Pitfalls of Ineffective Change Management

AGENDA

• Perceptions • The Good • The Bad • The Ugly

PERCEPTIONS

QUITE VARYING OPINIONS

WAIT FOR WRITTEN AUTHORIZATION

BEFORE PROCEEDING WITH A CHANGE

Contract v. Practice

How Projects “REALLY” Work

FACT OR FICTION Contractors like changes Contractors make $$$ (gouge)

on changes Productivity impact (?) can be

quantified on each change Contractors make money on the

markup in change orders

THE GOOD

EASIER SAID THAN DONE

SUPERIOR SCOPE MANAGEMENT

NO CHANGES PAYING / RECEIVING THE RIGHT

AMOUNT SPEEDY DECISIONS & RESOLUTION

NO SURPRISES

SUPERIOR SCOPE MANAGEMENT

Evaluate the contract Identify the change Notify parties of the change Document the change Prepare the change request Resolve the change request

Six Steps for Successful Change Order Management Katherine Molly - Cost Engineering - April 2007

THE BAD

PRICING AND MARKUP

Opinion from

19 41.30%0 0%

14 30.43%13 28.26%

Totals 46 100%

1.) Make up of Group Do you work for a: Responses

Owner organization – buyer of serviceEngineering organization – design of serviceContractor organization – builderFirm that consults to one or more of the abov...

Inflation

Totals

2.) Inflation in Claim What is the general level of inflation in claims? Responses

10% higher than actual value30% higher than actual value60% higher than actual value100% higher than actual value200% or more than actual value

Inflation

6 13.64%18 40.91%12 27.27%

8 18.18%0 0%

Totals 44 100%

2.) Inflation in Claim What is the general level of inflation in claims? Responses

10% higher than actual value30% higher than actual value60% higher than actual value100% higher than actual value200% or more than actual value

Inflation Extras

Totals

3.) Inflation in Extras What is the general level of inflation in extras? Responses

10% higher than actual value30% higher than actual value60% higher than actual value100% higher than actual value200% or more than actual value

Inflation Extras

7 15.56%23 51.11%

9 20%6 13.33%0 0%

Totals 45 100%

3.) Inflation in Extras What is the general level of inflation in extras? Responses

10% higher than actual value30% higher than actual value60% higher than actual value100% higher than actual value200% or more than actual value

Claim Prep

Totals

Responses

AgreeSomewhat AgreeSomewhat DisagreeDisagree

4.) Claim Submissions are well prepared

Claim Prep

3 6.67%11 24.44%22 48.89%

9 20%Totals 45 100%

Responses

AgreeSomewhat AgreeSomewhat DisagreeDisagree

4.Claim Submissions are well prepared

PRICE CHANGES or

EXTRAS APPROPRIATEY

CHANGE ORDER

COST COMPONENTS Elements

DIRECT COST IMPACT ON SCOPE INDIRECTS

Easy to quantify Causes

argument

WHEN DOES 10% MARKUP

COVER THE COSTS OF: - CHANGE ORDER

PREPARATION - FIELD OVERHEADS

- HOME OFFICE OVERHEADS

EXTRA WORK BREAK-EVEN POINT

0

100

200

300

400

500

0 500 1000 1500 2000

OVERHEAD AND FEE

DIRECT COST VALUE OF CHANGE

?

CHANGE ORDER PREPARATION

ESTIMATING PURCHASING CLERICAL ADMINISTRATION COORDINATION SUB-TRADES CONSULTANTS SITE

FIELD OVERHEADS

FIELD COORDINATION

TEMPORARY FACILITIES

ADMINISTRATION MEETINGS CORRESPONDENCE COST CONTROL

HOME OFFICE OVERHEADS UTILITIES BUILDING COMPUTERS ADMINISTRATION MANAGEMENT FINANCING INSURANCE BONDING EXTENDED WARRANTY BUSINESS DEVELOPMENT

RECOGNIZE; REAL COSTS

IN DIRECT COST QUOTATION

General Conditions

Supervision Temporary Facilities Field Support Temporary Utilities Construction Equipment Special Conditions

THE UGLY

CLAIMS DELAY & PRODUCTIVITY

CHANGES

AS A SOURCE OF CLAIMS

SCHEDULE

CHOICES SILENCE NO EFFECT IF AUTHORIZATION TO

PROCEED BY ……….. WILL PROVIDE EFFECT ON COMPLETION

OF THE WORK ON COMPLETION OF THE PROJECT

OR ALLOW 2 DAYS FOR EVERY CHANGE

Contractor Original Estimate

Hours

Contractor Original Estimate

Hours

Change Order Hours

Inefficient Hours

Under Estimated Hours on Original Contract Work + Contractor

Inefficiency

Impact of Change Orders

Dire

ct F

ield

Lab

or H

ours

0 100 Construction Phase (% Complete)

Inefficient Hours

PRODUCTIVITY

IMPACT ON SCOPE

Design and/or Fabrication error

Crews tries to make it fit Crews stands down waiting for direction /

clarification Foreman seeks direction from Engineer

and tries to get crew working productively

Demob to an other work face When direction is received remob to initial

work face

NEWS ITEM

Construction Claims Seminar Revay and Associates Limited

According to Construction Industry Institute (CII) Study (1995):

“generally … projects with a high % change

experience lower craft productivity than projects with little or no change”

IMPACT OF CHANGES ON LABOUR PRODUCTIVITY

• 5 - 10%

As a ratio of Completed Cost to Original Cost Estimate (U.S. Studies 1974-1985)

Construction Industry Institute Survey 1995 where Change = Increase in Scope

• up to 9% (Design-Build projects)

• up to 15% (Design-Bid Build projects)

Normal ?

40 45 50 35 30 25 20 15 10 5 0 0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Construction Change (%)

Con

stru

ctio

n Pr

oduc

tivity

Rat

io

Construction Industry Institute Study 1995*

“Quantitative Effects of Project Change”, CII - Publication 43-2, May 1995

• 1) The number of change orders issued was not an

accurate indication of productivity loss

• 2) The average size of change orders was also not correlated with productivity loss.

• 3) There was a high degree of correlation between loss of labor productivity and the percentage of change orders hours to total contract hours.

LEONARD STUDY This study determined that:

% Change orders = Actual Contract Hours = Total Actual Hours less Change Order Hours and less Unproductive Hours due to Contractor Inefficiencies

Change Order Hours Actual Contract Hours

X 100

Effect of Change Orders on Civil and Architectural Work

0

10

20

30

40

50

60

0 10 20 30 40 50 60

Loss of Productivity (%)

% Change Orders

Changes only Plus 1 major cause Plus 2 major causes

0

10

20

30

40

50

60

0 10 20 30 40 50 60

Leonard (1988) - Effect of Change Orders on Electrical and Mechanical Work

Loss of Productivity (%)

Changes only Plus 1 major cause Plus 2 major causes

% Change Orders

Impact on Spent Contract Hours

Spent CH 1,000 Extra 200 Total 1,200

Spent CH 1,000 Productivity 180 Extra 200 Total 1,380

Leonard (1988) vs. Ibbs (1995, 2005) Electrical and Mechanical Work

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Leonard - Changes only Leonard - Plus 1 major cause

Ibbs (2005)

Ibbs and Allen (1995)

Leonard - Plus 2 major causes

0.00

1.20

1.00

0.80

0.60

0.40

0.20

Construction Productivity Index

% Change Orders

Quantity of Change vs Impact (based on manhours)

-5%

0%

5%

10%

15%

20%

25%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Change Hours as % of Base Project Hours

Impa

ct a

s %

of T

otal

Act

ual H

ours

Productivity Improvement

CII

Electrical Contracting Foundation

Quantity of Change vs Impact (based on manhours)

-5%

0%

5%

10%

15%

20%

25%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Change Hours as % of Base Project Hours

Impa

ct a

s %

of T

otal

Act

ual H

ours

Mechanical Contracting Foundation

Productivity Improvement

Leonard

CII

COMMENT

Lost productivity associated with the cumulative effect of changes is one of the most difficult claims to quantify thoroughly and persuasively (even for the very experienced) . Productivity losses can impact both the changed work and the unchanged (base contract) work. There is no universally accepted method available at this time to quantify the cumulative losses. Current methods are subject to scepticism and criticism.

Constructin Claims Seminar Revay and Associates Limited

CONTRACTORS SHOULD

QUALIFY THEIR CHANGE ORDER PRICE

CHANGE QUOTATION The price quoted is only for the direct

cost of the change. We reserve the right to seek compensation for the

impact on contract work and / or the cumulative effect of changes when

these costs (if any) can be quantified.

The Great Debate

Owners

Absolutely refuse to accept

qualification

Contractors

Need to qualify so as to preserve their right to

discuss productivity

PROPER RECORDS

ALLOW YOU TO JUSTIFY & QUANTIFY THE REQUEST

FOR A CHANGE IN CONTRACT PRICE