Tech-driven Contract Management -The True Cost of Estimating Change Orders

Tech-driven Contract Management -The True Cost of Estimating Change Orders

Contract management happens to be a major cause for concern due to tight deadlines and cost variations. Such extremes make contract management one of the prime complications within the construction industry affecting project contracts.

As per one research report on contract management related to the Saudi construction Industry, Change Orders in Construction Projects witnessed significant cost overruns, ranging between 6 to 10% of the total cost of the project, and time overruns of about 10% of the total contract duration. Source[ Al-Dubaisi]

In the world of construction projects, periodic modifications in the contract may be necessary for entities that are already in process. Such intervening changes to an ongoing project are termed as change orders. The impact due to changes has given rise to adverse effects upon the unchanged work in the contract. Also, changes depend on the scale and the risk propensity of the project.

Post the award of a contract, changes are bound to occur which in turn triggers a change to the original scope of work and the contract. This could involve some changes & amendments that need, to be made to the contract via a formal change order request process.

This can be easily accomplished if the firm has a process-driven practice in place to track documents and get approvals for the requested changes. Process-driven here essentially means the whole process being I.T governed, and this is where construction management platform plays a decisive role. The tool takes care of the changes by following the formal process outlined in the contract documents. Thus an I.T centric practice does away with verbal approvals &replaces it with, documenting the request and submitting it with written approval having the amended contract before proceeding.

Due diligence enables teams to mitigate the significant costs and ‘schedule disruptions’ in construction projects.

Understanding the True Cost of Change Order calls for a Tech-driven approach.

Change Orders is all about the cost being Central to Contract Management. 

First, it’s important to get hold of the complete cost effect of change orders.
While usually inevitable, it’s difficult for teams to accurately estimate the impact of change orders. On average, change orders result in a 30% decline in efficiency.

Understanding the true cost–Linear, Non-linear and Incidental Costs–can help construction teams to manage contracts in a much transparent & consistent manner.

Linear Costs

Linear or Direct costs are costs that are directly affected by the change order. Typical direct costs include materials, labour, equipment, cost of communication and other expenses relating to the change.

Non-linear Costs

All overheads constitute non-linear indirect costs. They can be fixed or variable aspects as deemed by the accounting method, followed by the construction company. Indirect costs are basically “clubbed ratios” of the whole job.

Incidental Costs

Periodic changes made to change orders during a course of time contributes to Incidental costs. Some of them are the result of cost arising out of special circumstances which are usually unpredictable. 

What causes Change Orders

Change orders are typically issued to cover variations in the scope of work.
Some of the prime causes of change orders with regards to contract management are owner’s extra added job requirements, errors, oversight in design, absence of coordination between construction parties, substandard workmanship, and the proprietor’s financial difficulties.

The need for I.T centric process for driving Contract management today 

Conventional change order management model has recurring issues

The way change orders are managed determines the additional costs incurred by the construction company. What has been seen is that firms that do not adopt a tech-driven approach & who still rely on old-school methods of managing ‘change order’, frequently witness recurring problems.

Surging change order costs occurs as the project matures

Identifying problems early on during the design phase is much less costly & reduces schedule overruns than if they were to be solved later during the construction phase.

Insufficient Data

For project managers, without timely access to the right data and information always results in miscalculating budgetary aspects. As such non-tech-driven, i.e., traditional change order management eventually disrupts the project’s profit(s).

Zepth, an ideal candidate for contract management

a). Effective Change Order Management

Relying on traditional change order management is not a prudent choice for Construction teams and makes a strong case for a tech-driven approach.  This is so because of the rigid project deadlines, increasing project risks & pressure on project-heads and the rising cost of both equipment and labor adds to the rigidity.

As mentioned earlier, while some change orders need to be attended, like owner requested changes, even so, a credible construction management platform can help minimize the impact of change.  Therefore, on the one hand, a preventive strategy at the outset of the project can help avoid changes from occurring, and on the other hand, a restorative strategy, that emphasises on proficiency can aid in handling changes when they happen.

b) Accelerate deals and monitor contract-related timelines

Be it residential, commercial, civil, industrial, or environmental construction. Zepth construction management platform processes contracts faster, collates project files and controls budgets with digital signature solution. It has provisions to create reminder alerts for any contract-related deadline.

Moreover, the platform allows for notes to be organised, streamlines messages for self & for those managing the contract. Real-time integration feature tracks changes made, so all those who are privy to the contracts can have a wide-ranging record of revisions available at all times.

c) Integrated management of construction agreements

Effectively manage job functions across multiple teams and locations. Zepth’s document management capabilities enable to centrally manage all agreements along with supporting paperwork, such as permits, bids, and subcontractor contracts.

 d) Improved procurement process

Rationalise budgets with Zepths’s internal validation workflow, which ensures that each contract goes through a proper hierarchical approval process before getting signed.

Electronic signatures pertaining to documents, ensures subcontractor pacts and supplier deals aren’t unknowingly altered after being executed.

e) Enhanced Design Conceptualisation

Zepth ERP’sfunctional integration provides on-demand data during the construction phase, which enables project managers to predict better how design changes will affect the overall project.

f) Better collaboration during the Design Phase

At times construction projects suffer due to deficit collaboration, particularly in the design phase. Design phase in projects involve the synchronisation of intricate systems, bringing teams up to speed that include suppliers, contractors and subcontractors, project board members, lead consultants, together at an early stage, makes the project shape up better.

g) Enhanced Team Communication

Effective communication is vital for large construction projects. 
All changes made are available as alerts to teams working from different sites and in different departments.
Plus cloud-based document management improves the ability, to manage future changes and consequential costs. Therefore, these add visibility and accountability to the entire process of future contract management, as manual tracking of change orders using paper sheets or email trails becomes very limited.

h) Data Powered Change Order Management

Satisfactory change management is often an investigative process. Availability of more data and information allows project managers to optimise cost and reduce delays when a change order occurs.

Last but not least, it may not be the small number of things that construction companies do to moderate costs pertaining to change orders. Instead, in totality, the various changes made can create better competency, more precision and reduced incidents.

Indeed averting change orders from occurring and handling them well when they occur requires an organisational and procedural shift.

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