On a Friday afternoon, in July 2022, the General Contractor (GC) that was building our client’s $49 million-dollar multifamily project, discretely forwarded a change order in the amount of $925,694.42, including a claim for a fifty-week delay.  After climbing back up into my office chair, I reviewed the change order and called our senior project manager, representing the owner on the project.

We immediately began unpacking the single change order claim that approached 2% of the project’s total value. As the owner’s representative, it was critical for us to know what to look for, where to look, and what questions to ask in order to mete out the contractor’s claims, determine the cause of the apparent errors, and whether the contractor was entitled to the cost increases and schedule extensions.

To make matters worse, the contractors were pressuring us for quick decisions… or delays would increase even more

THE CONTRACTORS’ CLAIMS
The Construction Documents and the Owner are at fault

The claim for changes came from the Electrical Contractor (EC), stating that there were changes required to the size of the electrical meters and disconnects for half of the 24 buildings. Revising the equipment at this point in the project created a tsunami of changes to the wire and panel sizes, secondary feeds, couplings, breakers, and more.  Many of the secondary wire bundles had already been installed underground, requiring additional excavation and labor to reinstall.  All of this made even worse by the post-pandemic, supply-chain meltdown of electrical switchgear and equipment that everyone in the industry will fondly recall.

In summary, the electrical contractor was claiming the following causes for the change order:

1. The electrical drawings are incorrect and need to be changed
2. The engineer had approved the electrical submittals of the purchased and installed equipment
3. The owner’s previously approved value engineering revisions contribute to the required changes

Below is a brief breakout in round numbers, showing the order of magnitude to the material and labor changes claimed in the change order:

• $470,800 in wiring changes
• $71,500 in PVC conduit changes
• $146,000 meter centers and disconnect changes
• $112,200 in additional excavation and labor
• $125,200 in mark-up and fees

GRIM OUTLOOK
The pressure was on

Our initial take-away, after a brief evaluation with the owner, was discouraging.  All of the contractor’s claims appeared to fall to the owner’s responsibility. Being forced to pay an additional one-million dollars and losing a whole year on the schedule is, at worst, catastrophic and at best, an extreme expense to bear for any developer.

Furthermore, this change order cost did not include any general conditions expenses that the GC would incur during the fifty- week delay, if proven to be the fault of the owner. This could easily cost an additional $250,000 to $500,000.

To make matters worse, the contractors were pressuring us for quick decisions and to authorize the changes so that the subcontractor could order the new equipment immediately, or delays would increase even more.

JUMPING INTO ACTION
Time was Definitely of the Essence

We dove into the investigation immediately. Understanding that working knowledge of the approved construction documents, command of the contract language, and attention to the change order details were critical in establishing change entitlement to the contactor and protecting the owner.

Maintaining a teamwork approach and focusing on a timely solution was in the interest of all stakeholders. Our team re-reviewed all current drawings, specifications, and approved changes.  Meanwhile we requested the following documentation from the GC and EC.

• Copies of executed agreements and purchase orders
• Greater clarity in the back-up documentation
• Detailed spreadsheet showing comparison between approved construction documents and all proposed changes to materials and labor in the claim
• Copies of all approved Submittals
• All applicable material and labor unit prices

We also held a video-conference call to rally the consulting team and request their assistance.  After all, their drawings and approved submittals were being implicated as cause to the required changes.

KNOWING THE DOCUMENTS
… And Where the Dangers Lurk

With the goal to catalog all critical contract language, approved changes by the owner, and unapproved changes by the contractor, we quickly set out to unpack the documents and record the chain of events to establish a timeline and a responsibility matrix for the claimed changes.

How do you define “reasonable” when more than one-million-dollars and a year-long delay are at stake?

The Drawings

By comparing the approved, permitted electrical drawings to our field review of the contractor’s installed equipment and wiring, it became clear that they were not complying with the drawings and equipment specifications.  Furthermore, these voluntary changes by the EC had not been vetted by the project team, creating a domino-effect both upstream and downstream in the electrical systems.

Contract Language

We already knew that the Article 7 of AIA’s A133 Agreement, establishes the requirement for owner’s authorization prior to any costs related to changes in the work:

Section 7.1.2 states:

Where, pursuant to the Contract Documents, any cost is subject to the Owner’s prior approval, the Construction Manager (GC) shall obtain such approval in writing prior to incurring cost.

The contractor incurring costs for unauthorized, noncompliant work that had already been installed, should be the responsibility of the contractor.

Additionally, Article 7 of AIA Document A201- General Conditions, protects the owner from unauthorized changes made, as noncompliant to the Agreement:

Section 7.1.3 states:

Changes in the Work shall be performed under applicable provisions of the Contract Documents.

We also knew that the A201 put responsibility on the contractor whenever their submittals deviate from the specified equipment, even if approved by the design professional.

Section 3.12.8 of the A201 states:

The Work shall be in accordance with approved submittals except that the Contractor shall not be relieved of responsibility for deviations from the requirements of the Contract Documents by the Architect’s approval of Shop Drawings, Product Data, Samples, or similar submittals, unless the Contractor has specifically notified the Architect of such deviation at the time of submittal.

The EC’s shop drawings had clearly deviated from the Contract Documents.  And neither the EC nor the GC had notified the Architect or Engineer of the deviations. 

Critical discoveries

Our forensic-like exploration, along with several conference calls involving the entire project team, began to uncover some details that could possibly shift the responsibility onto the contractors:

• The EC had added 6 small words in red ink to his executed contract with the GC, stating: “will be wired with code minimum”
• We uncovered a memo from the EC to the GC during bidding that changed the amperage of the disconnects with an added statement: “they will have to redo the plans of course”
• Close examination of the timeline showed that the EC had revised the design of his electrical system and the GC never followed the change protocols required by the AIA agreement
• During one of our conference calls, while being pressed as to when his electrical revisions were approved and by whom, the EC said: “I am going to stop talking now.”

UNTANGLING THE CHAOS
Is the Owner Really Responsible?

So, what did this all mean? The electrical contractor was still sitting on undersized equipment, some of it already installed, and they were still pressing for quick decisions and a large amount of money. And, the threat remained for a one-year delay, or worse.

The owner just wanted the most reasonable solution. But how do you define “reasonable” when more than one-million-dollars and a year-long delay are at stake? How did this happen? Who is at fault?

Determining how we arrived at this position was paramount.  Secondly, who was responsible for the actions taken to cause the situation?  This was critical for determining which party, or parties, would be paying for the required changes.

Our discoveries had made it clear that the EC had value-engineered portions of his electrical system and the GC had accepted it, without submitting it for review and approval by the owner, architect, and engineer. Therefore, the construction documents were never changed, and the result was that the EC was installing an undersized electrical service to half of the buildings.

Once we had proven this, the GC then pleaded the case, that changes were necessary to make the project work financially. Where this may have been true, the AIA agreement documents clearly establish the protocols to follow for any changes to the drawings or specifications.  And for good reason, one seemingly simple change within a system, if not vetted and coordinated with the design team, can have critical impacts on other elements of the system, or the entire project.

To keep the project moving along while we worked toward a reasonable and equitable solution, we took the following concurrent actions:

1. Drafted a response memo to the GC denying the change order claims based on the following:
   1. The approved electrical drawings are accurate and current. The EC is currently installing an electrical system that is not operational and is non-compliant with the contract documents
   2. The voluntary changes included in the submittals were not in compliance with AIA contract’s General Conditions language
   3. The Contractor shall not be relieved of responsibility for deviations to the contract documents by approved shop drawing per the contract language.
   4. The owner will not pay overhead, profit, or fees on changes not caused by the owner
   5. The owner will not pay for any future, additional General Condition expenses
2. Request that the EC and electrical engineer work together towards compromises to revise the specifications to allow methods such as direct bury cabling, reduce circuit sizes where possible, etc.
3. Request that the EC and GC find alternate sources for new equipment procurement with shorter lead times.
4. Request that the EC forward written Cancellation, Re-stock, and Buy-back policies from the current equipment suppliers.
5. And to, order immediately, any approved equipment that has the longest lead-times.

CATASTROPHE AVERTED
Fast efforts, teamwork and compromise saved a lot of time and money

The EC and GC softened their claims and worked hard to find alternate vendors and to explore acceptable design solutions with the electrical engineer.  They made great strides in utilizing existing equipment and found sources with much shorter lead times for the required new equipment.

Because of the upfront, cost-saving efforts made by the contractors (the next lowest electrical bid was several hundred thousand dollars higher) and the messy situation caused by the engineer approving incorrect submittals, the owner was willing to compromise and cover some of the costs for the new equipment and additional labor.

After several rounds of review and negotiation, forty-five days after the initial change order was sent, Catastrophe was averted!  The owner agreed to pay $230,363. A savings of $695,331 from the original change order claim. In addition, the equipment procurement delays were reduced to weeks and months instead of years.

It is always good policy to take away lessons learned from every poignant experience, regardless of fault or responsibility

LESSONS LEARNED
Paying improvement forward

It is always good policy to take away lessons learned from every poignant experience, regardless of fault or responsibility. As construction project managers, if we aren’t improving every day, then we are not fulfilling our Mission.

In the end, the owner always pays, in terms of money and time, when contractors and subcontractors do not comply with the contract language or follow the means, methods and policies that we put into place to help projects run smoothly.

As part of project management planning, it is critical to know the language of the contracts, before and after they are executed. And to make certain that all parties clearly understand change protocols and the repercussions if they make non-compliant changes outside of the construction documents. The contract language should also hold the GC accountable for the subcontractors’ submittal formats and the A+E team should know to reject and return any submittal that is not compliant with the requirements.

Success never happens by accident. It takes focus and commitment from every member of the Project Management Team to hold themselves and each other accountable.