Wednesday, April 17, 2013

When Are Change Orders Not Appropriate?

We know that change orders are a fact of life on pubic works construction projects.  But are all change orders appropriate?  

Auditor and City disagree:  A change order issued by the City of Kennewick, Washington was the recent subject of an audit finding issued by the Washington State Auditor's Office.  The auditor noted that the change order was inappropriate and the work should have been bid.  The City argued that the auditor had no statutory support for their subjective decision, and that the City got the best financial deal possible for the taxpayers.

Basic facts:  Shortly after the City awarded a contract for building a new sports pavilion using a "Sprung Instant Structure" specified in the bidding documents, the City executed a no cost change order with the low bidder changing the building to a pre-engineering steel building instead.  The change order, which was executed prior to the work beginning, also increased the size of the building by 8,000 square feet and added 20 years of the useful life to the facility over the original design.

Reasonable price?  Even though the change order was a no cost change order, the auditor argued that the City cannot verify that it received the most reasonable price for the project, which should have been re-bid with new specifications for a new pre-engineering steel building.  In addition, the auditor noted, the scope of work that was the subject of the change order was very different than the project that was bid, and thus the new project should have been competitively bid in accordance with state law.  

City's position:  The City argued that the change order ended up costing the City less than it would have if the pre-engineering steel building were bid, as the City did not incur costs for termination of the existing contract, redesign costs, and delay costs pushing the project into a potentially higher priced bidding climate.

Subjective area:  There are no state laws in Washington specifically addressing the subject of when a change order is or is not appropriate.  The driving principle is that public works projects must be competitively bid.  When the scope of work is materially changed or increased beyond what was competitively bid, the auditor has consistently taken the position that agencies have violated the law.  What constitutes a material increase or change in the work is obviously subject to interpretation, and public agencies and the auditor's office often come to different conclusions.  

Project planning:  The City of Kennewick project points out the importance of public agencies doing sufficient design planning when preparing bidding documents.  It is interesting that the City had not previously evaluated the possibility of specifying a pre-engineering steel building instead of the "Sprung Instant Structure."  

Documentation:  Sometimes, public agencies make change order decisions for what they believe are the best of reasons.  If such a change order, however, may appear to be a material change, public agencies should be careful to clearly document not only the reasons for the change order, but to conduct a detailed cost analysis demonstrating why the price of the change order represents the best price that could be obtained, even in a competitive bid situation.  Such justification and cost analysis documentation may prove useful when the auditor's office reviews the actions of the public agency.

More information:  Click here to read the audit finding.

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

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