sum; or COST OF THE WORK Salaries of Constructor's employees when stationed at the field office to the extent necessary to complete the applicable Work, employees engaged on the road expediting the production or transportation of material and equipment, and supervisory employees from the principal or branch office as mutually agreed by the Parties in writing. 48 Attendees Only 24

25 Cost of all materials, supplies, and equipment incorporated in the Work, including costs of inspection and testing if not provided by Owner, transportation, storage, and handling Payments made by Constructor to Subcontractors for performed Work; 49 Cost, including transportation and maintenance of all materials, supplies, equipment, temporary facilities, and hand tools not owned by the workers that are used or consumed in the performance of the Work. 50 Attendees Only 25

26 Cost of the premiums for all insurance and surety bonds which Constructor is required to procure or deems necessary, and approved by Owner including any additional premium incurred as a result of any increase in the cost of the Work; 51 Constructor's Overhead and profit shall be added to any net increase in Cost of the Work. No Overhead and profit shall be applied to any net decrease in the Cost of the Work that is less than ten (10) percent of the Contract Price. 52 Attendees Only 26

27 8.4 CHANGES NOTICE Except as provided in and 6.4 for any claim for an increase in the Contract Price or the Contract Time, Constructor shall give Owner written notice of the claim within fourteen (14) Days after the occurrence giving rise to the claim or within fourteen (14) Days after Constructor first recognizes the condition giving rise to the claim, whichever is later. Except in an emergency, notice shall be given before proceeding with the Work. Thereafter, Constructor shall submit written documentation of its claim, including appropriate supporting documentation, within twenty one (21) Days after giving notice, unless the Parties mutually agree upon a longer period of time. 53 Owner shall respond in writing denying or approving Constructor's claim no later than fourteen (14) Days after receipt of Constructor's claim. Owner's failure to so respond shall be deemed a denial of the claim. Any change in the Contract Price or the Contract Time resulting from such claim shall be authorized by Change Order. 54 Attendees Only 27

28 Questions? Don t forget 10:15 am 11:30 am General Session with Jim Donald 11:30 am 4:00 pm NECA Show Hours 55 Attendees Only 28