Change Order Pricing and Productivity Loss
A contractor is performing a $5M fixed‑price contract for a 12‑month project. The original scope included installing 1000 linear feet of pipe at a unit rate of $500 per foot. After 6 months, the owner directs a change: an additional 200 feet of pipe must be installed in a congested area, which will disrupt the crew’s productivity. The contractor’s original estimate for the pipe installation was based on 10 feet per day per crew, with a crew cost of $5,000 per day. The contractor proposes a change order price of $150,000 for the additional 200 feet, which includes $100,000 for the pipe (200 ft * $500/ft) plus $50,000 for productivity loss. The owner’s engineer argues that the unit rate should apply and no extra should be paid. The contractor claims that the congested area will reduce productivity by 30% for the additional work and also impact the remaining original work.
1. Evaluate the contractor’s change order proposal. Is the productivity loss claim valid? How should the owner respond?
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The contractor’s claim for productivity loss may be valid if the congested area indeed reduces productivity. The original unit rate of $500/ft was based on 10 ft/day, implying a labor cost of $500/ft (since crew cost $5,000/day / 10 ft/day = $500/ft). For the additional 200 ft, at the same productivity, the labor cost would be $100,000. With a 30% productivity loss, the effective rate is 7 ft/day, so labor cost per foot = $5,000/7 ≈ $714/ft, an increase of $214/ft. For 200 ft, that’s $42,800 extra. The contractor’s $50,000 is close but slightly higher. However, the contractor also claims impact on the remaining original work, which could be a separate claim. The owner should request a detailed breakdown of the productivity loss, verify the actual impact, and consider negotiating a lump sum for the additional work. The owner’s engineer’s position that the unit rate applies is only valid if conditions are the same; here they are not. The owner should acknowledge the changed conditions but ensure the price is fair and reasonable.
2. What documentation should the contractor provide to support the change order? What are the risks for both parties if the change order is not resolved promptly?
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The contractor should provide: a detailed cost breakdown showing the original unit rate and the basis for the productivity loss, daily records of actual productivity in the congested area, a schedule analysis showing the impact on the remaining work, and any correspondence with the owner about the changed conditions. Risks if unresolved: the contractor may slow down or stop work, leading to delays; the owner may face claims for delay and disruption; the project may go into dispute, increasing costs. The owner should work with the contractor to agree on a fair price, possibly using a cost‑plus or time‑and‑materials approach for the additional work, and document the agreement to avoid future claims.