The Change Order That Ate the Contingency
A city contracts for a $1.2 million park renovation with a 10% construction contingency ($120,000). Six months in, the contractor has submitted change orders totaling $95,000: $30,000 for unforeseen soil conditions, $25,000 for a design omission in the irrigation plan, $20,000 for added shade structures requested by a council member, and $20,000 for accelerated schedule to recover from a rain delay. The project manager has been approving change orders verbally and telling the contractor 'we'll paper it later.' The city's contract requires written change orders signed by the purchasing manager before work proceeds. The council member's shade structures were never in the original scope or budget.
1. Categorize each change order and identify which ones present the greatest compliance and funding risk.
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Categorization:
- $30,000 unforeseen soil - classic differing-site-condition change; legitimate in principle, but must be documented and priced per contract.
- $25,000 design omission - owner/designer-caused; the city bears responsibility, but it still requires a formal change order.
- $20,000 council-requested shade structures - out-of-scope addition never budgeted or authorized; highest risk. This is a new requirement, not a change to existing work, and a council member's request is not contract authority.
- $20,000 acceleration for rain delay - time-related; whether the city pays depends on contract risk allocation for weather. Often not compensable unless the city caused the delay.
Greatest risks: the shade structures (no scope, no budget, no authority) and the acceleration (likely not owed). The verbal approvals compound everything.
2. The PM wants to 'just process all four' to keep the contractor happy and stay on schedule. What should the contract manager do, and what are the consequences of the verbal approvals?
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Do not process all four as-is. The contract manager should:
- Stop verbal direction. Only the purchasing manager (per contract) can authorize changes in writing. The PM's 'we'll paper it later' created apparent authority risk - the contractor may reasonably believe changes were authorized.
- Require written, priced change orders for the soil and design-omission items, with backup and independent cost review.
- Route the shade structures back through the proper channel: if the council wants them, that is a scope addition requiring funding identification and a formal amendment - not a contingency draw. Contingency is for unforeseen conditions within scope, not new wants.
- Evaluate the acceleration claim against the contract's weather/time provisions before paying anything.
- Assess contingency balance: $95,000 of $120,000 is committed, and the legitimate items alone ($55,000) plus proper handling of the rest may exhaust it. Flag to leadership that remaining contingency is thin.
Consequences of verbal approvals: potential unauthorized obligations, disputed entitlement, audit findings, and difficulty defending the city if the contractor claims the work was directed. The manager should document the history honestly, ratify only what is properly authorized, and tighten the written-change-order control going forward.