KING FAHAD UNIVERSITY OF PETROLEUM & MINERALS
Change Orders In Large Building Projects in Saudi Arabia
CEM 520
Construction Contracting & Administration
Written by:
Walaa Burghal 225684
Salem Kumar 250535
Ali J. Al-Batran 953168
January 16, 2008
TABLE OF CONTENTS
IntroductionObjective of the study
Literature Review
Causes, Effects and Control
Research finding and results
CONCLUSION & RECOMMENDATIONS
Recommendation for future studies
REFERENCES
Page 1
1. Introduction:
A change order in construction defined as a written order to the contractor that issued after execution of the contract. This change presents problems to all parties involved in the construction process. There are many reasons for issuing change order such as, further development of the owner, non availability or slow delivery of required material or correction of contract document errors and omission. A procedure must be set to deal with any change that might happen in the construction project from its conceptual development until it materializes in the field and the change must be managed well in order to minimize its cost, schedule and consequential effects that can lead to enormous cost and schedule overruns.
2. Objective of the study:
The main objectives of this study are to:
- Identify the main causes of construction change orders in Saudi Arabia.
- Identify the severity of those causes.
- Test the hypothesis that construction and contractors disagree on the severity of causes.
3. Literature Review:
Many articles and studies were conducted on changes, change orders and change management in construction. All of these studies discuss legal aspects of changes and the effects of it on the labor productivity. This article deal with legal, cost and management. By dividing it into four parts, basics of changes, legal aspects, cost aspects and the last part is managing changes. Changes can be classified in many different ways depending on the basis and the purpose of classification and the most common classification will be presented in this article.
Changes in construction project can be classified based on the cause that forced them, classified in terms of net effect on scope, classified by the procedure used to introduce them. The cause based classifications were found to constitute 52.5% of total changes and it falls into three categories: design change caused by improvement, caused by owner and the last one that originated by engineer. The net effect on scope classification can be additive change, deductive change, rework due to quality deficiency and force Majuro change. The procedure used to introduce changes based classification is important in discussing the legal aspects of changes and it can be one of the following, formal or direct change, constructive change and cardinal change
The major legal aspects are: selecting the best delivery system, drafting and interpreting change clauses and documenting change orders to be ready in case of litigation. Construction contract contains the subject matter and terms and conditions and must also include a compensation system and generally are classified according to the compensation system as follow: fixed price contracts and cost-reimbursable contracts. Fixed price contracts includes all contracts type in which financial terms require the contractor to establish a stipulated sum for the completion or execution of a defined quantity of work and under this kind of contracts the following types are listed: lump sum, unit price and guaranteed maximum. Cost reimbursable contracts include all contract types, in which financial terms allows the contractor price adjustment relative to project cost and the types that go under this category are: cost plus fixed fee, cost plus percentage and target price plus a fee.
Cost aspects studies changes in construction from a cost point of view and can be classified as either qualitative or quantitative. The impact of the a change are classified in the literature as follow: direct cost impact, direct schedule impact and indirect or consequential impact. The direct cost impacts are those limited to the work package in which a change is introduced and they could be positive or negative to the owner and contractor and there are two components to the cost of change: labor cost and material cost. The material cost can be easy estimated but the labor cost is difficult and it can be broken into productivity degradation, delays and demolition and rework. So, changes in construction generate effects that far exceed the working package or activity in which changes occur and that is called "RippleEffect".
The discussion so far has concentrated on the legal and cost aspects of a change. The most important point is to have system to manage these changes. This can be achieved by change control system because 50% of changes were in changing original scope so if we can control the scope and define it well we can cut the amount of changes to a minimum. All parties should expend more effort in the early development of the design to minimize changes during detail design and construction.
Change order administration might sound simple, but the procedures and documentation of a change are very vital elements in any change management program. The fundamental elements of any procedure are change recognition and scope definition, change order initiation and documentation, change order execution and closure.
The scope definition should be clear and well defined to distinguish between a change of scope and change due to design development and that required very strong technical skills.
Change order documents should be adequately documented and that can be achieved by a course of actions after issuing the change order and according to Saudi Aramco 20% of project work effort is directed at developing, processing and negotiating change requests.
4. Causes, Effects and Controls:
According to this study, there are 21 potential causes of change orders in construction projects in general and large building projects. These causes are change of plans by owner, owner financial difficulties, owner change of schedule, defined project objectives, substation of materials or procedure, conflict between contract documents, change in design, the scope of work for contractor is not defined, errors and omissions in design, lack of coordination, value engineering, technology changes, differing site conditions, contractor desire to improve his financial conditions, contractors financial difficulties, unavailability of skills, unavailability of equipment, defective workshop, safety consideration, weather conditions and new government regulations.
There are numerous effects brought about by changes and change order in construction. These effects are decrease in productivity, delay in completion schedule, dispute between owner and contractor, decrease in quality, increase in project cost, additional money for contractor, delay of material and tools, work on hold, increase in overhead expenses, delay in payment and demolition and rework.
To minimize the effects of change control we should review the common control procedure to minimize impact of change orders after they have been generated. These controls are clarity of change order procedure, quick approval, ability to negotiate changes, approval in writing, change order scope, pricing of indirect effects, justification of changes, review of contract documents, freezing design, team effort and use of WBS ( work breakdown structure).
5. Research finding and results:
Questionnaires restricted to EasternProvince large projects (SR20 million or more), large contractors (Grade 2 or above as classified by the Chamber of Commerce), building projects (excluding industrial, highway and other types) were used. 17 contractors and 17 consultants were provided the questionnaires.
The questionnaire was mainly addressing the prevailing industry characteristics including company size, experience level and the extent of cost and schedule slippage. Also, causes of change orders and their effects were analyzed. In addition, there was an analysis of the controls and procedures for the change orders.
5.1. General information and Industry Characteristics
The general information contains information on the size and level of experience of both the contractor and the consultant in large building construction in Saudi Arabia. Also, it has information on the extent of owner involvement and the incurred costs due to change orders and the construction contract format.
It was found that contractors are larger in size (number of employees) than consultants. Most consultant companies (70%) have less than 200 employees whereas 35% of the contractors have less than 200 employees.
For the experience level, over 50% of the contractors and 60% of the consultants reported over 15 years of experience. None of them has experience of less than 5 years.
65% of respondents reported that their projects are lump sum turnkey (LSTK) type. 18% reported that their projects are lump sum for labor work only (LS-LBR). No one reported design and build (D&B) contract type.
The civil/electrical related projects are the mostly requiring change orders as indicated by 60% of
respondent contractors and consultants while it is 23% for electrical related projects. 61.8% reported excellent or very good relationship with other parties (owner, contractor and consultant). Also, 41.2% said that the owner is involved in both design and construction stages while 35.3% are involved only in the construction stage.
More than 50% of contractors and consultants reported that the increase in cost is between 6-10% due to the change order while 26% reported that the increase is between 11-15%. On the other hand, 55% of contractors and consultants stated that the increase
from the original schedule is by less that 10%, 35% of them stated that the increase is between 10-20%.
5.2. Causes of change orders
Most of the contractors attributed the reason for the change orders to owner request in large building construction.. From the questionnaire, it was found that change orders are either originated by the owner or by designer/consultant.
The 17 respondent contractors provided widely dispersed data about the importance of each cause. Also, the 17 consultants attributed the reason for the change orders to the owner also. It can be seen that consultants placed more blame on owners and on contractors but less on themselves.
Based on the ranking of the different causes or sources of change orders by the contractors and the consultants, it was found that main reason is the change of plans by the owner. The second important reason is the owner's financial problems. New government regulations were ranked as the least common reason.
Both contractors and consultants believe that the owner is the major source of change in large building projects.
Page 1
Table 1
Ranking of Causes of Change Orders
No.Cause of Change OrderRanking by ConsultantRanking by ContractorCombined Ranking
1Change of Plan by Owner111
2Owner’s Financial Problem345
3Owner’s Change of Schedule477
4The Project Objective Not Well Defined111014
5Substitution of Materials/Procedures232
6Conflict Between Contract’s Documents556
7Design Change by Consultant945
8Contractor Scope of Work Not Well Defined1089
9Errors/Omission in Design523
10Lack of Coord. Between Cont. & Consultant477
11Value Engineering12912
12Technology Change111013
13Differing Site Conditions868
14Contractor Desire to Improve Financial Position61210
15Contractor Financial Difficulties71211
16Unavailable Required Labor Skill131316
17Required Equip. & Tools Not Available141418
18Workmanship/Materials Not Meeting Specific.131115
19Safety Consideration12912
20Whether Conditions151117
21 New Government Regulations151519 ______
Page 1
Page 1
5.3 Effects of change orders
The top five effects of change orders in the large building projects as found from the questionnaire of the 17 contractors are as follows: delay in completion schedule, increase in project cost, increase in contractors’ overheads, decrease in productivity of workers and additional revenue for contractors.
From the consultant’s point of view, the top five are as follows: increase in project cost, delay in completion schedule, additional revenue for contractors, dispute between contactors and owners and demolition and rework.
The importance indexes reported by the consultants are generally higher than what has been reported by the contractors. This means that consultants consider theses effects more prevalent than the contractors.
By considering both the contractors and the consultants, the top five effects of change orders in the large building projects are as follows: increase in project cost, delay in completion schedule, additional revenue for contractors, demolition and rework and increase in contractor's overhead.
5.4. Controls of change orders
The five most utilized controls by contractors to safeguard against change orders or minimize their effects when they occur are as follows: clarity of scope of work of the change order, negotiation of change orders by knowledgeable people, appropriate approval in writing, early setting of change order procedures and review of design changes for feasibility before approval.
However, the five most utilized controls by contractors are the clarity of scope of work of the change order, review of design changes for feasibility before approval, appropriate approval in writing, team effort among construction parties and negotiation by knowledgeable people.
From the overall responses i.e. of contractors and consultants, the top five controls are as follows: the clarity of scope of work of the change order, appropriate approval in writing, negotiation by knowledgeable people, and review of design changes for feasibility before approval, team effort among construction parties and early setting of procedures.
The least used control among contractors and consultants is freezing of design. This means that the design continue to be modified until the last activity in construction.
Page 1
Page 1
Table 2
Ranking of Controls of Change Orders
No.Control of Change Order Ranking by Consultant Ranking by Contractor Combined Ranking
1Early Setting of Change Order Procedures544
2 Timely Approval of Change Order875
3 Negotiation by knowledgeable People422
4 Appropriate Approval in Writing332
5 Clarity of Scope of Change111
6 Considering Indirect Effects of CO Pricing6106
7 Checking Design Changes for Feasibility253
8 Reviewing Gray Areas of Contract Documents796
9 Freeze of Design9117
10 Team Effort Between Parties364
11 Work Breakdown Structure886 ______
Page 1
5.5. Agreement test between contractors and consultants
Using t-test resulting in a value of 0.160 and t-critical value of 2.09, it was found that contractors and consultants agree on the controls of change orders. Close agreement is very evident.
6. Summary and conclusion
The study of change orders in large construction projects highlighted the significance of the change orders study, the objective set for it, its scope and limitations in addition to brief description of the construction in Saudi Arabia. Also, reviews of many articles, research studies and Ph.D. dissertations were included.
The possible causes, impacts and controls of change orders were discussed in detail. The data was obtained by providing questionnaires to large 17 contractors and 17 large consultants for regarding large construction projects.
The causes of change orders and their effects on project cost and schedule are complex and influenced by many interrelated factors. The higher the risk of a project, the more the difficulty predicts and plan for change orders.
Based on the field survey conducted, it was found that large construction projects are performed by large contractors with experience of more than 15 years. The most common contract format is lump sum turn key format (LSTK).
Most changes in large building projects are architectural. The cost overrun due to the change orders is between 6-10% of the original value. The schedule overrun is shown to be less than 10% of the original project duration.
The owner is the main source of change orders. Change of plans by the owner is the main cause of changes. The possible reasons for this are: the owner was not involved in the design process, the owner did not well understand the design or the owner may change his/her mind.
The second main cause of change orders is substituting material and/or procedures by the owner. This may occur as a result of availability of new materials in the market or the owner may change his/her mind about the required material.
Consultant is the second major contributor to change orders. This occurs when the consultant generates conflicting design documents or changes in design afterward.
To control the change orders, the respondents ranked the clarity of the scope of change as the first. Freeze of design and review of the contract for gray areas were ranked last and the least used controls by the contractors and consultants
The survey showed that contractor and consultant agree to a large extent on the causes, effects and controls of change orders. This is an indication of a mature and well developed contractual relationship.
Page 1
Table 3
Ranking of Effects of Change Orders
No.Effect of Change Order Ranking by Consultant Ranking by Contractor Combined Ranking
1Decrease in Productivity847
2Delay in Completion Schedule212
3Dispute Between Owner & Contractor496
4Decrease in Work Quality91010
5Increase in Project Cost121
6Additional Revenue for Contractor353
7Delay of Material & Tools878
8Work on Hold In Other Areas677
9Increase in Contractor Overhead735
10Delays in Payment to Contractor989
11Demolition & Re-work564 ______
Page 1
7. Recommendations
Based on the research findings and conclusion and based on the findings of previous studies discussed in the literature review, different recommendations are useful to be applied.
Since the owner is the main source of change orders, it very helpful to use a three-dimensional model to help owner see their projects before construction. Also, the use of animation can help minimize the change order raised by owners.
It is recommended that owners make adequate financial planning during the planning stage to avoid changing plans. On the other hand, the owners may need to get a project management consultant firm to supervise the design and construction which help ensure meeting the customer needs and expectations.
Also, the engineer needs to specify the material of the building in a detailed manner to minimize or eliminate the possibility of change order. Performance specification is another way of insuring that material to be used is meeting the requirement. The change orders should not be thought of always a source of benefit for the contactor. The contractor needs to educate his personnel on the negative effects of change orders. The contractors should consider the direct and indirect impact when there is a change order.