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Hello,
Brian Weeks here again with another MMCD Contract Consideration
this video clip will cover the topic of Issuing a Change Order.
This video will review when a change order is needed
and how to finalize the information needed on the form.
I'll discuss negotiations and
pricing methods
and then we'll use the example developed in the previous two videos to write up a
change order.
First of all what is a change order?
A change order is the formal authorization
to both the contractor and the owner
that the contract itself
has been changed.
On the contractor side,
it is the authorization required to do the work described.
In fact,
it's the demand that the work be done.
Once a change orders issued the contractor has no choice
but to immediately comply
whether or not the contractor which is to do so.
On the owner side,
it is formal negotiations
that the contract costs are going to change
and that the project completion date
may change too.
There is only one person
who can authorize, that is signed
change order.
This person is the contract administrator or C.A.
Who is appointed by the owner and whose authority is formalized in writing to
the contractor.
As an aside,
this is why the C.A. must be a person not a firm.
Specifically,
the MMCD does not allow delegation of this responsibility to an inspector.
In fact,
under the MMCD, the contract administrator signature is good as gold,
so that even the owner cannot override assigned change order
without the strong potential
for resulting costs in a dispute.
So, when is a change order needed?
There are large number of possibilities
but the general classes are,
when a change is being required
when extra work is being authorized,
what optional work is being activated,
went any new prices are being set.
Such as for quantity variations
or when any delay or acceration is being approved.
Change orders are not required
when there is no impact on contract cost or time.
Field memos or site instructions
are satisfactory for those items.
A change order,
which will affect cost, can be priced into any of three basic ways.
The simplest is to use
a lump sum for clearly defined work
this minimizes the accounting work load in the field.
The next alternative
is to use one or more new unit prices.
This will require tracking of the actual quantities involved in the change.
Finally the method of force account
sometimes known as cost plus or time and materials
is available one quantities cannot be determined at the time of pricing
or pricing cannot be agreed upon.
This method requires the highest degree of field accounting on both sides
for all of the time of materials and subcontractor efforts involved
everyday.
In the video the contemplated change order and RFQ
I discussed the ideal process
for generating change orders.
Specifically,
number one
gather the data and define the task.
Number two,
Write a complete contemplated change order.
Number three,
Received the quotation.
Number four,
Negotiate the quotation.
Number five,
Issue the change order.
and number six,
start the work the change order covers.
In the real world stuff happens
and this ideal sequence is more often a goal than reality.
However,
the closer you can follow this sequence
the easier the task will be.
Let me discussed negotiations,
it's not often the case that the C.A. will receive a quotation
that does not need clarification
and usually some negotiation about the cost of time.
This is to be expected,
the contractor is a for-profit business and part of the C.A.'s role is to
watchdog costs for the owner.
When the negotiation is over a quotation for extra work
both parties have the flexibility to withdraw
or to choose to continue to negotiate to an agreement.
When the negotiation is about a quotation for a potential change
the owner has the ability to say
"this will be done and you will do it"
in those circumstances negotiations are more unbalanced.
Nevertheless,
the C.A. is expected to make a fair evaluation of the quotation
it's in everyone's
best interest to come to an agreement on price and time
before the work must be tracked
using force account forms.
Often when negotiations seem to reach an impass
creative thinking about other issues on the job
may lead to a new solution.
For example, the contractor may agree not to
put in a request for extra costs
for other delays caused by the owner or C.A.
if he receives the time extension requested in this quotation .
Reaching a mutually agreed solutions all what's the best outcome.
In the end if negotiations fail, the fall-back position is for force
account cost tracking
in this way the contractor knows it will be paid if forced to do
work under change order
or pricing has not been agreed to ahead of time
Now, let's return to the example.
through the C.A. the owner has asked for a quotation to build a retaining
wall
as you can see from the drawring this wall will require some unspecified
quantity of grade work to reach final slopes.
the C.A. issued CCO twenty three point one
and received
quotation are RRC twenty twelve dash fifty seven in return.
The contractor has offered two pricing options
one fixed price to eliminate the owners risk,
and one where the unquantify grade work is done at unit price
with a lump sum for the balance.
This would reduce the contractors risk and potentially the owners cost.
The contractor has identified the time extension requested
under each of the two pricing options
and to reduce the owners cost,
the owner has offered an alternative drain rock for consideration.
On reviewing the quotation with the owner,
the owner has indicated it would really prefer a fixed price,
but the option one price seemed a little high.
Furthermore, the C.A. believes the time extension is too long
as much of this proposed extra work to be done concurrently with other contract
work.
Additionally, the owner does not see enough of a saving to approve the
alternate drain rock.
Then the C.A. and the contractor
enter into negotiations.
Eventually, the contractor agrees that a four day time extension is adequate
and a lump sum of thirty two thousand five hundred
is acceptable.
the C.A. then writes up the change order similar to this...
Let me review
some of the highlighted features to see why it can be so simple.
Firstly the form used will be the one the owners approved for use on this
contract.
I've use the standard MMCD template
but this will not normally be the case.
The change order number
will be assigned by the owners accounting or finance staff
and becomes the tracking number for all related internal approvals and
correspondence.
The key to a simple change order is the two lines referencing the CCO and
quotation.
If these documents are in place
and are unequivocal,
ie. there's no confusion about what was required by the CCO and what
was quoted upon,
than the change order can be just this simple.
Just make sure that the numbers and dates refer the latest versions of each.
Sometimes, negotiation
are formalized with an exchange of paper
but often the agreement is just done on a handshake
with the change order left a formalized it.
If the agreement was put on paper,
then refer to that document in the change order also.
If the agreement was informal,
then document the agreed terms
and the date of the agreement in the change order.
Again, we want to follow the say it once principal so there's no chance of saying
the same thing differently in two places.
Make sure to update
the new estimated contract value
and the revised substantial completion date
with the effects of this change.
Finally, it is essential that the C.A. sign it.
That is the only signature that can change the contract
and force a contractor to do additional work.
Note that while we have a spot for the contract to sign the change order,
this is not essential,
only the C.A.'s signature is required,
the contractor signature only confirms receipt, acceptance is mandatory by this
point
Once signed by the C.A.
the changes formalized and the contractor has
no further opportunity to withdraw the quotation.
So, to summarize,
the C.A. and only the C.A.
must issue a change order
anytime there's to be a change
to the contract price
or time
outside of the terms as tendered.
The contractor must not do any work on a change order item
until the change order has been issued
but then must comply immediately.
The sequence of documents is ideally as follow,
drawings and specs to define the work,
contemplated change order,
a quotation,
culminating in a change order,
(it's often following negotiations)
the say it once principal should be used in all documents in the sequence.
This makes it easy to keep the documents simple and clear.
I hope this has helped clarify this contract consideration
Please check our website for further assistance,
and see what other topics are presented in this series.
Thanks for watching!
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