The Impact of Changes on Construction Cost and Schedule

Changes on an engineering and construction project can be expected, but the potential for cost and schedule consequences of those changes must be understood by those directing the change. Those consequences involve not only the work package for which the change is directed, but other work packages and overhead functions as well.

The fixed-price or guaranteed-maximum-price contract are the contract forms where the change impact problem is most severe because each change modifies the basis upon which the timing and pricing were established. Any modification to this basis must have full and fair compensation. Past practices for price and schedule adjustments have not always provided this protection.

Recommendations and Ideas to Consider

The following recommendations and ideas are presented to improve the change process and/or minimize the adverse effects of changes:

• Owners may consider utilizing a lump-sum contract for detailed engineering to discourage introduction of changes by engineering personnel. However, this should be attempted only if a quality definition of scope is available. A two-stage contracting approach is suggested. The first stage is a reimbursable contract for development of project scope; the second is the fixed-price contract for detailed engineering. On the fixed-price contract, however, a milestone point in design development should be agreed to beyond which owner changes will be subject to cost/schedule adjustments.
• Owners should freeze the scope as early as possible in the design process.
• Use of CADD, particularly 3-D, will enable design personnel to avoid design errors, such as interferences, which lead to changes. Physical models will be valuable in the same way.
• A strong constructability program continued after the baseline scope and estimate have been developed will reduce the potential for changes.
• Proposed engineering changes should be reviewed and authorized through a structured scope and change control program.
• On award fee or other incentive contracts requiring periodic evaluation of contractor performance, owners should consider including effectiveness of change management as one of the grading criteria.
• Owners/engineers on a fixed-price contract should, during bidding, provide the bidding contractors with an honest assessment of the status of design and potential for change.
• Owners should not require contractors bidding on fixed-price work to provide unit prices for charged work as part of the basic contract. The contractor cannot anticipate the conditions under which the changes will be executed, and therefore cannot reasonably estimate all direct and consequential costs.
• Risks that are the responsibility of the owner or engineer should not be transferred to the contractor.
• On a fixed-price contract, the contract should specify that float is jointly owned, but responsibly shared, by owner and contractor and that available float may be used to accommodate changes.
• At the outset of a project, owner and contractor representatives should establish the mechanisms and procedures for administering changes.
• To provide a realistic baseline for adjustments due to changes on a fixed-price project, the owner should require the contractor to submit prior to or shortly after mobilization:
  • A WBS for the project which is resource loaded to include planned worker-hours per control level element
  • A Control Schedule in critical path format that is consistent with the WBS
     
• A contractor must maintain thorough estimating, planning, and controlling records as baseline documents for any changes. When a change occurs, additional records must be prepared to show all implications of that change.
• Owners and contractors may consider an up-front agreement to place original project planning documents and data of both parties in escrow for later reference relating to changes. This will force both sides to be more proactive and thorough in their planning.
• The contract Changes Clause should acknowledge that price and schedule adjustments will fully consider both direct and consequential effects.
• Owners, engineers, and contractors should establish a team approach to change management and openly communicate on the subject.
• The owner should identify to the contractor the individual(s) with authority to direct changes, and the contractor should identify to the owner those with authority to receive changes.
• On a fixed-price contract, if sustained overtime or other condition known to degrade productivity must be imposed on the contractor as a consequence of a change, an up-front differential on productivity (or cost) should be agreed to.
• All changes should be in writing.
• Changes should be resolved in a timely manner as they occur. Do not defer their resolution until the end of a project.
• Contractors should not leave pricing of changes to estimators alone. It should be a project team effort to insure inclusion of all cost elements.
• A contractor should develop checklists of potential cost and schedule impact items for use in preparing estimates involving changes.
• All project stakeholders should take steps to make their personnel more knowledgeable about the consequences of changes. By understanding these consequences, they may give change management more serious attention.
• When a change is introduced, the owner and contractor should consider completing the work as originally specified and then going back and reworking it with another crew. This approach, although apparently costly, may actually be more cost-effective since it eliminates the productivity and morale degradation effects on the first crew.