KING FAHD UNIVERSITY OF PETROLEUM & MINERALSDHAHRAN, SAUDI ARABIA

Construction Engineering & ManagementCEM-520

CHANGE ORDERS IN CONSTRUCTION PROJECTS IN SAUDI ARABIA

BYAbdulghafoor Habib Al-Dubaisi

Represented By

Ali Al-MalkiAbdulwahid Al-Zahrani

Deyab Al-JubranMohammed Al-Shammari

May 27,2007

OUTLINE

1 -INTRODUCTION

2 -OBJECTIVE

3 -LITERATURE REVIEW

4 -CAUSES, EFFECTS AND CONTROLS

5 -SURVEY QUESTIONAIRE

6 -RESULTS AND FINDINGS

7 -CONCLUSIONS

8 -RECOMMENDATION

9 -QUESTIONS AND ANSWERS

1- INTRODUCTION1- INTRODUCTION

Saudi Arabia has in the last thirty years experienced a huge volume of work in the field of construction. This is because the wealth created by the oil which resulted in a

very rapid grow and transformations during the period .

Large and complex projects have been built, attracting contractors and construction companies from all over the world. Most of those contractors and their companies lack sufficient understanding of the social, cultural and physical environment of Saudi

Arabia .

This situation coupled with inexperienced owners led to inadequate design resulting in many changes to plans, specifications, and contract terms which we call it change order. A change order is a written order to the contractor, signed by the owner, and issued after execution of the contract, authorizing a change in the work or an

adjustment in the contract sum or the contract time.

This study will assist both owners and contractors to plan effectively before starting a project and during the design phase to minimize and control changes and change

effects .

This study will also lay foundation for further research on the subject. The study will be limited to large building construction projects (projects costing over 50 million Saudi Riyals) in the Eastern Province of Saudi Arabia.

2- OBJECTIVE2- OBJECTIVE

The main objectives of this research study are to:

1 -Identify the main causes of construction change orders in Saudi Arabia.2 -Identify the severity of those causes.

3 -Test the hypothesis that consultants and contractors disagree on the severity of causes.

3- LITERATURE REVIEW

Introduction

This review is by no means a comprehensive one, it covers most

important articles and subjects and can open the door for

further research on the subject of changes.

The literature review section is divided in four parts.The literature review section is divided in four parts.

The first part defines the The first part defines the basics of changesbasics of changes and their terminology. and their terminology.

The second part covers the The second part covers the legal aspects of changeslegal aspects of changes in literature. in literature.

The third part covers the evaluation and The third part covers the evaluation and cost aspectscost aspects . .

The fourth part concentrates on The fourth part concentrates on control, administrationcontrol, administration of changes. of changes.

Basics of ChangeBasics of Change

A change is any modification to the contractual guidance A change is any modification to the contractual guidance provided to the contractor by the owner or owner's provided to the contractor by the owner or owner's representative. representative.

This includes changes to plans, specifications or any other This includes changes to plans, specifications or any other

contract document.contract document.

Changes in constructions are caused by design, Changes in constructions are caused by design, construction, fabrication, transportation or constructions.construction, fabrication, transportation or constructions.

There are three categories for design changes:There are three categories for design changes:

Design changes caused by improvement through design Design changes caused by improvement through design process.process.

Design changes originated by owner.Design changes originated by owner. Design changes initiated by Engineer or consultant.Design changes initiated by Engineer or consultant.

Changes can be classified by the procedure used to Changes can be classified by the procedure used to introduce themintroduce them

Changes can be classified in terms of net effect on scope Changes can be classified in terms of net effect on scope

The Legal AspectsThe Legal Aspects

The Major Legal Aspects areThe Major Legal Aspects are

Selecting the best delivery system (contract format)Selecting the best delivery system (contract format)

Drafting and interpreting change clauses. Drafting and interpreting change clauses.

Documenting change orders to be ready in case of litigation.Documenting change orders to be ready in case of litigation.

Certainly not all types of contracts are Certainly not all types of contracts are equally sensitive to changes.equally sensitive to changes.

If contracts are classified as either cost If contracts are classified as either cost reimbursable or fixed cost, the latter reimbursable or fixed cost, the latter will be the most sensitive to changes.will be the most sensitive to changes.

Cost AspectsCost Aspects

The cost impact of a change is greatly affected by the The cost impact of a change is greatly affected by the

timing of the change.timing of the change.

A change issued before construction has limited A change issued before construction has limited

effects as compared to a change issued after effects as compared to a change issued after

construction has already started and material have construction has already started and material have

been procured.been procured.

The impacts of a change are classified in the literature The impacts of a change are classified in the literature as follows:as follows:

Direct cost impact.Direct cost impact. Direct schedule impactDirect schedule impact.. Indirect or consequential ImpactsIndirect or consequential Impacts

Management AspectsManagement Aspects

The following actions will help in controlling The following actions will help in controlling changes:changes:

Owner should define his needs and project Owner should define his needs and project objectives early in the project life.objectives early in the project life.

Owner must be committed to change control.Owner must be committed to change control. A team effort by owner, Engineer and contractor A team effort by owner, Engineer and contractor

to promote recognition, reporting and resolution of to promote recognition, reporting and resolution of a change is required throughout the life of the a change is required throughout the life of the project.project.

All changes must be justified from a cost point of All changes must be justified from a cost point of view.view.

Owner should provide people who posses the following Owner should provide people who posses the following skills:skills:

1. 1. Negotiation skills.Negotiation skills.

2. Estimating skills.2. Estimating skills.

3. Engineering design and layout skills.3. Engineering design and layout skills.

4. Communication skills. 4. Communication skills.

4- CAUSES, EFFECTS AND CONTROLS4- CAUSES, EFFECTS AND CONTROLS

CAUSES:CAUSES:

By Owner.By Owner.

By Contractor. By Contractor.

By Designer or Consultant. By Designer or Consultant.

By all three parties combined. By all three parties combined.

By an outside reason. By an outside reason.

EFFECTS:EFFECTS:

On efficiency. On efficiency.

On time. On time.

On cost.On cost.

On relation between owner and contractor. On relation between owner and contractor.

CONTROLS:CONTROLS:

Conducting efficient change order procedures.Conducting efficient change order procedures.

Effective planning of change ordersEffective planning of change orders ..

Following legal and formal procedure. Following legal and formal procedure.

Assessing changes and administrating them.Assessing changes and administrating them.

Implementing team work and effortImplementing team work and effort ..

5- SURVEY QUESTIONAIRE5- SURVEY QUESTIONAIRE

CONTENTS:CONTENTS: Six sections.Six sections.

SAMPLE RESTRICTIONS:SAMPLE RESTRICTIONS: Total qualified participants were:Total qualified participants were:

42 contractors.42 contractors.

41 consultants.41 consultants.

SAMPLE SIZE:SAMPLE SIZE: Statistical principles resulted in choosing 16 responses. Statistical principles resulted in choosing 16 responses.

1717 responses were chosen by the researcherresponses were chosen by the researcher ..

SCORING:SCORING: Ordinal scale was used and transformed into an interval Ordinal scale was used and transformed into an interval

scale .scale .

'never' to 'very often' = zero to 100.'never' to 'very often' = zero to 100.

Using the following equationUsing the following equation::

Importance, Prevalence, and Utilization Indices were Importance, Prevalence, and Utilization Indices were

calculatedcalculated ..

54321543211 0255075100 xxxxxxxxxxIIc

6- RESULTS AND FINDINGS6- RESULTS AND FINDINGS

1.1. The discussion of the results from the sections on The discussion of the results from the sections on general information.general information.

2.2. The analysis of data on causes of change order.The analysis of data on causes of change order.

3.3. The analysis of data on the effects of change The analysis of data on the effects of change orders.orders.

4.4. The analysis of data on controls of change The analysis of data on controls of change orders.orders.

5.5. Correlation and hypothesis testing.Correlation and hypothesis testing.

General InformationGeneral Information Contractors are larger in size (number of employees) than Contractors are larger in size (number of employees) than

consultantsconsultants Most consultants companies (70%) are less than 200 Most consultants companies (70%) are less than 200

employees whereas only 35% of the contractors are smaller employees whereas only 35% of the contractors are smaller than 200 employees than 200 employees

None of the contractors and consultants participated in the None of the contractors and consultants participated in the

survey has experience of less than 5 yearssurvey has experience of less than 5 years

Distribution of contractors and Distribution of contractors and consultants over the type of consultants over the type of construction contract formatconstruction contract format

65% lump sum turnkey 65% lump sum turnkey type. type.

18% lump sum excluding 18% lump sum excluding material. material.

None of the respondents None of the respondents reported design and build reported design and build (D&B) type contract (D&B) type contract

Causes of Change OrdersCauses of Change Orders1.1. Change of plan by ownerChange of plan by owner2.2. Owner financial problemOwner financial problem3.3. Owner change of scheduleOwner change of schedule4.4. The objective of project is not well defineThe objective of project is not well define5.5. Substitution of materials or productSubstitution of materials or product6.6. Conflict between contact documentsConflict between contact documents7.7. Change in design by consultantChange in design by consultant8.8. The scope of work for the contractor is not well definedThe scope of work for the contractor is not well defined9.9. Errors and omissions in designErrors and omissions in design10.10. The lack of coordination between Contractor and consultantThe lack of coordination between Contractor and consultant11.11. Value engineeringValue engineering12.12. Technology changesTechnology changes13.13. Differing site conditionDiffering site condition14.14. Contractor desire to improve his financial situationContractor desire to improve his financial situation15.15. The contractor financial difficultiesThe contractor financial difficulties16.16. The required labor skills are not availableThe required labor skills are not available17.17. The required equipment and tools are not availableThe required equipment and tools are not available18.18. Workmanship or material not meeting the specificationsWorkmanship or material not meeting the specifications19.19. Safety considerationSafety consideration20.20. Weather conditionsWeather conditions21.21. New government regulationsNew government regulations

ContractorsContractorsConsultantsConsultantsContractors Contractors and and

ConsultantsConsultants

11Change of plans by ownerChange of plans by ownerChange of plans by ownerChange of plans by ownerChange of plans by ownerChange of plans by owner

22Errors and omissions in Errors and omissions in designdesign

Substitution of materials or Substitution of materials or proceduresprocedures

Substitution of materials Substitution of materials and proceduresand procedures

33Change in design by Change in design by consultantconsultant

Owner's financial problemsOwner's financial problemsErrors and omissions in Errors and omissions in designdesign

44Substitution of materials or Substitution of materials or procedures.procedures.

Owner change of scheduleOwner change of scheduleOwner financial problemsOwner financial problems

55Owner's financial Owner's financial problems and conflict problems and conflict between contract between contract documents.documents.

Lack of coordination between Lack of coordination between contractor and consultant.contractor and consultant.

Change in design by Change in design by consultantconsultant

Effects of Change OrdersEffects of Change Orders 1.1. Decrease in productivityDecrease in productivity2.2. Delay in completion scheduleDelay in completion schedule3.3. Dispute between owner and Dispute between owner and

contractorcontractor4.4. Decrease in quality of workDecrease in quality of work5.5. Increase in project costIncrease in project cost6.6. Additional revenue for Additional revenue for

contractorcontractor7.7. Delay of material and toolsDelay of material and tools8.8. Hold on work in other areasHold on work in other areas9.9. Increase in contractor's Increase in contractor's

overheadoverhead10.10. Delay in payment to contractorDelay in payment to contractor11.11. Demolition and re-workDemolition and re-work

Contractors and Contractors and ConsultantsConsultants

Increase in project costIncrease in project cost

Delay in completion scheduleDelay in completion schedule

Additional revenue for contractorsAdditional revenue for contractors

Demolition and re-workDemolition and re-work

Increase in contractor's overheadIncrease in contractor's overhead

Controls of Change OrdersControls of Change Orders 1.1. Early setting of change order Early setting of change order

handling procedureshandling procedures2.2. Timely approval of change orderTimely approval of change order3.3. Negotiation by knowledgeable Negotiation by knowledgeable

peoplepeople4.4. Appropriate approval in writingAppropriate approval in writing5.5. Clarity of scope of changeClarity of scope of change6.6. Giving consideration to indirect Giving consideration to indirect

effects in change order pricingeffects in change order pricing7.7. Checking and review of design Checking and review of design

changes for feasibilitychanges for feasibility8.8. Review of gray areas in contract Review of gray areas in contract

documentsdocuments9.9. Freeze of designFreeze of design10.10. Team effort between partiesTeam effort between parties11.11. Work-break down structure Work-break down structure

Correlation and Hypothesis TestingCorrelation and Hypothesis Testing CorrelationCorrelation exists between the exists between the amount of change order generated amount of change order generated and company size, owner and company size, owner involvement, years of experience, involvement, years of experience, relation of principal parties, amount relation of principal parties, amount of increase in schedule and use of of increase in schedule and use of controls are studied in this chapter.controls are studied in this chapter.

The hypothesis testingThe hypothesis testing is used by is used by using T-test statistics and the same using T-test statistics and the same hypothesis testing technique is used hypothesis testing technique is used to test for contractors - consultant's to test for contractors - consultant's agreement or disagreement on the agreement or disagreement on the prevalence of effects and the prevalence of effects and the utilization of controls.utilization of controls.

ConclusionConclusion

correlationcorrelation calculations failed to calculations failed to prove any relation between the prove any relation between the variables considered and the percent variables considered and the percent increase in project cost due to change increase in project cost due to change orders.orders.

ConclusionConclusion

Test for the degree of agreement or Test for the degree of agreement or disagreement between the consultants disagreement between the consultants and contractors on the causes, and contractors on the causes,

effects, and controls of change orderseffects, and controls of change orders show agreement.show agreement.

7- CONCLUSION7- CONCLUSION

The causes of change orders, and their effects on projects cost and schedule are complex and influenced by numerous interrelated factors. The risk and uncertainties associated with project changes make predictions and planning for changes a difficult task.

The research tested the level of agreement between contractors and consultants over the causes, effects, and controls and found a large degree of agreement. The research showed also that over 60% of changes are civil or architectural in nature.

The research indicate that owner is the major cause of change orders in large building projects. Increase of project cost and schedule are the main effects as expected. Clarity of scope of work is the most utilized control against change order problems.

8- RECOMMENDATIONS8- RECOMMENDATIONS

Based on the findings of this research study and the literature search, the followingrecommendation are made:

1 -The research indicates that owner is the major source of change orders in large building construction. It is recommended to get a project management consultant firm (PMC) to supervise both the design and construction activities to insure that

owners need and expectations are met by the design.

2 -Substitution of materials or procedures came as the second source of change orders and normally originated by owner. It is recommended to have the Engineer

to specify the material for the building in a detailed manner to eliminate the possibility of changes later.

4 -The utilization for the review of contract documents is very low. Contractors should expend more effort prior to contract award to review contract document.

5 -Contractors should consider using Work Breakdown Structure or other tracking system more often than it used now. Many contractors indicate they are not using any type of structuring system for their construction activities and this may lead to inability to tracing effects of change orders on the rest of the project.

9- QUESTIONS AND ANSWERS9- QUESTIONS AND ANSWERS

Question # 1Question # 1

What are the three most common causes of change What are the three most common causes of change

orders from the contractor's and consultants point of orders from the contractor's and consultants point of

view? view?

Answer # 1Answer # 1

1.1. Change of plans by ownerChange of plans by owner

2.2. Substitution of materials and proceduresSubstitution of materials and procedures

3.3. Errors and omissions in designErrors and omissions in design

Question #2

True or false

1 .The cost impact of a change is greatly affected by the timing of the change. (True)

2 .All types of contracts are equally sensitive to changes. (False)

THANK YOU