The State of Pennsylvania Claims Contractor is “Change Order Scheming”

The State of Pennsylvania Claims Contractor is “Change Order Scheming”

https://www.constructiondive.com/news/pennsylvania-lawmaker-proposes-legislation-to-prevent-change-order-schemin/600254/

Today’s topic comes from an article from Construction Dive titled, Pennsylvania Lawmaker Proposes Legislation to Prevent ‘Change Order Scheming’ on State Projects

Change Order Scheming (Construction Dive, 2021)

The State’s proposed legislation is motivated by higher-than-expected costs on the Mount Rose I-83 interchange project. The situation is a microcosm of the construction industry’s discrepancy between the clients and contractor’s perception of what causes change orders. In this instance, the client (State of Pennsylvania) is under the impression that contractors are “cheating” them by bidding low to be selected and then using “change order scheming” to make up the cost during execution. In contrast, the contractor (Cherry Hill Construction) claims that “most change orders result from owner-provided designs and field changes to those designs.” The change orders the contractor is referring to include:

  • Unexpected water and debris, costing $24 million in change orders and a 598-day extension to the schedule.
  • The State’s decision to remove unexpected materials encountered in excavation.
  • The State’s own design errors, and the hundreds of change orders required to correct them.

Who is Right? Will Legislation Solve the Issue?

The State, in their accusations, assume the contractors are primarily at fault and are intentionally causing change orders. Taking this project in isolation, it is easier to draw that conclusion, but to fully understand the reason for the change orders, we need a macro perspective of the industry. By looking at the big picture we can identify that this project is not a unique situation. Project change orders to this degree are common industry wide. Recent studies report only 20% of projects finish on time and 32% on budget (Rivera, 2017). Just by examining the news in the last few months, it is easy to find large projects which have fell under litigation due to the same type of disagreements:

When looking at the construction industry’s performance issues over the years, it would be very unlikely that the source of increase costs/time is due to the majority of contractors being cheaters. An alternative explanation would be that there is a systemic problem with the method by which projects are procured and delivered.

The Performance Based Studies Research Group (www.pbsrg.com) has performed various studies researching the cause of change orders. The three largest studies were done with the US Army Medical Command, State entities within Minnesota, and Rijswaterstaat (Dutch Public Works and Water Management agency). The studies document hundreds of projects valuing more than $2 Billion. The results identified that in most cases less than 5% of change orders were due to the contractor, with the primary cause of change orders being the client, and the second cause being unforeseen conditions (Kashiwagi et al., 2012; Van de Rijt et al., 2011).

 Problem: The State isn’t Utilizing Expertise

If the contractors were the source of the issue, legislation could be a potential solution. However, the data would suggest that client stakeholder issues and unforeseen conditions are the source of most change orders. The PBSRG studies would reaffirm Cherry Hill Construction’s claims on the I-83 project:

  • Client stakeholder issues, change orders based on design errors
  • Unforeseen conditions, change orders based on new information such as the unexpected material in excavation and water/debris.

Expertise is the only tool that can mitigate these types of change orders. Client stakeholder issues can be mitigated through proper coordination and preplanning. For instance, design errors are to be caught by an expert upfront, immediately identifying the cost for correction. The cost for correction should be lower than if caught later or too late in a project. Unforeseen conditions should be mitigated as experts have more accurate estimates and plans, resulting in less unforeseen conditions and impact upon occurrence, due to proper mitigation.

The article points out that the State does not gauge expertise in their selection of contractors. Rather, the State treats all contractors the same and hires the lowest price. The problem may not be cheating, but the State’s inability to identify and utilize expertise caused by the widespread use of the “low-bid” procurement and project management approach in the construction industry.

Solution: An Approach Which Utilizes Expertise

The Best Value Approach (BVA) hires contractors based on their expertise and places the contractor in the role of the expert. The BVA utilizes a system which allows contractors to clarify and plan a project before execution. After execution the BVA tracks and mitigates risk throughout the project through a licensed reporting system. The documented performance of the system is as follows:

  • 2,000 projects valued at $6.6B over 30 years.
  • 94% of projects finishing on time, on budget and with a satisfied client.
  • 65 ASU Intellectual property Licenses.
  • 384+ academic journal papers.

To learn more about the Best Value Approach and how it brings accountability and utilizes proactive expert contractors, go to:

  1. Free membership for latest tips and news: https://pbsrg.com/membership/
  2. For latest books, events, and licensed partners: https://pbsrg.com/resources/
  3. Latest BVA journal publications: www.cibw117.org/
  4. Annual Best Value Conference in January: https://bestvalueconference.ksm-inc.com/
  5. Latest presentations and videos: https://www.youtube.com/channel/UCxBi26nXLDTqG4ZRV6p0iiQ

 References

Kashiwagi, D., Kashiwagi, J., Smithwick, J., Kashiwagi, I., Kashiwagi, A. (2012) The Source of Degradation of the Construction Industry Performance. Journal for the Advancement of Performance Information & Value, 4(2).

Rivera, A. O. (2017). Shifting from Management to Leadership: A Procurement Model Adaptation to Project Management (Doctoral dissertation, Arizona State University).

Van de Rijt, Witteveen, W., Vis, C., & Santema, S. (2011) Best Value at the Directorate-General for Public Works and Water Management in The Netherlands: A Case Study of the Procurement of Infrastructure Projects Worth $1,200M. Journal for the Advancement of Performance Information & Value, 3(1).