Change Orders

Q. We awarded an A&E design contract for a new Greyhound Depot that would also include commercial space. Design and eventual construction would utilize FTA funding. The original program said approximately 8,000 to 9,000 square feet for Greyhound and 22,000 square feet for commercial. The user department now wants to increase the size of the building by going from 2 to 3 or 4 stories which would require a change in the architect’s original contract. The footprint and site are the same as before. Does this constitute a cardinal change? It seems to be within the general scope of the original solicitation but the fee may increase by 20 to 25 percent. A.If this were a construction contract there would be little question that a re-bidding would probably be necessary as the cost of the work would increase beyond anything that a change order would be permitted to do. But since this is a design contract, the issue of whether or not this is a cardinal change might be answered differently by different people. To avoid this problem we would suggest you look at the situation from the perspective of a non-competitive justification and document the file thoroughly if you believe the circumstances warrant a non-competitive modification to this A&E contract. We understand that your agency has spent about $80,000 to date on the design and programming by this A&E. There is also the issue of termination costs and the process of settlement. How much of that would be recoverable if you terminate this contract and conduct another competition needs to be documented. For example, would another firm accept the work done by this A&E and give you a price credit for it during negotiations? We would doubt that they would. Further, another competition will also be a qualifications-based award, so the opportunity for submission of a lower price through competition is not a consideration. Selection would be made on the basis of qualifications, and you need to ask yourself if the incumbent contractor is likely to win again. Would you expect that the qualifications of the A&E firm should change because of adding two floors to this building? Since the footprint does not change and the added floors require no different A&E expertise than the original design, it is hard to imagine that you will need qualifications other than those you now have.

Q. Our engineering staff issued a T&M change order for the construction project. Now the work is complete and the contractor is getting ready to submit their payment application. The contractor notified the RE that they were not able to produce the invoices for some of the material used for this change order due to some internal issues. Our contract specifies that in the absence of the invoices the agency will determine the lowest price for a specific item. However, the contract does not specify the methodology for determining the lowest price. What are the best practices for establishing the material lowest price for a Construction Change Order? A.You could ask the contractor to submit accounts payable documentation that shows what the supplier was actually paid; ask for the supplier’s name so you can contact him and get invoice info from the supplier; determine the identity of a number of suppliers for this product and contact them directly for pricing information.

Q. Our agency is reviewing a cost proposal that we received from the Contractor for Extra Work (Owner requested change). We cannot agree on the material cost for the new material verses deleted material. What are some of the best practices for negotiating material cost for the Change Order in the absence of the itemized bid proposal? Can you recommended pricing strategies for construction projects that are very complex and involve multitude of materials and items? For example, in this instance we are building a new water treatment facility. At the time of bid preparation our technical staff felt it was impossible to itemize all items/materials in order to establish unit costs. Therefore, they opted for the lump sum bid. A.The Best Practices Procurement Manual (BPPM) discusses the pricing of deleted work in construction contracts in section 9.2.3.3 – Pricing of Construction Changes. This section is available online at: www.fta.dot.gov/library/admin/BPPM/ch9.html#BM9_2_3_3. The basic rule, as discussed in the BPPM, is that the cost of items deleted must be the cost that the contractor would have incurred had the change not been issued. The deduction is not to be based on the amount included in the basic bid for that item of material or work, unless the item being deleted was a severable item in the pricing schedule of the contract. Thus it is not relevant what the contractor included in its lump sum bid price for the pipe. This rule leaves the contractor in the same profit or loss situation that it was in before the change was issued. As far as pricing strategies for large, complex projects, one of the most helpful things you can ever do is to invite industry representatives to give their inputs once the project scope has been determined. You will need to determine if you are going to contract for the project on a traditional design-bid-build method, a design-build method, Construction Manager (Agent or At-Risk), etc. The choice of project delivery methods will go a long way in determining how the contract items are priced. One basic suggestion is to talk to other agencies that have built similar facilities to determine their experiences, recommendations, lessons learned, etc. The other very positive thing you can do is to solicit industry comments and suggestions as to how to mitigate the risks both to the agency and the bidders and still get the best possible prices. In other words, get all the information and experience you can from those who have built that kind of facility before you commit to an approach. And try not to let politics overrule the sound judgment of the experts.

Q. We currently have a contract with a service provider to provide Transit Management and Operations - the Authority provides facilities, rolling stock, and fuel, the contractor provides the remainder of what is needed for Operations including a general manager and support staff as well as drivers. The Contract calls for a fixed fee paid to the contractor including profit and all management and other fixed cost, plus variable costs (drivers wages, cost of providing fare media, etc.) that are submitted in a budget every year with a not to exceed cap. We want to expand service by adding a regional connector to the downtown district of a larger regional neighbor. Would adding a regional connector bus service be considered a cardinal change to the contract assuming that the other parameters of the contract (i.e. the authority provides rolling stock and facilities) remain the same? A.The subject of contract changes, including cardinal changes, is covered in the Best Practices Procurement Manual (BPPM), section 9.2.1. The BPPM is available here. The BPPM discusses several criteria or issues that must be considered when deciding whether a change is “within the scope of the contract.” First is the language of the contract changes clause itself. Would the proposed change be covered by the language in the clause? You may want to have your counsel review the clause, and for future reference make sure the language would allow for changes to routes, etc. One of the tests to be applied is the amount of effort the contractor is required to perform for the changed work vs. the effort in the original contract. From the information provided by you it would appear that the additional effort for this route expansion would not be so large that it would be found to be a cardinal change on that basis. For example, the number of additional drivers required for the route change would be 8 (to be added to an existing staff of 90). Another important test is the scope of the original competition; i.e., what the competitors should have anticipated to be within the scope of the original competition. From your information, we would surmise that the original offerors would have anticipated changes/additions to routes since this is normal for the industry. Further, the language in your solicitation was clear in requesting offerors to suggest services for routes other than the base requirements in the solicitation. Your agency was clearly telling the competitors that route changes should be expected. Based on the above, we do not feel this change to include a regional connector would be a cardinal change. We feel it is a proper change order given the tests that are normally applied.

Q. We have a construction contract that is complete and all changes resolved but two. We did not receive claims although the contractor continually "reserved his rights." Almost a year has passed and although the Contract says he will submit his final pay application and the release of claims and Surety release - we have received nothing regardless of how many times I follow up with him. We have about $38K in retainage - what do we do as we can't pay it without the release - but do not have written claims to resolve - no action! FFP Construction Contract - problem contractor. Was to be completed in October 2003 - finished punchlist in 2004. A.You very much need to work with your legal counsel's office to devise a solution to this problem. As far as the outstanding change orders that have not been negotiated, your contract clauses need to be reviewed carefully to see if the contractor has waived his rights to an adjustment by not submitting a timely claim. You also need to determine if you have the contractual right to issue a final contracting officer's decision (which may be appealable), but which at least starts the clock moving toward legal resolution. These are just a few thoughts, but your counsel's advice is critical.

Q. Is strict T&M the only method of performing cost analysis for a negotiated change order? By strict T&M, I mean that the cost proposal and the independent estimate must be analyzed according to the markup percentages (direct labor, materials and subcontractors) with no stipulation for profits. If such is true then why do we even negotiate, instead just verify the units. Are there any other methods? The construction contract was competitively procured. We are now into negotiating our first change order. Contract duration is roughly 3 years. A. The FTA procurement Circular 4220.1E paragraph 9.h.(2) states the following requirement in non-competitive situations such as those involving change order modifications to contracts.: A cost analysis, i.e., verifying the proposed cost data, the projections of the data, and the evaluation of the specific elements of costs and profit, is required. Paragraph 10 of the Circular also deals with cost and price analysis, and states that the method and degree of the analysis required will depend on the individual circumstances, such as the value of the contract or modification, etc. It leaves the degree of the analysis to the grantee’s discretion. It also requires that the analysis begin with an independent cost estimate (ICE) done by the grantee before receiving the contractor’s proposal. It is clear that you will have to do a cost analysis of the various cost elements and profit submitted with a lump sum proposal for the changed work. If you have advance agreements in the contract, however, that already stipulate what rates the contractor is to charge on change order work (ceilings subject to later audit), then we would think your analysis would simply have to confirm the fact that the proposal does indeed reflect the agreed-upon rates. If there are costs not addressed by the advance agreements (e.g. materials) then you will have to satisfy yourself the contractor’s estimates are reasonable, and document the file with an explanation of how you evaluated those costs (e.g., copies of quotes from contractor’s suppliers). For quantities of labor hours and materials proposed we would suggest you compare them with the independent cost estimate (ICE) you did before receiving the contractor’s proposal, and document the file to explain any significant variances between the proposal and the ICE that you actually negotiate with the contractor. The Best Practices Procurement Manual (BPPM) discusses the topic of cost and price analysis in section 5.2. Sections 5.4.2.2 and 5.4.2.3 may also be helpful as they deal with the content of pre-negotiation plans and the memorandum of negotiations. There is also an extensive “Pricing Guide for FTA Grantees” at the FTA Helpline site. The BPPM and the FTA Circular 4220.1E, as well as the Pricing Guide, are available online here, under the Online Tools and Resources tab.

Q. We are in the process of building a light rail extension. As part of this process, we are building soundwalls. During the construction of these walls, we have had to remove some trees from backyards (root damage) and/or damaged existing landscaping. In order to be responsive to homeowners, we are trying to quickly resolve problems by purchasing gift certificates to places such as Home Depot or Lowe's. In other cases, we'd like to reimburse people for the loss of trees, plants, sprinkler systems, etc. as a result of this wall work. In most cases, these costs are unforeseen and not the fault of the contractor. How would we bill this to our project? I do not want to call them claims because that involves a lengthy process that delays repairs, angers homeowners and results in negative public relations. Being as all these costs are less than $500 per house, it seems like there should be some way to expedite the process, cut them a check or gift certificate and continue our work. A.We would recommend you issue a change order to the construction contract, directing the Contractor to reimburse homeowners affected by the work and accumulate the costs on a Time and Materials basis in a separate account so that you can reimburse the Contractor for actual expenses plus a nominal mark-up for administrative costs, fee, etc. This would automatically charge the project with the costs as if they were part of the construction costs (which they are). The change should stipulate a "not-to-exceed" amount so that you control your total potential liability, as well as an opportunity to review the reasonableness of each claim paid by the Contractor. We believe this is the fastest and most efficient way to accomplish your goal. This avoids the administrative problems that would arise if you made direct payments to homeowners.

Q. We have a job with the US Navy (Hard bid) Fixed price. The Navy has made changes to the contract, deleted some items and adding others. We have offered the Navy a deduct for items deleted. We have offered the navy a price adder for new work. We added profit and Overhead to the new work but did not offer a credit for Profit or Overhead on work deleted. The Navy says we must return Profit and Overhead on work deleted per a FAR requirement which they have not provide to us. We dispute the return of Profit and Overhead as we had to do the estimates, write contract and now may have to issue cancellation orders for work not performed. Are we correct or must we give profit and Overhead back? If yes, all or can we negotiate a percentage? A.The Changes clause in FAR 52.243-1 for fixed price contracts requires the CO to make an "equitable adjustment in the contract price" of the contract whenever a change is made causing either an increase or decrease in contract costs. The term "equitable adjustment in price" would include your costs, both direct and indirect, as well as profit. However, the costs and profit to be credited for the deleted work is negotiable, and you should be able to recover your administrative costs in having to issue changes to your suppliers. The requirement to deduct profit in deductive changes has been held rather consistently by various Federal Boards of Contract Appeals. If, however, the deleted work would have been performed at a loss, the ASBCA has refused to allow the government to deduct profit since this would be an inequitable addition to the contractor's losses. Typically the Boards have used the same overhead and profit rates for deductive changes that were used for additive changes under the contract.

Q.What is the definition of a contract amendment which is not within the scope of the original contract as it is used in Section 9.f of FTA Circular 4220.1E? A.There is some detailed guidance in the Best Practices Procurement Manual (BPPM), Section 9.2.1, "Contract Scope and Cardinal Changes," on the subject of what is meant by "a contract amendment that is or is not within the scope of the original contract." The BPPM suggests a number of criteria that must be applied to each case in order to determine if the work being added is properly within the authority of the "changes clause" of the contract, or conversely, if the work must be treated as a "new procurement" requiring the approval of your in-house reviewing officials for a non-competitive (sole source) contract. When the work to be added is within the scope of the contract, and thus a proper "change order," it need not be processed as a sole source procurement with a "sole source justification." When the work to be added is not within the original scope of the contract, it would constitute an impermissible "cardinal change" to the contract if it were added by means of a change order, and this would violate the FTA Circular 4220.1E paragraph 9.f. This type of "new work" must be processed as a sole source add-on with an appropriate justification, or else competed. As far as the particulars of your situation, we would advise that the increase in the contract value because the original amount was insufficient to complete the deliverable is not a change in the contract requirements, and thus does not constitute a change to the contract statement of work (scope of contract) requiring a change order or a sole source justification. Depending on the type of contract you negotiated with the CPA firm, this would be either a cost overrun (if a cost type contract) where you would increase the estimated cost (and funding) of the contract but not the fixed fee, or a funding action to increase the funds allotted to the contract if it is a time and materials (T & M) type of contract. If you are using a T & M type of contract, you should consider a CPFF contract instead (at the point when a new contract is needed) because a T & M contract offers no incentive to the contractor to complete the work within the original contract value, and actually offers a disincentive in that the profit increases with the labor effort expended. It is for this reason the FTA Circular 4220.1E , paragraph 7j, allows the use of T & M contracts only when no other type of contract is suitable. (The BPPM offers a discussion of contract types in Section 2.4.3.) With respect to the other circumstance mentioned in your letter - that the CPA firm will be performing other tasks similar to those originally contracted for, it is difficult to answer that question without further information, but the safest approach may be to process a sole source justification through your approving officials. One of the issues to be considered per the guidance of the BPPM is the quantity of the work to be added vs. the original contract. If the change represents a major change in the quantity of the work, then it should be processed as a new procurement action with a sole source justification. Or if the new work would extend the contractor's work into an area of the agency's operations that was never contemplated in the original competition, then the new work should probably be treated as a new procurement. Once again, we suggest you review the criteria set forth in the BPPM on the subject of in-scope vs. out of scope changes.  The other question concerns the performance of a cost analysis. FTA Circular 4220.1E, paragraph 10, requires either a price or cost analysis for every procurement action, regardless of whether it is a change order or a new sole source procurement. So one or the other will be required regardless of how you decide the issue of change vs. new procurement. The FTA Circular 4220.1E, paragraph 9.f, however, requires a cost analysis (specifically) if you determine that the work in question is not within the original contract scope and is a sole source add-on. In this case you will need to obtain a detailed breakdown of the proposed billing rates from the contractor, showing the individual cost elements and profit. You will need to analyze the individual cost elements to determine if they represent costs that the contractor is now incurring and which can be expected to be incurred in the future, and you will need to analyze the proposed profit to determine if it is reasonable. You will need to document your files as to the analysis performed. The BPPM offers some guidance on cost analysis in section 5.2, "Cost and Price Analysis."

Q. Is the following considered a cardinal change? We have a contract for steel-body busses and we want to purchase-composite body busses. A.We would assume that you have a contract for steel-body busses and that you will have to change the contract if you want composite-body busses. You should review this issue with your legal counsel to confirm this interpretation. The Best Practices Procurement Manual, Section 9.2.1 - "Contract Scope and Cardinal Changes," discusses the various issues and criteria that must be evaluated when deciding if a particular contract change is within the scope of the contract, or whether it is a cardinal change. Cardinal changes are impermissible under the changes clause of the contract. We would recommend that you review the guidance in the BPPM, and especially note the following criteria: Was a composite body bus within the scope of the original competition? That is, should the competitors have anticipated this type of change as being possible? Also, if the original IFB had been issued for composite body buses, would the original bidding have been affected enough that another company could have won the contract? If the competitors could not have anticipated the possibility of this type of change, or if the original bidding could have been altered to the point of producing a different winning bid, then this change is not within the scope of the original competition and this would in fact be a cardinal change. What are the collateral impacts of the change? Would this change require substantial alteration of other components or subsystems? If the answer is yes, then this is very likely a cardinal change. ______________ * BPPM, Section 9.2.1 is available on the Internet.

Q. Is the following scenario considered a sole source procurement or a change order? Agency A decides to piggyback on Agency B's bus purchase procurement, which includes fareboxes as an option. At the time of entering into the contract, Agency A doesn't include fareboxes. Subsequently, Agency A determines that it's best to include the fareboxes in the purchase. The fareboxes called for by Agency B in the original request for proposal are from the same manufacturer (as agency A) but different model/system/software. Can Agency A include the fareboxes as a change order or would that be sole source procurement? A.The Best Practices Procurement Manual, Section 9.2.1 - "Contract Scope and Cardinal Changes," discusses the various issues and criteria that must be evaluated when deciding if a particular contract change is "within the scope of the contract," or whether it is a "cardinal change." Cardinal changes are impermissible under the changes clause of the contract and they must be processed as sole source actions requiring agency management approvals. We would interpret your present circumstance as one where you have a contract for buses without fare boxes (via an assignment of a portion of the original contract rights). Using all the criteria set forth in the BPPM, Section 9.2.1, we feel you may properly issue a change order to this contract requiring fare boxes of whatever design or performance characteristics you feel are appropriate for your buses. We assume the bus contract is still current and the buses are yet to be delivered. This being true, such a change would appear to meet all the criteria discussed in the BPPM as being "within the scope of the contract." ____________ * BPPM, Section 9.2.1 is available on the Internet.

Q. What is a material change? For instance, if a transit property is ordering a rail car that is 95 feet in length, can the agency wishing to piggyback order a vehicle, say, two feet shorter? Is that a material change? Can the interior seating configuration be different? Will FTA allow an agency to piggyback with those changes? A.The Best Practices Procurement Manual (BPPM), Section 6.3.3* - "Joint Procurements of Rolling Stock and Piggybacking," advises in the paragraph entitled "Piggybacking Worksheet," Item No. 12: "For an assignment, only "within scope" (non-cardinal) changes are allowed . . .for further guidance see BPPM Section 9.2** - "Contract Scope and Cardinal Changes." Section 9.2 of the BPPM gives a number of criteria that should be applied to each case in order to determine if a change is within the scope of the contract, and you should consult this guidance and apply the criteria to your procurement situation. One of the criteria we would note concerns "collateral impacts of the change." This refers to the impact of the proposed change on other aspects of the product (other components, subsystems, etc.). In the case of a change to the length of a rail car you need to determine the magnitude of the collateral impacts on such things as the chassis and couplers. These are structural issues that may involve a redesign effort and a major structural change to the vehicle. Also impacted may be the location of the doors, and this too may represent a major redesign effort. Should the collateral impacts of this change in car length involve these kinds of structural or system redesign issues, then the change would be a "cardinal" ("material") change, and would not be acceptable in accordance with FTA's policy concerning "piggybacking" and "cardinal changes." The interior-seating configuration would not appear to represent a "cardinal change" as defined in section 9.2 of the BPPM. Once again, however, review the criteria in section 9.2 before reaching a final decision. ____________ * BPPM, Section 6.3.3 is available on the Internet. ** BPPM, Section 9.2 is available on the Internet.

Q. The question has to do with the additional cost when a change notice is issued. Is the cost for the change treated as a stand-alone cost (meaning that you document/get approvals based on the cost of the change; unless the amount of the change causes the original order to break through the next threshold)? Or does any change to the cost cause that contract to go through "again" the documentation/approvals that were required when the order was originally placed? A.Internal agency procedures may differ on the issue of whether the cost of a change is to be treated as a stand-alone cost or whether the resulting contract value should be the determining factor. Our Federal experience was to treat the change as a stand-alone cost for purposes of reviewing the change itself, so that internal agency reviews were more intensive the greater the value of the change orders. We are speaking of changes pursuant to the "Changes" clause (i.e., changes in the specifications, place of delivery, etc.), and not sole-source add-ons to the contract. However, if the resulting contract value crossed a dollar threshold for the inclusion of certain contract clauses (e.g., at $100,000 and $500,000 more clauses were required), we would add the clauses to the contract when we negotiated the change and issued the contract modification. If you are dealing with modifications to the contract which are in fact new, sole source additions to the original work, then we would recommend that the value of the sole source work when added to previous sole source add-ons to the contract be the determining factor for agency reviews. It is important to avoid the appearance of a series of sole source add-ons, each of which is below a given dollar threshold, in order to avoid a higher-level management review. Your file documentation supporting the new work as a proper sole source action should reflect the entire history of the original contract and any previous modifications in order for the reviewing official to know the true extent of the sole source transactions with that contractor. We would also point out that if the additional work is such that the contractor might be placed in a non-competitive position for future work, that this fact be documented and the reviewing official made aware of the total picture when he/she reviews the proposed action.

Q. We have recently competitively awarded a construction contract for a new building. We would like to use sales tax recovery to purchase the commodities directly from the suppliers that the General Contractor received his quotes from. We would then deduct those amounts as well as the 6 1/2% sales tax from the total contract price of the General Contractor. What rules do we have to follow as it has already been competitively bid, and has anyone else used this to reduce the overall cost of their construction bids? A.We do not see a problem with your agency modifying this construction contract by means of a deductive change order in order for your agency to furnish the materials to the contractor, as owner-furnished-property, so as to avoid the 6.5% Florida sales tax on the materials that would be incurred if the contractor were to purchase the materials himself. The bidders were informed in the IFB that you reserved the right to buy any or all of the materials needed for this project and furnish them, so we see no basis for any complaints by the winning contractor or other bidders. Q. This pertains to the New Jersey TRANSIT (NJT) Federal General Provision Contract Language “Audit of Change Orders.”  The question Regards Applicability of FAR Subpart 15.403-1, Contract Pricing. The text of NJT’s Federal Contract Provisions contains a section entitled “Audit of Change Orders,” which states that NJT has the right to audit “all documents related to the preparation of the contractor’s bid including the final calculation on which the bid was based.” A potential proposer for a specialized locomotive procurement claims that paragraph 15.403-1 of the FAR states that any documents used in the preparation of a competitive bid are not subject to audit under any circumstances. The proposer requests that NJT delete the requirement from the contract. According to the proposer’s interpretation of this section, NJT would also be prohibited from obtaining cost or pricing data to determine the fairness and reasonableness of change order pricing. It is unclear to NJT how paragraph 15.403-1 of the FARs can be considered applicable to change order work since there is no price competition, that prices for a rolling stock manufacturer’s labor and material are not set by law or regulation, and that, if this requirement does apply, changes would only involve the switching of one commercial item for another. It is NJT’s position that this section of the FAR applies to commercial products, not rolling stock, and that this information is needed to determine price fairness and reasonableness. A. It is important to note that your third-party contracts using FTA grant funds are not subject to the FAR but to 49 CFR Part 18, Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments. The CFR requirements have been incorporated by FTA within FTA Procurement Circular 4220.1E, which is available online: http://www.fta.dot.gov/documents/fta_c4220_1E.doc    You will note that paragraph 10a. of the Circular deals with cost analysis of contractors' proposals for change orders and does in fact require grantees to perform a cost analysis when there is no competition. This in turn will require the contractor to submit cost details supporting its price proposals for change orders. Below is the Circular language that is taken verbatim from 18 CFR Part 18:36(f):    Cost Analysis. A cost analysis will be necessary when adequate price competition is lacking and for sole source procurements, including contract modifications or change orders, unless price reasonableness can be established on the basis of a catalog or market price of a commercial product sold in substantial quantities to the general public or on the basis of prices set by law or regulation.    The CFR is available online: http://edocket.access.gpo.gov/cfr_2007/octqtr/49cfr18.36.htm