Topic: Construction

By Mike Norman, Senior Cost Engineer

Government construction projects are frequently subject to amendments to the original contract. When this occurs, the contractor must prepare a change order and quote the price for the extra work.

But too often, change order proposals lack clarity and the amended scope is not well quantified. As a result, establishing a mutual understanding of scope between the owner and contractor can be challenging. The result is an overblown schedule and cost overruns.

However, these scenarios can be remediated. The change order pricing process can be successfully streamlined with construction partnering, which creates greater efficiencies and helps organizations save time and money.

The issue: Efficient change order pricing

Before I address what construction partnering is, and why it’s important, let’s talk a little about the current processes it’s meant to replace.

Scoping out a change order requires a complete set of project documents that carefully define the new scope of work and its impact on the construction schedule and performance. Unfortunately, this often overlooked detail has considerable impact.

When an owner orders a change to the contract – yet fails to provide extensive quantitative information (let’s call this “qualitative” scope) – it can take more time to resolve scope issues and develop the estimate. The lack of information may lead to many questions among estimators. To find answers, they will formally request more information from all bidders. This exchange takes time and leads to increased costs, delays, and inefficiencies.

The challenge for federal owners

This process is especially burdensome when government construction projects are at stake. Consider a scenario where the building owner is a public agency. In many cases, policy and/or law require these agencies to develop independent estimates of change order costs. In the federal government, and agency rules also require that the owner generates an Independent Government Cost Estimate (IGCE).

When defining the scope of a “qualitative” change, government estimators must inevitably make scope assumptions. This second-guessing can have a significant impact on the estimate.

But a contractor must also make assumptions. This begs the question: “Will the contractor’s assumptions match those made by the government?” Based on my experience, the answer is “no.”

Government estimators have an additional task. They must analyze each contractor’s estimate, compare it to the IGCE, and attempt to resolve the differences created by differing scope assumptions – a process that can take hundreds of hours. Meanwhile, contractors (and subcontractors) spend equal time developing a price for the work. Negotiating a settlement then adds more time to the process – the further apart the estimates, the more hours spent negotiating.

It is often the norm for this to happen, which can result in the failure to negotiate an agreed price, the issuing of a unilateral change order, or the reissue of the proposed change.

The solution: Construction partnering

What is Construction Partnering?

Contractors and government agencies can overcome these roadblocks and frustrations by implementing a limited form of construction partnering. One in which the stated intent is to develop a common understanding of scope and assumptions.

Construction partnering is a structured process that brings together project stakeholders to set goals, develop processes, discuss and resolve scope issues, and improve project outcomes. Successful partnering can reduce project costs, expedite schedules, reduce changes and claims, and improve communication.

Construction partnering achieves this by furnishing an environment conducive to the free exchange of information and open communication. It involves a single, facilitated meeting between parties. It also minimizes the “gotcha” attitude sometimes displayed by owners and contractors that arises from concealing information.

Because decision makers (notably subject matter experts and contracting officers) are in the same room, they can propose real-time solutions that reduce the government’s cost to analyze and resolve differences between the IGCE and the contractor’s scoping and assumptions.

Construction partnering and change order scope

To amplify the effectiveness of this meeting and achieve accord, several elements are key.

First, the agency and the contractor must do their homework. Prior to the meeting, each entity should develop and exchange their understanding of the scope. At a minimum, this must include the following:

• A summary description of the presumed scope
• A list of scope issues prioritized by importance
• A list of assumptions

Next, both parties must review each other’s submissions and prepare to discuss the various issues in detail.

The meeting should be governed by a set agenda that has been reviewed and accepted by the agency and the contractor. During the interaction, both parties must be prepared to focus on resolving differences so they can proceed with pricing based on mutual understanding.

Overcoming objections

It’s not unheard of for government contracting officers to express fear that a collaborative approach to the change order process crosses the line separating “what is scope” from “dictating the contractor’s method of executing work.” However, a properly facilitated construction partnering meeting that includes contracting officers should alleviate that concern – while providing a forum for the parties to explain their respective approaches.

As a guideline, a partnered meeting could resemble the following agenda:

• 8:00 am: The facilitator opens the meeting. Each participant introduces themselves and their role in the process.
• 8:30 am: The facilitator sets forth the meeting logistics and rules (e.g., only one speaker at a time).
• 8:45 am: Leaders are asked to state their respective goals and share scope understandings and assumptions that the government and contractor agree upon.
• 9:00 am: To break the ice and set up an atmosphere of trust and openness, the facilitator guides the group through an exercise…
• 9:15 am: As a group or assembled in subgroups, participants address the issues in order of importance (the “homework” discussed above will include ranking the issues in order of importance). Subgroups can be formed in a variety of ways. Ideally, the most knowledgeable SMEs are included in the appropriate subgroup.
• 12:00 pm: The group or subgroups report their results. The facilitator will issue a written report memorializing the results.

 

Ordinarily, a construction partnering meeting will not resolve all issues, and any outstanding issues and resolution timeline should be noted. However, this is not acceptable. For estimators to begin work on a change order, it is crucial that all issues are resolved during the change order scoping meeting. If they are not, the SMEs and contracting officer should try and reach consensus.

Improved communication, improved strategy, and issue resolution

Is four hours sufficient time to yield efficiency in the case of “qualitative” change? Even if the meeting is extended to eight hours, I argue in the affirmative.

For instance, in the case of a proposed change with a seven- or eight-figure value, an agency might spend hundreds of hours generating a Class 3 IGCE and just as much time again analyzing the contractor’s proposal.

To resolve this issue, a partnership meeting might include ten to twelve stakeholders – this equates to 48 hours of cumulative people time. Even this short amount of time can generate labor savings far exceeding 48 hours. Such a meeting also saves money, while simultaneously building trust between parties who have long resisted coming to the table.

Construction partnering is a win-win for all involved.

 

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About the Author

Mike Norman is a Senior Cost Engineer currently leading a team of estimating professionals completing cost, schedule, and risk analysis tasks for the Department of Energy.

Connect with Mike at mike.norman@acuityinternational.com.