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Managing Change vs. Administering the Change Order Process
By: Bruce Hallock, PSP
"Change means movement, and movement means friction. Only in the frictionless vacuum of a nonexistent abstract world can movement or change occur without that abrasive friction of conflict."
Saul Alinsky (1909-1972)
Introduction
Change affects every aspect of human endeavor, and construction is no exception. A recent survey of professional engineers identified change as the major cause of project failure. The term "Change Management" suggests that change can be controlled and we can tailor our response to change to minimize the risks of failure and maximize opportunities.
Before proceeding let's agree on at least one point. Change happens! The universe is constantly changing, it is endemic, and our challenge is what we make of it. Virtually everything we see and touch in our daily life is the result of change, and we need to get used to the thought that nature loves nothing more than changing existent forms and making new ones. While we can not eliminate change, we can eliminate the non-value adding iterations often associated with construction changes. This can be achieved through effective change management.
What is Change Management?
Two concepts come to mind when we consider the implication of "change management":
- Managing the Process of Change; and,
- Administering the Change Order Process
The reality is that Managing Change is the "horse" and Administering Change is the "Cart". All too often on construction projects the stakeholders tend to get the Cart before the Horse. We need to re-focus on the "horse"; no "cart" ever won a race!
Change is a risk, and like any risk it is usually better if it is borne by those best able to manage the risk. Under most forms of construction contract, the contractor is usually the first to manage change when it's effects are experienced as delay, disruption and additional costs. Not unreasonably the contractor attempts to deal with the change to his best advantage within the terms and conditions of the Contract. As a result the contractor may not consider other possibilities that not only improve his position but benefit the owner as well.
Understanding the Change Paradigm
If we accept that change represent the major cause for project failure, the development and application of an effective change management process becomes a necessity to insure project success. Regardless of the name we ascribe to it; a "field directive", "supplemental instruction", "scope creep", "modification", "revision", or the like, changes all seem to engender a negative reaction. Over time that negativity can evolve into anger and confrontation.
In the author's experience too little effort is spent in the analysis of why changes occur, in contrast to the effort expended assigning blame. Due to the negative response to changes project personnel fail to avail themselves of the benefits which can be derived from understanding the dynamics of change and potential value change may have to the project.
The ability to identify the factors which cause changes is the first step in being able to manage them accordingly.
Change Does Not "Just Happen"
At the beginning of this paper I stated that "change happens". On a global level that statement is true however in the construction environment we know that with few exceptions change is the result of some event initiated by one of the project stakeholders. The design and drafting of the specifications and contract documents are the work of human hands. The procurement and erection are likewise the products of human intervention. The planning and decisions regarding the sequence of erection, whether good or bad, are all a function of human endeavor. So by default it is up to us to manage the events and consequences of those events. There is enough opportunity to go around, this is a problem which engulfs us all and which can best be resolved when we work together.
The extant literature has many different classifications for changes. To simplify this discussion we will classify changes as "anticipated change" and "emergent change". Anticipated change is any change that is planned ahead of time and occurs generally as intended. Emergent change on the other hand is spontaneous and arises out of conditions that were not anticipated or intended.
The process of managing change can now be focused on addressing these two categories. If changes can be anticipated then the process and procedures required to cope with planned events is really rather straightforward. The spontaneous nature of "emergent change" requires more thought. We know changes will occur. What we don't know is when, what kind, and how big. Knowing that changes will happen, part of the battle is already won, and we can focus on dealing with the unknowns. Consider the emergent change management process as akin to the fire department. Like change, we know fires will happen, we just don't know when, where, what kind or how big. The fire department however has the equipment, the resources, and the training in place to deal with any eventuality. Contractors and owners need to develop similar tools to manage project changes.
Experience has demonstrated two typical responses to change; the knee-jerk or reactive response; and, the anticipatory or proactive response. Managing the change process argues for a systematic, structured process knowing that changes will take place. The project stakeholders need to act in a proactive manner to cope with changes in an efficient manner; and not in a reactive mode dealing with the unplanned consequences of delayed completion dates and claims for extra costs.
Classifying Change
Before developing a strategy for managing change we need to understand why changes occur. There are several reasons project personnel fail to understand why changes occur; two of the most prominent are:
- We confuse the effect for the cause; and,
- We rarely look beyond the superficial reason, to look for the root cause.
While an initial reaction to change is often negative, we need to divest ourselves of the concept that change is fundamentally bad. Changes when properly understood can provide us with opportunities to address systemic problems, adopt new techniques, adapt to conditions over which we have little or no control, or bring betterments to the delivery of the project. The following represent the principal cause of changes on projects today:
- Design Revisions: Basic changes to the original design due to changes in technology, operations and maintenance enhancements, product or use.
- Errors and Omissions: Errors or omissions in the contract documents, design drawings and/or specifications.
- Market conditions: Unanticipated changes in the supply of labor, material or capital laws, taxes and unanticipated price escalation due to natural disasters, war, or strikes. Market conditions may also affect the value of the completed project leading to design revisions.
- Performance Errors: Failures to complete or provide in the timely delivery of contractual obligations or commitments.
- Differing Conditions: Unanticipated changes to site conditions or abnormally severe weather. Differing site conditions may result from archeological geological, environmental, biological, and historical conditions.
- Conscious Decision: Deliberate decisions which are intended to gain time or recover lost time and result in impacts to the schedule. These decisions may result in other changes and are not the consequences of those changes.
Managing Change
Managing change therefore means implementing changes in a planned and systematic fashion. The aim is to more effectively implement new or revised work on an ongoing project, and organization. Changes not only impact the changed work, but when not properly controlled seriously impact the "unchanged" work. Managing changes whether internally or externally initiated, anticipated or emergent lie within and are controlled by the project organization. Our next step then is to demonstrate the benefit or impact of the change. The cost benefit analysis must also include the effect of not adopting the change. We must further:
- Validate the change against the baseline project scope, cost and schedule;
- Define a business case for the change and source and/or method of funding;
- Provide a formal justification for the change;
- Determine the cost and time to implement the change;
- Settle, approve, properly authorize and execute the change order; and,
- Communicate the change status to the project, and track the performance of the changed work.
Impediments to Change Management
Why hasn't there been a more concerted effort to manage change? There actually have been, and some projects have done so very successfully, however let me suggests three reasons why this effort has not been more universal:
- Most standard forms of contract in the construction and engineering industries (AIA, AGC, or ABC) do not include a provision for change management. If you asked many in the industry would point to the "Changes" provision of the contract and ask what more is required.
- The division of authority on projects has contributed to the problem. Who is going to take the lead; the Owner, the A/E or the Contractor? When one focuses on change as a risk, the assignment of responsibility may become clearer.
- The shear volume of information on large projects, the duration, and multiple stakeholders has made it difficult to produce a comprehensive plan which fully defines the project requirements and manages the needs of all the stakeholders. It is only in recent years that modern software and faster computers running on multi-user networks have allowed the planner's intentions to be shown sufficiently clearly for changes to be identified and their effects quantified.
Change Management
Effective Change Management emerges out of three very simple concepts, planning, communication, and assessment.
- Initial planning and formation of processes and procedures which will frame the complexity and scope of the project;
- Contract formation stressing how to build the project rather then how to defend the contract; and,
- A thorough risk assessment.
First, even before the project starts, the owner and contractor need to discuss the project goals and budgets. This is an opportunity to explain that change orders and unforeseen conditions are inevitable; that there are no perfect plans no matter who designs the project; and, how the two parties can work together to manage events that are bound to have an impact on the project. Following is a success story to show how this can, and did work.
A Change Management Success Story
In the late 1970’s, Fluor-Daniel, Inc. entered into a contact to construct a petrochemical plant in the Industrial City of El-Jubail, Saudi Arabia. Following an extensive planning effort including a detailed risk analysis, Fluor decided to modularize the equipment modules which would significantly reduce construction costs, shorten the delivery schedule and improve. Two Japanese shipyards were selected as the modular assembly yards. As the modules were completed they were then load on special vessels for transportation to Saudi Arabia where the setting and final systems integration took place. Three separate design firms in the United States performed the project design for the six process plants which made up the project. Over a three year period 219 modules with a total weight of over 78,250 Metric Tons were designed, constructed and shipped on 30 separate voyages on 2 Dock Express ships. The largest of these modules was over 1,560 Metric tons, and measured 44m x 30m x 32m. The work was performed on a fast track basis, and when the original bids were submitted the design was less than 5% complete. Design revisions were inevitable and there were a substantial number of revisions issued.
The project team understood from the beginning that change was antithetical to the Japanese. If this project were to be successful, everyone had a great deal to learn about how the project was to be executed. Many of these elements could not be easily rendered into a contract, much less the standard change clause. Recognizing revisions were inevitable, processes were implemented to "manage design revisions":
- An engineering team from each of the Modyard Contractors met with their design counterparts in the United States to review design philosophies and methods, which most importantly developed a relationship between the parties, and an understanding of what conditions were driving changes. The understanding of the conditions driving changes permitted the Modyards to implement better procedures to control and implement changes and track and report the effects of the change.
- The process design contractors were required to notify Fluor’s Modyard staff of any design revisions that were required two months or more after the required IFC dates. These design changes were then reviewed with the Modyard Contractor, and work plans modified accordingly.
- Changes three months or less before a module shipping date were reviewed with the Modyard Contractor prior to being issued and a determination was made whether it could be done in the Modyard or designated as field work and accomplished at the Jobsite after the modules were delivered. More often than not, the Modyard Contractors undertook to perform these changes.
It became clear early in the program that the process plant engineers needed to have a better understanding of how the Modyard Contractors approached and performed their work. This was also true for the module Contractors.
One early example of this was the method used to fabricate the module base frames. The first structural steel shop drawings submitted to the design engineer were rejected due to "incorrect" weld symbols. The modyard contractor had shown all the welds to be "down" welds. The structural engineer assumed the weld symbols were incorrect, questioning how welds on the underside of the frame could be "down" and not "up". The modyard contractor resolved the engineer’s confusion by pointing out the use of the twin 400 Ton Goliath Cranes at the shipyard were able to rotate the base frame so that all welds could be down welds, easier and assuring better quality.
The project management team working with the modyard contractors developed procedures for the review and implement of design changes, and for performing rework necessitated by interferences and design "busts". At the end of the Project there were 384 changes in the unit prices and 1,190 other changes which resulted in 72 amendments to the contracts. Over 2,600 field rework items were identified and resolved at regular weekly meetings. In spite of this atmosphere of change, the work was completed on time (it had to be to meet pre-determined shipping dates); completed under budget; to a level of quality and dimensional control which met or exceeded the specified requirements; and, all pricing changes were settled prior to the final shipment; all without a single claim.
The keys to this success were anticipation and communication. All parties understood that change was inevitable, and on this project, it was almost constant. To handle change successfully the project team had to communicate effectively. The barriers to communication were further compounded by both language and culture, and geography. Instead of being negatives, the project team turned these factors into positive forces to promote communication, understanding and success.
The procedure for managing engineering design revisions was just the first in a series of procedures for dealing with changes the Modyard would develop. Agreements for procedures related to quantity measurement for unit price work and invoicing for unit price work were reached with the Modyard Contractors prior to the construction kick-off meetings, and were consistent between both Modyards. The Modyards recognized that changes would also result from Requests for Information (RFIs); rework resulting from interferences and conflicts in design; and, the need to monitor work priced under the cost reimbursable provisions of the Contracts. These procedures were developed independently with each Modyard Contractor.
Rework was seen as having several unique factors that transcended the typical pricing concerns. Rework could generate scrap or reusable material which could impact unit pricing, or for which strict accountability was required. Rework also had quality concerns related to material identification, and dimensional tolerances if the rework were associated with interconnecting piping. Each of the Modyard Contractors was requested to draft a rework procedure which were then reviewed and approved. Rework procedures proved to be very dynamic and with mutual concurrence were constantly being refined, updated and improved. There were a number of guidelines developed for rework that were common for both Modyards:
- Electrical, Instrumentation and piping rework were subordinate to structure, unless the piping were process piping where a specific routing, including slope, were required due to process criteria.
- The Modyard and Contractor field superintendent identified the impact, and confirm the quantity of work involved. Entitlement and pricing issues were thus removed to the management staff to resolve. Removing the field staff from commercial discussions kept the work moving, and avoided unnecessary conflict. On occasion further input from the field staff was required to approve rework, but in the long run the working relationship that kept the work moving was deemed to have greater value then minor differences in pricing the changed work.
In its infancy, the rework procedures generated considerable paperwork and required substantial staff resources. Initially weekly meetings were held to review rework items and agree on entitlement and cost. Over the life of the job, process simplification and Contractor and Modyard staff "education" resulted in a smooth process that reduced paper and minimized the resources required, such that routine changes were routinely resolved with face to face meetings required for only the very complex or contentious of issues. By May of 1984 when all rework was completed over 2,600 rework changes had been resolved.
The ratio of the cost of extra work performed to unit price work was less then three percent, a reflection of the considerable care exercised by the Modyard staff in controlling field changes and the willing cooperation of the Contractor. The procedures developed to control rework resulted in a high level of confidence between the parties. More importantly the resulting documentation of each action served to prevent claims from arising from one of the more traditional sources, field-changed work.
Staffing limitations in cost engineering personnel likewise had an impact on the Contract change procedures. Evaluate of the Contractor’s change proposals was based on the reasonableness of the pricing versus comparison with an independent estimate. This was possible due to the relationships which had been developed and the processes put in place which established pricing guidelines for changed work. The total cost of changed work was well within expected and acceptable ranges therefore the return on costs to have had additional cost engineering staff at the Modyards would not have been justified.
Cost reimbursable (CR) work introduced some unique challenges for all parties. This work included all pressure testing and non-destructive testing of piping, electrical and instrumentation; bracing and special protection of piping, electrical and mechanical equipment for shipping; receiving, handling storage and preparation for shipment all OFM; stress relieving; assembly of air cooled heat exchangers, fired heaters and furnaces; and engineering costs.
The Japanese construction industry was not generally familiar with cost reimbursable Contracting methods. Japanese companies at the time typically did not use invoices from vendors with whom they have enjoyed a continuing association. Thus the paid invoice, as normally used in the United States to validate payment, was not available. As a substitute, the Contractor’s material delivery slip reflecting receipt and direction to make payment was used in lieu of the invoice. Knowledge gained by the Contractors regarding CR commercial terms and by the Modyard staffs in understanding Japanese industrial practices greatly facilitated the provision of suitable documentation to validate cost reimbursable work. The Contractors responded promptly to all requests for documentation and audits of their systems demonstrated their accuracy and efficiency.
Change Management Best Practices
In 1990 the Construction Industry Institution (CII) Cost/Schedule Task Force published a report on the impact of changes on construction cost and schedule. From this Task Force Report the CII developed change management best practices.
In 1996 CII commenced the collection of bench marking and metrics (BM&M) data on over 1200 projects within the heavy and light industrial, infrastructure, and building groups of the construction industry. In 1977 Project Change Management Best Practices were added to the more practices being measured. With respect to project change management, the CII BM&M data measures fourteen change management best practices. In a recent study of the CII data colleted between 1997 and 2001 the relationship between the usage of these project change management elements and project change cost performance were analyzed.
The results of this study provide meaningful insight into which of the practices is more effective and thus more likely to improve project performance. Following are the fourteen practices included in this study:
- Was a formal documented change management process familiar to the principal project participants used to actively manage change on this project?
- Was a baseline project scope established early in the project and frozen with changes managed against this base?
- Were design "freezes" established and communicated once designs were complete?
- Were areas susceptible to change identified and evaluated for risk during review of the project design basis?
- Were changes on this project evaluated against the business drivers and success criteria for the project?
- Were all changes required to go through a formal change justification procedure?
- Was authorization for change mandatory before implementation?
- Was a system in place to ensure timely communication of change information to the proper disciplines and project participants?
- Did project personnel take proactive measure to promptly settle, authorize and execute change orders on this project?
- Did the project contract address criteria for classifying change, personnel authorized to request and approve change, and the basis for adjusting the contract?
- Was a tolerance level for changes established and communicated to all project participants?
- Ware all changes processed through one owner representative?
- At project close-out. Ws an evaluation made of changes and their impact on the project cost and schedule performance for future use as lessons learned?
- Was the project organized in a Work Breakdown Structure (WBS) format and quantities assigned to each WBS for control purposes prior to total project budget authorization?
Of these fourteen practices the Zou/Lee study determined that the combination of practices 1, 4 and 5 were the "most effective", while the grouping of practices 2, 6, and 8 were deemed to be "effective."
On the Saudi-Petrochemical Project these six practices, along with several others, were implemented with the result that the project was completed earlier than planned and under budget. All of the initial project goals for quality and performance were met or exceeded. Because of the effective use of a change management process, the module completion exceeded expectations. All shipping dates were met, with minimal work transferred to the jobsite.
Thus one could conclude if a project were to implement only six of the recommended best practices, significant success in managing cost and time impacts on project performance would be obtained. While no "one size fits all" these best practices provide the guidelines to develop a highly effective change management process.
Elements of a Change Order Management System
The recognition that we need to build a better "mouse-trap" is beginning to take hold. AACEI and CURT are not alone in leading this recognition. At the 50th Annual Meeting of AACE International several papers were presented on this same topic. Owner that make up the majority of CURT’s membership are taking the initiative to make radical changes in how we deliver projects and to more effectively the changes in this process.
One example is the State of Mississippi. In 2002, concerned that the state Bureau of Building Management (the Bureau) was not managing change on its capital projects effectively directed the Joint Legislative Committee on Performance evaluation and Expenditure Review (Peer) to conduct a study of all the Bureau’s performance in managing changes. PEER reviewed the Bureau’s construction contracts between June 19 2001 and December 19, 2001 that had experienced changes of at least one percent or more of the original project budget. In its summary findings PEER stated that the Bureau did not have an effective system to manage change orders:
- The Bureaus oversight of cost changes is incomplete, inconsistent and fails to assure that changes are reasonable;
- Over half the change orders reviewed did not identify who requested the change; and.
- The bureau lacks an information management system with which to track projects and change orders for retention and use for future decision making "to identify projects with greater risk of change".
PEER made several recommendations regarding the development and implementation of a "model" change order management system. The first element of this system is the "assessment of the reasons for and cost efficiency of the change". This assessment would include the determination of the identity of the requestor and why the request was made.
PEER came to the conclusion that change is a project risk and to better manage changes the collection and analysis of change order and use experience data is essential for management of changes and for future decision making. As part of this information management system PEER recommended that the bureau needs to include criteria for classifying changes by type, requesting entity, and the root cause for the change such as error, omission, change in scope, etc.
Conclusion
There is no magic cure for changes and one change management system will not work for every project. While the tactics and methods will vary with the project delivery system, the delivery culture, location, and a myriad of other details, a common strategy can be effective.
Before the project starts the stakeholders need to discuss the project expectations, objectives and budgets. This is an opportunity to explain that change and unforeseen conditions are inevitable; that there are no perfect plans no matter who designs the project; and, how the two parties can work together two manage events that are bound to have an impact on the project. The parties don’t know what will happen or when, but something will, and everyone needs to be prepared to respond.
Implementing a change management process enables proactive communication. Comprehending the dynamics of change, why they happen and what causes them and their impact on the project cost and schedule serves to avoid incorrect conclusions on the management of a project, and when applicable demonstrating value added to the project.
All parties need to understand that change to manage change successfully they have to communicate effectively. Barriers to communication can often be compounded by organizational culture, and geography. Instead of being negatives, the project team can learn to turn these factors into positive forces to promote communication, understanding and success.
Contract provisions need to be modified to change the paradigm in how we address changes; and the parties need to implement policies and procedures, even before the award of the contract is made to identity, monitor and manage change.
The project stakeholders need to focus their thinking towards proactive responses; to plan for change and develop the tools, the resources and techniques to successfully manage change. A proactive process serves to lubricate the friction of change, mitigate the abrasiveness, and reduce the project’s stress level, a reactive model does not. |
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