How to Negotiate a Change Order
It's more about reality and contract than it is about bargaining.
When I first started working in development, one of the most widely used tactics in the market was to delay approving change orders until enough of them piled up and then getting the general contractor to agree to a ‘settlement’ on the bulk.
This process left the developer feeling like he won and the GC like he lost, ultimately leading to a very poor relationship between the two and some rough job site interactions.
Here’s the thing: when I actually started going through the details of the change orders, I realized that between discrepancies, double counting, and the contractual reality that not all claims were, in fact, change orders, the owner was being overbilled.
Often by more than what he had ‘settled’ for.
Not only was the project stress from the initial tactic unnecessary, but it didn’t follow reality in terms of who ‘won’ or ‘lost‘.
Also, it didn’t follow the contract, and most importantly, it wasn’t fair.
That was when I realized that most people focus on the total cost, not on understanding the underlying factors that make up a change order.
These are the two things that make up a change order:
Whether a change order is contractually warranted
The cost breakdown
…and everyone involved in development and construction can benefit from understanding how they work.
1. Is this a change order?
The first question to ask when a potential change order comes is whether it really is a change order. (I wrote about change orders here.)
To determine this, you must first assess whether the potential change was part of the initial contract.
If it was, you’ll need to determine whether it was brought up within the contractually required timeframe.
Ideally, these expectations are thoughtfully considered and discussed during the initial contract negotiation so the team understands their rights and obligations from the beginning.
There are some instances when I’ve agreed to extend the timeframe when more time is reasonably needed to review information and determine pricing. However, consistent communication is required.
There is no excuse for a change order to be brought up for the first time months after the work is completed.
This is also why it is crucial to ensure a change order notification deadline is clearly established in the contract. This benefits the owner and the contractor.
If it’s clear that a potential change order doesn’t fit within the contractual description of what constitutes a change order, it’s the owner’s responsibility to dispute it. This doesn’t mean the conversation needs to be unpleasant!
I always start by asking questions to ensure that the way I’m looking at it is what the contractor intended. There are several common explanations why sometimes something is submitted as a change order when it shouldn’t have been:
The GC bought the scope, but the subcontractor ‘forgot’
The GC bought the scope from a trade different from the one submitting the CO.
The GC forgot to buy the scope.
If it is determined that the GC forgot the scope, that isn’t a change order, and the GC’s contingency should be used to cover the cost. More about that here.
If a trade forgot to buy scope that was included in their contract, then the GC should resolve that with the subcontractor, but that is not a change order.
2. Is the cost accurate?
This is where many people may hide behind the idea that ‘good clients don’t nickel and dime.’
I always push back on this attitude when it comes to checking the cost breakdowns presented in change orders. This is like going to a restaurant and not checking the bill (except you’re spending investor money, and your job as a GP is to ensure you’re spending it wisely).
The main point of reviewing cost breakdowns is to ensure they’re accurate, not to bargain. Most of the inaccuracies I’ve seen in change order costs are honest mistakes, and people are usually glad to correct them.
Some typical mistakes I’ve seen:
The subcontractor charges for a material used on a different project.
For instances where two layers of drywall are used in an assembly, sometimes the material is counted twice in two places, effectively charging double.
Material takeoffs are incorrect vs. the field.
Labor rates were not per contract.
The subcontractor submitted an estimated labor charge, instead of actual.
An unnecessary trade was added to the change order.
The most common: the wrong markup was assessed vs. what was agreed to in the contract.
Reviewing change order cost breakdowns is a major part of managing construction.
In many instances, like in smaller projects or when the project owner is not very experienced, the design team can provide a lot of help reviewing change order breakdowns.
This is why ensuring adequate construction administration scope in the architect’s and engineers’ contracts is key.
Things to negotiate.
Having said all that, there is a time and a place to negotiate within the context of change orders. Understanding all the contractual obligations doesn’t preclude reason, and it certainly isn’t more important than the relationship with the GC. To that point, knowing who is responsible for what is a great starting point for a negotiation.
There are instances when I’ve agreed to:
Split the cost of a contingency item with the contractor as a partial change order.
Agreed to pay for general conditions beyond what the contract required.
Extend the schedule (especially when there is a liquidated damages clause). In that instance, we agreed the contractor would cap their general conditions, so we still kept control over the additional costs.
Approve change orders as a lump sum, rather than T&M (time & materials) when the circumstances warranted it.
The point is not to abide by the contract so narrowly to the extent that it hurts the project. At the end of the day, the mission is to complete the work, which is much more easily done when all parties act in good faith.
Knowing you can negotiate change orders to prioritize fairness, and the GC relationship is not mutually exclusive to understanding and enforcing the contract requirements. In fact, the go hand in hand.
Showing proficiency and attention from the beginning of a project helps set the standard that the team will follow. It also tends to make people realize they won’t have an easy time taking advantage of an inattentive or inexperienced owner.
In addition to our development work in NY, MADDPROJECT provides fee development and professional project management services across the US.
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