What are change orders?
A “change order” refers to an official change of any kind in the original scope of work or terms of a construction contract agreed to by the owner, contractor, and project designer. Change orders include work that must be added or removed from the original contract in order to best serve the finished product of a project. Depending on the magnitude of change that is needed, the original contract amount and terms may be significantly altered. As such, it is in the best interest of all stakeholders to quickly process a change order to ensure a project can continue uninterrupted.
Impact on construction contractors:
In July 2019, the U.S. Government Accountability Office (GAO) released a report on federal change orders that identifies factors that play into change order time and assesses the extent to which agencies monitor time frames for finalizing change orders. The GAO conducted this research on the premise that delays in processing contract changes and making payments can create challenges for contractors, especially small firms. As AGC has known, GAO confirmed that one of the main issues that delayed change orders causes is an interruption in cash flow to a contractor. The longer it takes for an agency to process a change order, the longer it takes for contractors to be paid for their work, which disrupts project schedules and hinders the capacity of contractors, especially small firms, to keep a project on track. Delayed change orders cost not only the government, but contractors, valuable time and money. In their analysis, GAO found that many agencies do not collect adequate data on the impacts of change orders, nor are they able to quantify how often these occur across the federal government’s construction sector. As such, GAO made recommendations that federal agencies develop a strategy to adequately collect data on project change orders and work to identify a strategy to address the issues that arise with them. You may read the report here.
AGC Message:
- Change Orders Are a Routine Part of Every Construction Project. It is common with any construction project—public or private—for unforeseen issues to emerge. These unforeseen issues usually involve work outside the original scope of the contract. As a result, a change to the contract is required for the contractor to perform the work.
- The Federal Agency Change Order Process is Broken. Contractors are increasingly frustrated by the slow approval of and late payment for change orders. While change orders wait to be approved and paid by federal agencies for months or even years, contractors must continue to pay their own bills—payroll, material costs or even taxes. The Small Business Payment for Performance Act would require federal agencies to make interim partial payments to contractors for unilateral changes directed by the buying agencies.
- The Federal Agency Change Order Process Delays Projects. Work must be stopped or slowed down because of untimely processing of change orders. Construction schedules remain tight and the lack of quick turnaround on change orders can have a negative ripple effect on an entire project, often resulting in delays.
- The Federal Agency Change Order Process Puts Small Businesses in Jeopardy. Ironically, the same federal agencies that work to meet small business contract award goals to help grow those entities can ultimately be the cause of these small businesses closing their doors. According to the Colorado Small Business Administration, the U.S. Department of Veterans Affairs failed to pay at least 33 small business construction contractors in a timely fashion, with some waiting more than a year after work completion for payment. Of those 33 companies, at least two filed for bankruptcy.
- Federal Agencies Must Take Steps to Address Persistent Issues With Change Orders. As GAO recommended, agencies must begin to collect adequate data on the effects of change orders and lay out a strategy to address them throughout the government construction sector.
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