Although change orders are not always a bad thing, site developers and construction companies have formulated a few guidelines for minimizing them.
By: Paul Dvorak/Editor
Contract change orders are so ubiquitous in some industries that if you Google the term, spaghetti-like flow charts pop up showing how a few organizations handle the changes. The charts are mostly from state organizations and aimed at road construction companies.
Change orders are often requests subcontractors present to site developers because of unanticipated conditions usually in the soil or scheduling. The general impression is that change orders are from oversights or embarrassing mistakes. But that is not always the case, say the people we interviewed. Wind farms are considerably different from general road and construction jobs because so much is influenced by their remoteness, large and complex schedules, and that coveted PPA.
Where do they come from? The first wind farm finished many projects ago, so why do change orders still crop up? There are many reasons, but our sources focused on these:
It’s the roads. “From our experience, it’s the roads and the reason is that they cover a large part of the construction work in wind projects,” says Blair Loftis, Kleinfelder Engineering’s VP and national director of alternative and renewable energy. “A turbine site might occupy only a quarter acre, but you can have many miles of roads for construction access and permanent use.”
Scheduling errors. “We’ve had only two noteworthy change orders on wind projects in the last 12 years and both involved late supply of wind turbines,” says Andrew Fowler, Executive VP of Construction with RES Americas. “Both occasions involved the late delivery of turbines due to new facilities and technology. The first occasion was from issues at the new turbine factory and the second was due to the slow delivery of a brand new turbine model,” says Fowler. “RES Americas has a successful record of BOP construction projects, but obviously, if the delivery of the turbines is delayed, the impact on the construction schedule can be significant. If a turbine design is new or the turbines are being shipped a long distance, that can affect delivery in a bad way.”
In addition, each state DOT has different rules on width, length, and divisible roads. Some states, for instance, let trucks piggyback two components, two blades or a blade and a hub. Other states insist that if such a load can be divided, then it’s an oversized load, and must be divided into two.
What’s more, truck loads may be fine when they leave the factory. But when they come to a border, they may have to go far to the east before heading west because one state on a more direct route says the truck isn’t loaded properly.
Remote locations: When equipment companies deliver machinery to conventional locations, they go to an address on a paved road most drivers can easily find. But when delivering turbines to a wind farm, the “address” is a dirt road in a corn field that looks like every other corn field in the country. To make matters worse, components are coming from all points on the compass and they must arrive in a four-hour window. That kind of precision invites delays.
Hurry, get the power purchase agreement: Owners are trying to get their power to market quickly and do what they can to limit the capital put forth in early design stages. “They have to put enough capitol up front to acquire the purchase agreement or PPA, and to do that they must move forward to final construction stages,” says Kleinfelder’s Loftis. But most planning for the pro forma is done off of limited engineering. For instance an owner may only take the project up to 60% of engineering design to secure the PPA because that gives the project financial legs. That PPA comes with a hard date to get the project grid connected. Hence, rushing and risks.”
Owners will take risks to cut costs. “Change orders are not always bad,” says David Hattery, a partner with Seattle-based law firm Stoel Rives LLC. Hattery has 20 years of legal experience with energy construction projects. “Change orders can be good for a project because they may lead to lower costs. The insinuation some make is that something sinister or bad has happened. The reality is that, change orders merely deal with unanticipated situations. A lot of what goes into a contract is the allocation of risk.”
A tower foundation provides a simple example. “A contractor may assume in its bid price that the foundations will be built in good soil based on the owner’s soil report,” says Hattery. “If the contractor starts work and finds something not shown in that report, say, hard rock, which is more expensive to deal with, then that will call for a different foundation and a redesign. If a contract makes the contractor responsible for these extra costs, then it will reasonably increase its bid price to cover the risk of encountering rock, pocketing the difference if no rock is encountered. However, if the contractor knows that it will get a change order if it runs into rock, it will price the foundations for the less expensive foundation, and the owner will only pay the extra costs if and when the foundations hit rock. This results in a fairer price and a more efficient project overall.
A few best practices. For construction firms, detailed plans are one way to avoid change orders. “Ideally, everyone will have their engineering correct at the beginning of the project,” says RES Americas’ Fowler. “It’s important to have the construction team involved in the development phase. That way, development benefits from the experience of the construction team and construction is able to better plan its work with a better understanding of the entire project.” But the ideal is infrequently encountered, so our experts suggest these best practices for avoiding construction change orders.
Best practice 1: Get subcontractors involved as early as possible. All contributors agree that the secret, if it’s a secret, is to get everyone onboard early on. “Having everyone working from the same plan at the outset makes it easier to iron out wrinkles before construction commences. That let us avoid change orders,” says Fowler.
Others concur. “We normally know about a project six months to a year in advance,” says Kleinfelder’s Loftis. “That’s when we start working with owners in a controlled format looking for encumbrances and constraint issues that can be built into an evaluation. And if not, the issues can be raised and contingencies planned.
Loftis says a few early questions to ask include: How much of the real-estate is available for wind development? Can we anticipate intervening concerns? What issues surround habitat or jurisdictional delineations? What about the community or stake holders that may intervene and want some land conveyance? There may be some specific creature, flora or fauna, relevant to that region. “Working with owners early in a consulting approach lets us anticipate these things so they are not surprises,” he says.
Best practice 2: Walk the site. Surprisingly, some projects are bid sight unseen, in engineering terms, says Kleinfleder’s Loftis. “Bidders will look at photo imagery. Google is sufficiently advanced for that, after which they will put together an order-of-magnitude bid. You really have to get out there, look at the site, and see what the constraints may be and what conditions vary across the site. There is no substitute for putting boots on the ground. Otherwise, bidders make gross generalizations. We often go out with the developer and a team that includes a representative from the construction company, the site’s geotechnical engineer, its meteorologist for wind resources, the site’s biologist, and the civil design engineer. The team approach is to look at the site and evaluate the issues to incorporate into the plan, the scope, and ultimately, the cost.”
Also, look at alternative surveys, any sort of exhibit from the developer. This information will assist in developing a useful field exercise, a site walk or reconnaissance.
Best practice 3: Thoroughly review the contract to alleviate risk. Just as you walk the site, “walk” the contract. “Identify the project areas you think are going to be problems and spend your powder there,” says Stoel Rives’ Hattery. As the industry grows, it moves toward standardization, even though every project differs. Hattery suggests several questions in a contract review. For instance, how remote is the site? A lot of project work involves moving large equipment. A lot of it on rough roads that are fairly dicey, and in windy places. “Every site will have a different challenge be it roads, weather, or rain,” he says.
“In this practice, you literally read through each and every contract clause and think: What’s different about this project? Talk to developers and owners. The question I like asking is: ‘What do you think is going to be the problem?’ Engineers know this. Are they worried about a tight schedule? Worried about the turbines being delivered all at once or about crane availability? Are they worried about not getting the A-team from a particular contractor?” says Hattery.
Best practice 4: Write your preferences into the contract.Ask for key people, those you trust, and write their names into the contract, says Hattery. “The last thing to worry about is getting inexperienced crews. As contract director, you can go into all levels of detail.”
Best practice 5: Let the BOP contractor supply the turbines.“This gives the contractor responsibility for coordinating turbine delivery so the units arrive when they are ready to be lifted,” says Fowler. “On the two occasions I mentioned when we did encounter significant delays due to the late delivery of turbines, we had big cranes on site just waiting, for six months in one case and nine months in the other. That is a long time for any construction project to be on hold, and like any industry, delays cost money. A contractor in control of the turbine supplier would have total responsibility to short out the issues.”
Best practice 6: Keep the bidding competitive.“This is important for strategic reasons,” says Fowler. “If someone comes in way under two or three bids that you know are about right, then you have be careful.” A bid of 20 or 30% less than the budget should be a red flag.
Hence, it is always a good idea to keep bidding competitive. “There is always someone else lined up for the next project. Aligning yourself with multiple trusted partners puts you in a stronger position. If you have just one company bidding some aspect of a
project, then it is more difficult to spot issues as you have no comp-arison and are in a far weaker position to fix the problem when you find them.”
Fowler admits that his advice comes from events that occurred two years ago when conditions were different than they are today. “For example, a lot of projects were moving forward, but there was a shortage of turbines. Consequently, companies were ordering turbines a couple of years in advance. Things have changed a lot since then. One big difference is that the supply of turbines has increased, so people need not order too far ahead and turbine suppliers need not be on critical path with different projects competing for the same production slot.”
Best practice 7: Use face-to-face conferences to find problems.“I’m a big advocate of, at some point, sitting down with the project team in a face-to-face meeting,” says Stoel Rives’ Hattery. “Only so much can be done on the phone, so at some point you need to sit down in a quiet room, turn off the cell phones, and think about the project, the site plan, and carefully consider the appropriate allocation of risk for this specific project. As a gatherer of issues, I’ll try to get those risk points clearly covered in the contract. I’m very respectful of the professional developers and engineers. They know what they are doing,” he says.
Hattery suggests a few titles to invite. “If we represent owners, as we do more often than we do contractors, there will be a key leader or project developer, and they will also bring in an outside engineering firm or two. and a project developer who is responsible for things such as permit siting. A director of construction often comes into a project after development has progressed to a point where construction is the issue and they really put in the details. Those are the people you want because their issues converge,” he says.
Best practice 8: Work on clear communications and good relationships. Good relationships should link the owner, contractor, and equipment vendor. Make sure the subcontractor is able to complete its tasks on time. “If bidding out to subcontractors, use people you have used before and you like. They are more likely to understand the requirements and give you a better idea of what real costs should be,” says Fowler.
“Include the OEMs because they typically come on site and commission their turbines,” says Hattery. The turbine OEMs will deliver, but the BOP contractor mechanically completes the equipment. “The contractor and OEM will walk through each turbine and say this is mechanically complete after which the OEM representative will commission the turbine. The better those people talk to each other, respect each other, and believe that one is not trying to get into the other’s pocket, the more smoothly the project flows.
Lawyers will spend a lot of time on how turbines will be considered mechanically complete. “I want an agreed checklist so that the owner, the BOP contractor, and OEM are all on the same page,” says Hattery.
In addition, these details should be clearly listed in a document for all significant parties. “Then everyone can stay in their lanes, they know what to do, and have a clear expectation that if something is not done, it’s on their watch. If it’s on someone else’s watch, we know it too,” he adds.
Best practice 9: Update the project checklists as the industry changes. Each project will probably require several checklists before the final walk-through. The box, Change orders for late bolts, tells of seemingly inconspicuous items that are absolutely essential but were overlooked until they were needed.
Bake the details of a checklist into the contract, says Hattery. Most such checklists are proprietary and everyone has a little different way of going about them, but such lists can be points of negotiation. “There is a confluence of three interest here,” says Hattery. “It’s where to interface with a construction guy from the developer’s side, with the contractor’s project manager, and the turbine manufacturer.”
One construction firm tells of a distribution to which it sends its most recent compilation of lessons learned from the previous job. The list goes to subcontractors, suppliers, staff, and supervisors from the project. And the firm expects its subs to implement the lessons.
The firm also builds the lessons learned into preconstruction planning meetings that are reviewed
for follow-on projects. Checklists of this sort can approach 100 items and includes lines for sales tags, labor relations, community relations, to engineering check-offs and budgets.
And don’t wait for subcontractors to ask for copies of the list. Send it to them and expect to see its ideas in their next proposal.
Best practice 10: Put the schedule on a Gantt chart and share it. A Gantt chart is a schedule of interdepend-ent tasks, predecessors, a critical path, leading and lagging events, milestones, resource loading all of which require buy-in. Loftis suggests several scenarios and how they might play out guided by a Gantt chart.
“A Gantt chart can be overlaid with the construction schedule and so let teams head off conflicts. For instance, suppose someone suggests finishing the geo-technical work in a month. The chart might indicate the task as doable if that team runs four crews instead of two, and at an additional cost.”
Another scenario might show need for an 80% complete civil design because a category supervisor has to review it before getting building permits. “Suppose the 80% mark must be reached by December while the Gantt chart shows the work not done until March, then you can respond with a need for more resources to accelerate work and request additional costs. Go through this approach so teams understand the interconnections between scope, schedule, and budgets,” says Loftis.
The design gets buy-in this way. “The final thing we do is assign a qualified project manager, whose only role in the project is to manage the iron triangle – scope, schedule, and budget. Every project needs someone accountable for making sure things stay within the bounds of the triangle,” he adds.
So change orders are not always some-thing bad, they are just part of contract administration. There are often no-cost changes, and occasionally they are deductive cost changes. Sometimes prices go down. “We’ve seen projects with dozens of change orders, and that does not mean there are bad things going on,” says Hattery. “It can mean that the parties are on top of all the little changes and people are being careful contract administrations. And then there are projects with few change orders but huge problems and law suits. So, the two things do not necessarily correlate.”
Fowler says his goal is always zero change orders to the client, something his company has delivered more than once in the past few years. “In cases where we had a few from subcontractors, we handled them in a way that resulted in none to clients. It’s how you get repeat business.” And this business, some say, is all about repeat business. WPE
Filed Under: Construction, Projects