Quantifying the Impact of Change Orders

By John S. Mrowiec

Contractors or subcontractors sometimes seek compensation for labor cost overruns, contending that project change has adversely affected their labor productivity on the unchanged work.

Among typical owner responses are that the claimant has demonstrated no link between the change and labor productivity on other work, the claimant has not ruled out other causes, signed change orders release that "cumulative impact" claim or the amount sought is overstated. Owners and the courts seek evidence for causation of change to reduced labor productivity.

Contractors have sought empirical support for the concept that change might adversely impact unchanged work on a particular project.

Beyond that, there seems to be no method to recognize this phenomenon, much less to quantify it, at the time of agreeing to specific change orders.

Previous Studies Done

In the March 2003 issue, we wrote about some of the empirical studies of the effect of project change orders on labor productivity. One of the more prolific authors of some of the most recent studies was Professor Awad Hanna of the University of Wisconsin at Madison.

Between 1999 and 2002, he had teamed with others to publish three studies: A. Hanna, J. Russell, T. Gotzion & E. Nordheim, Impact of Change Orders on Labor Efficiency for Mechanical Construction, 125 J. Constr. Eng. & Mgmnt. 176 (1999); A. Hanna, J. Russell, E. Nordheim & M. Bruggink, Impact of Change Orders on Labor Efficiency for Electrical Construction, 125 J. Constr. Eng. & Mgmnt. 224 (1999); and A. Hanna, R. Camlic, P. Peterson & E. Nordheim, Quantitative Definition of Projects Impacted by Change Orders, 128 J. Constr. Eng. & Mgmnt. 57 (2002).

Summarizing the 1999 studies, the authors reported that there appeared to be a relationship between the timing of change orders and the amount by which labor efficiency was impacted. Those 1999 studies reported a "direct relationship" between change orders and schedule compression, stacking of trades and the sequencing of work.

Quantifying Change Order Effect

Unanswered by the 1999 and 2002 studies was, even if it is more likely than not that the cumulative impact of the change orders were the cause of reduced labor productivity, how does one quantify the impact caused by the change orders?

A new study attempts to answer that question, A. Hanna, R. Camlic, P. Peterson, M. Lee, Cumulative Effect of Project Changes for Electrical and Mechanical Construction, 130 J. Constr. Eng. & Mgmnt. 762 (Dec. 2004).

The study reviewed electrical and mechanical projects with lump-sum contracts, employing a design-bid-build project delivery system and between 2,000 and 240,000 manhours in size. Labor hours were used as the basis of defining percentage of change, productivity loss and project size. That way, geographic price differences are eliminated.

According to the authors, a delta approach can show both cause and effect of the cumulative impact of the change order.

Delta was defined as the difference between the actual labor hours to complete the project and the estimated base hours plus the approved change order hours. Positive deltas reflect a loss, and negative deltas a higher-than-expected efficiency.

The authors note that delta can result not only from change orders but from contractor-caused inefficiencies, underestimated original contract hours or other productivity inhibitors like weather.

Data was collected in conjunction with the Construction Industry Institute. The 2004 study included only those projects where it had been determined that change orders were the "main reason" for productivity loss and where the contractors believed the original estimates were reasonable.

Then, the authors employed a two-phase approach.

First, the authors performed statistical hypothesis testing on 70 variables to determine correlation between those factors and the percent delta. Second, the authors employed the multiple linear regression process to develop a model from the independent variables in the database that would predict the value of the dependent variable, percent delta.

Some factors were found to be significant in the first phase hypothesis testing but were eliminated in the second phase because they were found not to have predictive power when interacting with other factors. The study then involved a sensitivity analysis of the regression model to determine if the variables in the model affect the final value of percent delta.

Study Results

The study found that the percent delta increased (more non-change order labor overrun) as the percent of change increased and as change order processing time increased.

However, when contractors regularly track labor productivity, the percent delta is significantly lower (less non-change order labor overrun) than when productivity is not tracked.

The variables ultimately judged, in combination, as most reliable for predicting the quantity of impacted labor hours and their determined coefficients were (1) percentage of project change (0.12), (2) percentage of project manager time devoted to the project, (-0.08), (3) percentage of owner-initiated (as opposed to design errors) change (-0.17), (4) whether the contractor tracked productivity (-0.09), (5) whether there was over manning (-0.05), and (6) change order processing time (0.02).

The study tested its predicting model on 42 projects with 78 percent predicting the labor overrun within 10 percent of the actual loss, and then used seven new projects to validate the model. All seven predicted the loss within 16 percent of the actual.

Whether the 2004 study actually will be employed by claimants, and accepted by courts, for quantifying the cumulative impact of changes on the unchanged work, remains to be seen. The study did result in some claims prevention advice to owners and contractors.

The authors recommend that owners attempt to limit changes from design errors by spending more time and money with the design team ahead of construction. When changes arise, reduce the processing time.

They also recommend that contractors spend more effort in tracking productivity during the project. They find that projects where the contractor updates the schedule regularly had lower productivity losses.

John S. Mrowiec is a partner with Chicago-based Conway & Mrowiec, a construction and public contracts law and litigation practice. He may be reached at (312) 658-1100. For information, go to the firm's Web site at www.cmcontractors.com.