Construction Change Orders and Disputes
July 1, 2022

With the slumping economy the last few years has brought, many construction companies are struggling to obtain new work and maintain a decent backlog of new opportunities. Many contractors find the pool of bidders expanding as more construction companies are bidding opportunities, reducing or eliminating the expected profit margins. One of the trends difficult economic downturns have seen is the reduction of back office staff to compensate for the reduced margins.  As a result, there is more pressure on the remaining construction administration staff to do more with less. Contractors need to be efficient in performing the work while receiving less profit for the work.

The tasks and effort necessary for contractors to oversee and coordinate a construction project can be daunting.  The contractor’s team needs to obtain budget efficiencies and generate the expected profit on the project. It is imperative that contractors focus on:

  • Planning early to ensure proper communication and execution during the project. (Parties involved should include: Estimating, Accounting, Home Office Management and Site Management and possibly subcontractors);
  • Ensuring that the construction team and supervisory personnel know exactly what is included in the contract, such as terms of scope, notice and provisions that will allow the contractor to isolate and substantiate all potential change orders or out of scope work;
  • Establishing the controls and documentation to capture out of scope work (such as cost codes, work orders, daily logs, correspondence, calculations and supporting cost records) that will allow the contractor to substantiate all out of scope work;
  • Ensuring the bid documents, bid estimate and assumptions incorporated into the bid thoroughly detail what was incorporated into the contract;
  • Compiling necessary supporting documentation to quantify any additional change orders, costs or claims;
  • Contemporaneous documentation and a detailed cost system that isolates the change order costs to provide the best chance to receive additional compensation and avoid costly litigation or dispute resolution;
  • Acknowledging that performing out of scope work and/or change order work can impact the original work in both time, efficiencies as well as cost; and
  • The proper communication that is vital to success.  Keeping the owner, architect, design professionals, contractors and subcontractors informed is critical. Waiting until the project is complete is a recipe for disputes or unauthorized changes orders and significant claims.

Ensuring a profitable project

In a litigation matter or a claim dispute situation, the supporting documentation helps the parties reach a successful outcome.  If a contractor can utilize contemporaneously created documentation that supports contractual changes the contractor has created a strong basis for getting paid. Appropriate documentation will resolve most disputes, avoid them entirely or settle them with minimal effort.  Proper planning and support offer the contractor a competitive advantage in prosecuting the contract work and getting paid for change orders even if the project was obtained based on a bid that included minimal or no anticipated profit margin. However, it is critical to eliminate contractor errors in the bid or inefficiency from the change order process.  In too many disputes the contractor fails to realize the expected profit and then attempts to use poor documentation to collect either contractor errors or inefficiencies in the prosecution of the work against the owner.

Construction and Real Estate is a specialty consulting service that ParenteBeard’s forensic, litigation and valuation services group (FLVS) provides to its client base.  Several of our team members have well over 25 years experience in the construction industry and have worked on numerous engagements that involve all aspects of building and construction industry.

Sureties, insurance companies, owners, design professionals, contractors and subcontractors have engaged ParenteBeard to provide expert consulting and expert witness testimony related to project prosecution and to substantiate the contractor costs. Our construction projects have included new construction and renovations of existing resorts, hotels, schools, universities, condominiums, high-rises, convention centers, parking garages and sports complexes among others.

If you have questions regarding our construction expertise, reach out to a member of our FLVS leadership team.