Wednesday, November 6, 2013

When is a Change Order Permitted vs. Bidding the Work Separately?

Under what circumstances may a public agency issue a change order to a public construction project, versus when must additional work an agency desires to add to a project be separately bid and awarded?

It's an important question.  The answer, however, isn't always clear. Just like the skies of the Pacific Northwest, some things are simply gray.

Audit finding:  In the State of Washington, the State Auditor's Office regularly issues audit findings against agencies who have issued change orders for work that was "not included in the awarded bid specifications."  The Auditor's Office recently issued an audit finding against the Orcas Island Fire Department for adding $56,000 of work to a $426,562 contract for construction of a new fire station.  The audit report noted that the work included in the change orders represented "separate projects and appropriate bidding procedures should have been followed."  Unfortunately, the audit report does not identify the nature of the change order work that the auditor deemed inappropriate.

All change orders represent work not bid  The audit report makes the following statement: "Change orders are only allowable if the additional work is within the bid upon scope of the project."  By their very nature, all change orders include work that are not part of the "bid upon scope of the project."  That's the reason why a change order is necessary.  The audit report statement that "change orders are only allowable" under certain circumstances represents an opinion that is not specifically supported by any state law. 

Spectrum of acceptable actions:  Clearly, there are some change orders that are outside the original intent and scope of a project that should be bid as separate projects.  But there are also other change orders that may be outside the original intent of the project where it makes more sense to execute a change order.  Here are some reasons why it isn't always in the public's interests to separately bid all changed work:
  • Mobilization costs:  Adding work may be less expensive due to reduced contractor mobilization costs.
  • Safety issues:  There may be safety concerns associated with having more than one contractor on the project site.
  • Accountability:  With one contractor, it is easier to identify what party is responsible for coordination and appropriate performance and execution of the work.  
  • Contract documents are never complete:  No set of drawings and specifications that are bid is ever 100% complete.  It's simply not possible or cost effective to develop such documents.  The very nature of the construction process is that there will be unexpected conditions that arise, and changes and additions to the work that are necessary.
Ensuring competitive costs on change order work:  One of the criticisms of auditors with change order work is that there is an increased risk for a public agency of not receiving "the best price possible."  Just as public agencies are frequently required by laws and regulations to develop a cost estimate for each project (federally funded projects require this, and RCW 39.04.020 requires it in Washington state), a cost estimate can and should be developed for change order work.  Public agencies should also require from contractors a breakdown of change order costs with backup documentation that can be compared with the agency's estimate.  

Problems with low bidders:  Bidding is not the only method to determine the best price possible, and, in fact, bidding comes with its own host of challenges as evidenced by the experience of so many agencies of the problems that often come from the low bidder.  While a bidder may be low, their bid may be too low and an agency may end up either paying more to administer the project, deal with delays, and put up with inadequate performance. 
The question:  Change orders are a fact of life for construction projects, whether it is for governmental, commercial, industrial, or residential construction.  When is a change order permitted versus when must additional work be bid separately?  The answer is complicated and depends on the specific circumstances.  Agencies in Washington state, however, should be aware of the conservative position that the State Auditor's Office routinely takes on change orders and act appropriately.

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

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