Audit & Consultancy

Construction Audit: Change Orders

Change orders can occur for many reasons: change in plans, site conditions, weather delays, or other unforeseen reasons. The key word is “unforeseen”.

Careful planning and open communication will help minimize change orders but at the end of the day, they will still happen.

Change Order Risks

To adequately control change orders, there needs to be procedures (preferably included in the contract) that the contractor must follow to report any needs for a change order to the owner as soon as the need is recognized. Concurrently, there needs to be internal procedures in place to quickly assess the needs and approve the change order. Then the approval can be communicated to the architect and contractor to commence work.

The need to approve change orders quickly is one of the reasons change order abuse is so prevalent. If a change order is not approved or disproved quickly a domino effect on project timing can occur – as the change may be a trigger on the critical path for project completion. Delays in approval may result in subsequent change orders for time delays or the need to provide overtime to catch up.

Change orders should be included in any audit work related to the project, as they are amendments to the contract. It is common to find overpayments when auditing change orders, therefore proper analysis is a potential source of recoveries. Overpayments have been discovered due to incorrect approvals, unreasonable prices (compared to other related costs in the contract), charges covered elsewhere in the contract, and site conditions that do not exist.

Who is responsible?

Determining who is responsible for the change orders can result is substantial recoveries.

Chnage order accountability should be assigned to:

• Owner
• Architect
• Contractor

Keys to successful management of change orders.

Have proper controls and methodology to:

• Report the change, the need for a change, and if possible alternate solutions.
  
• Verify the need independently of the requester.
  
• Approve the change through proper channels and within certain authority limits.
  
• Monitor changes for overall impact on the project.
• Analyze changes for anomalies that may indicate fraud or abuse.
• Ensure all credits have been acted on and applied.