Change Orders - Sometimes Necessary, Sometimes Unethical

Author: IPVM Team, Published on Feb 19, 2018

Change orders are a common element in project sales. Sometimes they are a necessity and appropriate ways to deal with arising issues, but sometimes contractors abuse them to make profits at the expense of the customer and rival contractors.

Why Change Orders?

Most customers prefer to get a single committed price for executing an entire project rather than paying on a time and materials basis where the contractor(s) just keep running the clock and adding up more time / bills.

The challenge with a contractor charging a fixed price is that they need to know very clearly what the customer wants them to do. This is hard to do since projects can include a vast number of requirements, details, and tasks. Even if the customer or their consultant specifies the project in great detail, there is a risk something could be missed or something else might be desired. Even more difficult, sometimes there is ambiguity or debates about the meanings of words inside a specification and what that covers.

Sometimes Necessary

Sometimes, though, change orders are necessary. Things do change. Customers may decide they want more than they originally planned or they want to put things in different places.

Beware Bad Motivations

However, some companies use change orders as a way to make more money, e.g., consultant Michael Silva shared an example:

A project manager for a big national integrator told me in confidence that he was expected to come up with change orders equaling at least 10% of the project cost on every project. Failure to meet this goal would be considered a negative during his performance review.

As a consultant, I am always open to ideas from anyone on how a project can be improved, but don't want project managers or technicians looking for problems that don't exist just so they can write change orders or unnecessarily up-sell customers in order to earn a bonus.

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Unethical - Win Low Bid, Make Money On Change Orders

A common motivation / tactic is to bid low on a project, sometimes at or below cost and then plan to make it up via change orders. In some strange way, the contract itself is the 'loss leader' and the change orders are the profits.

The reason to do this is to beat other bidders who are fairly bidding the project, including their required profit on the job.

Exploit Contract Language

While an ethical bidder may reasonably interpret a specification, an unethical bidder may look for contract language that may imply or be potentially vague to exploit. Examples of this could include:

  • Generic or missing hardware specifications: Users may not explicitly state new equipment must be used, with some bidders providing refurbished or used gear, failing to provide warranty, etc.
  • Missing operational requirement details: Days of video retention, recording frame rates vs. live viewing frame rates, training requirements, or other issues may not be explicitly stated and seen as a change order opportunity for integrators.
  • Missing devices: Devices may be shown on a drawing but not a riser diagram or vice versa, leading to contractors omitting it from their price to recoup on change orders later.
  • Unit pricing not requested: Users may not specifically call for unit pricing for cameras or other devices during bidding, leaving integrators to mark these items up excessively after the fact.
  • Conduit/raceway: Integrators may consider conduit or Wiremold extra in their proposal, noted in terms and conditions, and easily missed by buyers.

These are only a few items which may be gamed after work is awarded, but there are many other examples.

Awarded Contractor Has Negotiation Advantage

Before the contract is awarded, the buyer has a strong advantage, since many bidders will be competing to win the job. However, once the buyer awards the contract, the awardee has increased power. At that point, it is significantly harder to take away the job from the awardee, allowing the winning bidder to push for change orders.

Reputation / Long Term Damage Risks

Now, an integrator who does this regularly risks getting a bad reputation locally for playing that type of game. However, 2 things support integrators who do this: (1) many contracts last a long time, making it worthwhile even in the mid-term to do this, (2) even if their reputation is known, often contracts require or so strongly favor low-cost bids that the bad integrator can still win.

Self-Defense Steps

Some recommendations for buyers to protect themselves:

  • Read proposal carefully: This should go without saying, but buyers should read and understand what is and is not included in proposals they are given. Many buyers simply look at price and a bullet point scope of work before signing a proposal which encourages change order games.
  • Require unit pricing at time of bid: To prevent excessive change orders, users may request unit pricing for each type of camera or other device provided in a proposal and make clear that this pricing will be considered when reviewing proposals, not just bottom line price.
  • Set a max change order allowance: Users may also allocate a maximum percentage of the base contract that is allowed for change orders (e.g., 25% of contract price) before work must be renegotiated as a new contract.
  • Require detailed submittals: Users may ask for detailed submittals as part of the proposal process, including product data sheets of included equipment as well as risers/line drawings.
  • Hire a consultant: Finally, when in doubt, users should consider a security consultant to manage their RFP process and review proposals, as they are generally experienced in comparing proposals to specifications and spotting these issues before they become problems.

Comments (22)

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I like the idea of No change order s , but there are more jobs being won on change orders than actual bid.

Many company's will bid or look at the bid based on recovery , not on performance

What is not said , not what is said

thru the years , we have worked on sooooooo many jobs where it appeared that the engineers really did not understand the scope , body or project in any way shape or form

Just tried to get an idea of how to go once in the bid process.


Being a 30 year veteran of this kind of mentality we have learned to look beyond the bid platform and look at how to be the low bidder and still come out on top .

Recovery :

Getting the Job at a loss and picking it to pieces once in hand.

Typical federal , state , public way of doing business

Not what is said , but what is intended and not said

change orders allow for this and cannot be any other way

Many times the project has had no budget for changes , so that is why you have missing parts or missing deleted scope s or cancelled bids

Typical : company's as you increase in value ,you decrease in potential opponents

This is from Bonding, Background, Reference Jobs and ability to man the project and carry the burden for a long or extended period of time.

The other part that is not mentioned is when is the company that got the bid , realizes they cannot perform at the agreed upon price , and realized they will be bankrupt at the end of the project call it for what it is.

This is why change order , to recover the funds to the engineered value and keep the business who really did not know what they were getting , get back on their feet and not take the ship down .

Is this fairly common? Because in all areas of construction or bid work that I have been involved with, once the bid is placed, adding to that bid is very difficult to do. If you underbid, you eat the costs unless it was something that the customer added to their original scope of work. I cant imagine this is much different?

I think the biggest thing you can do as a buyer is to not make payment until the project is fully complete.

Is this fairly common?

Yes and no. There are some integrators which are particularly adept at finding loopholes in the contract to exploit. If the consultant said to put in a 20 year old camera in their spec, remedying it is a change order. General Contractors have put items in place to combat this. What this has resulted in is everyone doing so much paperwork that the cost of doing the paperwork when working for a GC is greater than the actual project value itself.

Moral to be learned: don't be this way.

My personal moral learned: don't work for a GC.

Typical for certification process: you conduct a tender for a consulting project. As an output you get a report (RFP, RFQ, deficieny list, etc.) and conduct a second tender for mitigating the issues. The consulting company cannot participate in a second one. There are still the ways to get the job in one hand but it makes it harder.

So I'd suggest to use one company for a system design stage, and consulting/control during the second, installation stage. And still, there's no big project without change requests. At least, I've never seen one.

Unethical - Win Low Bid, Make Money On Change Orders

I’m not why this is necessarily unethical. As the article says, “change orders are a common element in project sales...”.

If a company recognizes that a certain percentage of legit change orders are typically encountered, why should they not work that into their bidding calculus?

If a company recognizes that a certain percentage of legit change orders are typically encountered, why should they not work that into their bidding calculus?

If there is language that is possibly unclear, a responsible integrator can simply submit questions while the bid is open to resolve them. Holding such questions and then using it as profit generating tactic is ethically questionable.

Agree.

The standard construction contracting process, the AIA (Amercian Institute of Architects) used to go out for bid make use of RFI - Request For Information periods to get the ambiguities ironed out.

Withholding questions or getting clarity on purpose can be found as a breech of contracting law. I'm not sure how aggressively this is pursued, but the mechanism is there.

Withholding questions or getting clarity on purpose can be found as a breach of contracting law. I'm not sure how aggressively this is pursued, but the mechanism is there.

To play devil's advocate, even if you could pursue that, it would be hard to prove. The bidder / winner could easily play dumb and say "I just assumed they wanted X, not Y." Unless somehow they got documents that proved the bidder had planned it before responding, I am not sure how they could prove it was intentional.

There is very little case law related to claims for bidders withholding questions or failure to get clarity. More often, the claim that documents were ambiguous. The theory of contra proferentem holds that, all things being equal, lack of clarity is held against the drafter of the document. And, it's much easier to get a jury confused about what a specification calls for than to prove that a subcontractor should have known to ask a question.

That all being said, these cases don't get to trial (or even settlement) unless the value of the claim is significant. Costs and fees for litigating such a contract dispute can easily start at $25,000 with the only award being restitution. Claims involving loss and liability are far more common but, they still boil down to contract terms and conditions.

Holding such questions and then using it as profit generating tactic is ethically questionable.

Agree, in that case, because of deception.

That’s why I said “legit” change orders, like

Sometimes, though, change orders are necessary. Things do change. Customers may decide they want more than they originally planned or they want to put things in different places.

More questionable, though possibly still defensible would be the case of the expected upsell, e.g. customer insists, against objections, he doesn’t need true WDR on every camera, but I expect he’ll come around pretty quick.

A project manager for a big national integrator told me in confidence that he was expected to come up with change orders equaling at least 10% of the project cost on every project. Failure to meet this goal would be considered a negative during his performance review.

Ive hired people from "a national integrator" that have told me the same thing, practically verbatim. Its sickening to know that if we happen to lose something to them the end-user is getting screwed on purpose. Luckily, that reputation is becoming more widely known in our area.

Sounds like the airline industry. Advertise the lowest possible rates online to get the first "click", then add all the amenities previously included in the base price. It took legislation/regulations to get airlines to publicly list fees beyond the base ticket price.

Many integrators don't like to play in the bid market. Some try to do the bulk of their business as negotiated sales.

The integrators that do prosper in the bid market have learned the rules of the game and how to work with the big electrical contractors. The change order process is probably built in to the very fabric of the system, and not easily changed.

Except they figured out how to do it again, not with required fees but with baggage/seats/food etc...

When working with some , we are told to bid exacqly what you see , no more , even if it does not work , once into the project we ask for clarification , when they see it wont work then they ask for options then CO come out .

this is typical

and no Law

When we go to job walks we have found that the people walking are just a rep for company . not those bidding and they use the details of others to find out what and how to compete , not to eng., make correction, or get the right product .

Consultants are the Rma for this process and that is why they get paid for thier work.

not the fault of the contractor who must bid per spec. or loose his shorts in process of educating others to replace Him.

no law against just bidding what is presented , and no law against bad Specifications

over 30 years of doing business , I have found and Know for a Fact that the more you let on in the job walk the more jobs you loose.

I stopped going to walks because so many unqualified individuals show up to learn about what is going on and had no clue as to the depth of the project.

So it is relevant to perspective.

You cannot be the trainer for the Jobs your bidding on or the trainer for those who want into the game .

Training is at the School , not at the job walk

As a smaller integrator, we've won and continue to win bids against larger national integrators by stating in our bids, no change orders. If we missed something or didn't clarify something through the RFP process, that's on us. The only exception to this is adding products that weren't on the bid or moving/replacing products after they've been installed to customers specification (but even that's rare). Customers I've dealt with always tell how shocked they are that we don't do change orders, and usually give us more business because of that. They know what we bid, is the final bid.

I've only had to bid on two large jobs that I knew were going to need additional work above the specs. I submitted two bids for each, what they asked for, and what was going to be required to do it right. I got both jobs at the do-it-right price.

Wish it was a Honest, Just, perfect, standardized world , but it is not

When I Tell exactly as it is , it never goes over well and the powers to be don't reward me for my effort's

Yes Integrity 1st , but better to stay in the background and do to the letter of the law than to try to fix the misguided leadership out there

Very ego driven , leadership by example, better to stand alone than to participate

Bottom Line is you have to do what is the best interest of Your leaders or you will be at the bottom of the line.

I work for many who want it right , but not until I am in the program , not just to get others a better Name.

One thing I have learned in the 30+ years of dealing with bad leadership is

the more they fail , the worst they do , the Better I look and I will surly be the hero when performance comes into play

Be the Best, Do YOUR best, Let others take care of the rest

The bidding process is a flawed system for buying anything that is not truly a commodity. Properly done with security integration, the company putting out the RFQ needs to have the expertise (in-house or from a consultant) to understand the project thoroughly so they can draft a comprehensive document that leaves no ambiguity. Very few Owners/users have this ability and many don't understand what they want/need. The ones that have this expertise have invested in strong internal security and construction resources or outside consultants.

The vast majority of bids are lacking in clarity, purpose, technology, and connection to the Owner's/user's business goals. The answer is to shop for the company you want to work with outside of a bid scenario. Look at their ability, history, reputation, and character. Once you've found a valued partner that you can trust, there is no need to bid jobs out. This assumes you can trust them to be fair in pricing. While you might be able to squeeze them in a bidding process, the costs in time to draft and review the bids will overrun any savings. Be wary of the finance department arguing that all expenditures over a certain amount must be bid out. With engineered systems like security, the joy of any money saved in the bid process will quickly pass when the reality of the "bargain" integrator becomes evident through a lack of ability and/or character.

P.S. The unethical bidding behavior happens on both sides. While bidders can often take unfair advantage of poorly written specifications, I've seen RFQ's that are clearly missing key elements and onerous terms that restrict profit and overhead to ridiculous percentages. I've never enjoyed public/government or bid chasing projects because it opens the door to the change-order game. And, bid work is often like swimming in the swamp...You can't do it and come out smelling like a rose. I'd rather spend my time selling the value of what my company has to offer.

Response to David...

We have been told that the reason ancillary systems such as security, AV, etc, are bid out has mostly to do with financing them. When included in the construction project, they are covered by whatever long term financing is in place for the project, be it loans or bonds. If the owner takes control of their own destiny, they must finance the project separately, hire a consultant or use a trusted vendor for the design, then install the systems after the construction is completed. Most projects do not allow vendors not covered under the project contract to work concurrently on the site.

We commonly see empty conduit and power circuits included in the bid spec, usually for services such as cable, telephony, data-com, etc, which are then installed after the building is turned over to the owner.

While the owner can then get exactly what they desire (if they truly kn ow what is required to accomplish their goals), they are responsible in getting the construction spec writers to provide the infrastructure they will later need. We have seen lots of surface raceway installed because the construction phase did not install the correct piping in the correct locations.

#2, I've been in the same situations where jobs are not coordinated well. I've also been on the winning side of large construction projects with clients where a trust relationship existed before the start of the project. The agreements with the GC, CCIP/OCIP insurance issues, and financing can all be worked out without...perhaps with check bids where the incumbent has the "right of last offer." This isn't something that is common and perhaps impossible with public work but, it can be done in the private sector. Ultimately, with the right vendor and right client, it will provide a better more efficient delivered system.

Recently change orders have been a growing problem in my organization. While I agree once a project is started there maybe a need for a legitimate change order, it has recently become a nightmare at many different facilities under my area of responsibility.

The most egregious example is a long time integrator who has done work at the site for years provided a proposal on a project that we awarded to. At the kick-off meeting before even setting foot on campus for this new work he requested a change order because the SOW called for installing a PTZ where a fixed camera existed asking for more money to run new cable. We explained they were offered a prebid site visit and they have worked on the sight for years. Just muddles the process and extends the performance.

Change orders a growing problem.

Nice Article.

That's a bad sign of worse things to come from the "winning" bidder. A large private college near Boston went out to bid a few years ago for what would be a $14M, multi-year project. The incumbent integrator knew exactly what Security/Police, facilities, and IT wanted and the conditions of many of the very old buildings. For example, where there was a door contact only in the plans, the incumbent knew they wanted a request to exit sounder and key switch.

As the bid was narrowed to just two companies, a large national integrator underbid the project by $3M-$4M to "take it off the street." The board and finance team were smitten with this large integrator. The "smoke and mirrors" leveling said that this national held all of the highest certifications as did the regional integrator. In reality, the local office of the national had no strong techs with experience with the access control or video systems. The college also didn't care that the national was selling them this 4-year project at a loss.

Shortly after the project started, the "dedicated project manager" left the national and, changes to the core systems were pushed before any of the work started. As this project is winding up, it seems as though the project is already $3M over budget. They lost all momentum and goodwill with the former incumbent along with any expected savings.

My point is that the savings that bidding offers very seldom provide the ultimate savings over staying with a trusted partner.

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