Monday, April 1, 2013

When Are Change Orders Appropriate?

Change orders are to be expected on public works construction projects.  It's impossible to design a project to address all unknowns that may arise.  But when should additional work be performed as a change order, and when should it be bid as a separate project?

Politics and change orders:  Sometimes, political decisions cause public agencies to issue change orders in order to meet critical deadlines.  The borough of Belmar, New Jersey recently bypassed competitive bidding for more than a half million dollars of electrical and foundation work in repairing the borough's boardwalk that had been damaged by Superstorm Sandy.  Officials are racing to have the boardwalk opened in time for Memorial Day tourists.

NJ change order regulations:  New Jersey state regulations prohibit change orders for "extra work that could reasonably be effectuated by a separately bid contract without unduly disrupting the basic work or imposing adverse cost consequences."  The state code also prohibits change orders if they "materially expand upon the size, nature or scope of the project as it was originally described in the bid specifications."  Experts noted, however, that other parts of the regulations provide flexibility to support Belmar's actions.

Article on Belmar's change order:  Click here for an article describing more of the circumstances surrounding Belmar's change order.

Negotiate and document:  When change orders are necessary, it is important for public agencies to carefully review detailed backup documentation of the contractor's proposed costs, and, where appropriate to negotiate costs.  A record of the negotiations process should be maintained to demonstrate that the amount of the change order is competitive and reasonable.  This type of cost analysis is required for federally funded projects, and is a good practice for all projects. 

Change orders in Washington state:  Unlike New Jersey, Washington state does not have any state laws addressing when it is or isn't appropriate to execute a change order.  However, the Washington State Auditor's Office routinely issues audit findings to public agencies for change orders they deem are outside the original scope of work and could be bid as a separate project.  In January 2012, the Auditor's Office issued a performance audit on the importance of agencies negotiating and documenting change order costs.  Click here to read my blog entry on their audit report.

Mike Purdy's Public Contracting Blog 
© 2013 by Michael E. Purdy Associates, LLC

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