Construction Contract Changes: Days Turn into Months Without Oversight

Published: August 26, 2019

Architecture Engineering and ConstructionUSACEGSA

Contract change orders can be unknown risks to companies, but the government has its own duty to spend dollars wisely.

On construction sites, workers are operating heavy machinery, demolishing buildings, pouring concrete, and installing electrical and heating and air conditioning systems. Beyond the site, traffic lanes are blocked off, cars diverted, or roads simply closed. Construction companies are accustomed to these aspects of their projects and their impact on cost and performance. However, government contractors are often hit by the unexpected—on paper.

“Changes in, and additions to, scopes of work represent unknown and, to a large extent, uncontrollable risks. They can have an enormous impact on the time of performance and costs,” Edward DeLisle, co-chairman of the Federal Contracting Group at Cohen Seglias Pallas Greenhall and Furman law firm, told two House Small Business subcommittees in a 2017 hearing.

“Often the government does not move as quickly as it should, which puts the contractors—especially a small government contractor—in a difficult situation,” he said.

Delays in Change Orders

The contract change orders can be time-consuming, and, as DeLisle said, they can be unknown risks to companies. The government, however, has its own priorities to make sure it is allocating federal dollars wisely.

In a study of the U.S. Army Corps of Engineers (USACE), the agency completes many change orders within 60 days, based on change orders made between 2013 and 2018. Yet, approximately 45 percent of the contract changes lasted more than 60 days, and just more than 3 percent took more than a year, according to the Government Accountability Office report.

A large part of the delay comes from the overall process and the government making sure the change order is prudent and appropriate. The process includes creating a cost estimate, identifying funds, negotiating with the contractor, completing reviews, and ultimately processing the change order.

“Some of these steps play a role in protecting the government’s best interests,” agency officials told GAO.

Indeed, USACE told GAO that a significant factor affecting the timeline is getting a complete proposal that includes the sufficient information on cost and schedule changes. Without the necessary information, the two sides have to delay negotiations.

Like other times when two parties work together, miscommunication can be a major obstacle. A contractor may conduct unauthorized work during the process. The result is additional reviews and longer delays. These lengthy delays hit small contractors hard.

USACE, GSA AEC Contracts

Contract spending has increased with a large portion of contractors identified as small businesses.

USACE has increased its overall contract spending by 53.2% from FY 2017 to FY 2018, with the overwhelming amount going to Architecture, Engineering and Construction (AEC) projects. AEC jumped from $8.14 billion in FY 2017 to $12.07 billion in FY 2018.

 

 

 

 

 

 

 

 

 

Its largest NAICS code was for Commercial and Institutional Building Construction, and that code jumped nearly 76% from FY 2016 to FY 2018 to $6.9 billion. Small businesses hold 35% of AEC contracts.

While smaller than USACE, the General Services Administration’s Public Building Service (PBS) has increased its contract spending by more than 9% from FY 2017 to FY 2018. It awards contracts mainly for AEC work and more specifically to the Commercial and Institutional Building Construction NAICS code, like USACE. For PBS’s AEC contracts, roughly a third of the contractors are small businesses.

Lawmakers have been concerned about these delays, particularly creating uncertainties for small contractors. They note that small businesses don’t have overhead margins, like larger prime contractors, and cannot afford to go unpaid for work they have performed. Without these prompt payments, some firms will struggle to meet their payroll.

Change Orders from Start to Finish

The result of the Small Business Committee’s efforts, the Fiscal Year 2019 National Defense Authorization Act requires agencies to improve construction contract administration. It requires agencies to share their policies and practices to comply with definitization of requests for a reasonable adjustment, and then the agency has to show its past performance regarding change orders in the previous three years.

So far, only USACE has such data collected, and it does not monitor it regularly. Its systems produce contract change data for its districts, but data consolidation and calculations must be done manually and are not done regularly, according to GAO. Thus, officials at USACE, and particularly at PBS, which does not even track such data, cannot identify problems and respond to them appropriately.

“Given these limitations, USACE and PBS cannot centrally identify emerging problems with contract change timeframes or monitor compliance,” GAO states in its report.

Neither have strategies for gathering and tracking the data.

“These data system limitations are likely to create difficulties for agencies when providing the information required by new legislation,” GAO noted.

USACE responded to GAO’s comments, saying that it will develop the strategy to expand on existing data systems to routinely collect information and monitor how long it takes to finalize a change order. GSA said it would develop a strategy as well.

With regular collections and reviews of information on the contract change process, contracting officials can spot potential problems.

“What happens, for example, when the contractor realizes that it cannot build what is depicted on the plans and specifications, or a situation where the government decides to change the configuration of a room in the middle of performance?” DeLisle asked the subcommittees. “That’s where the real risk lies for a construction contractor, especially a small one. And they happen all the time.”