Surety Bond Quarterly - Fall 2016 - 15


Another task force member, Jerry
Hayes, president of United Electric
Company in Atlanta, concurred, saying
that "change orders are universally misunderstood by architects, owners and
Jerry Hayes
general contractors. They think we make
a lot of money on change orders, and we don't. We don't
recover all of the costs."
The Greater Toronto Electrical Contractors Association
developed a "Change Order Protocol" in 2011. That document has proved helpful in Canada. Giovanni Marcelli,
owner of NorthernTransformer in Concord, Ontario, Canada,
and founder of Accubid, felt so strongly about the importance of fixing the change order problem, he financially
supported the ELECTRI effort and serves on the task force
that developed the Guidelines.
"Giovanni is the consummate expert, because he was
able to get some things done in Canada that we need
done here," said Don Campbell, Executive Director of
the Southern Nevada Chapter of National Electrical
Contractors Association in Las Vegas.
"The Guidelines will initiate a better process where
contractors and owners and engineers sit at a table and
discuss these issues," Marcelli said. "This is a beginning
that will help all parties have a common document, one
that owners and engineers can better understand and
resolve the problem of change orders." Marcelli expects a
uniform format and process for change orders will benefit
all stakeholders in the construction industry.
While the ELECTRI Guidelines specifically relate to
electrical work, Long and Syal said they could serve as
a format for handling change orders for other trade professionals as well. Syal cautioned that other trades may
need to apply their own historical cost data to come up
with appropriate overhead and profit percentages.
Marcelli called educating owners and engineers about
change orders the best approach, but even better would be
abolishing change orders. "It's a lose, lose, lose," Marcelli
said. "If we can find a way to minimize changes, it will be
a win, win, win."
Until that day comes, electrical contractors plan to
take these Guidelines to others in the industry and start
a new process of compensation for change orders. "We
need to have this conversation, and changes need to be
made and made soon," Long said.
Cost categories create conflict
How costs related to a change order are allocated creates
most disputes. This includes determining recoverable
direct costs, overhead, the overhead/profit percentages
and costs related to impact factors. "What they are allowing us for overhead and profit and direct cost, we are
basically subsidizing the cost of the change order," Long
said. "We lose money on every change order."
For the most part, direct costs, perhaps additional
wire or switches, are readily identified and quantified.

NOT ONLY DO CHANGE ORDERS COST
MONEY, BUT ALSO THEY INTERRUPT
THE FLOW OF WORK TAKING PLACE
ON THE JOB AND MAY DISRUPT
TIMELY COMPLETION.
Wages and benefits for the person carrying out the work,
transportation expenses and storage can be included.
Overhead includes rent, utilities, personnel, education
and training, legal fees and advertising.
"Overhead has always been and should be the cost of
doing business when you have no work," Long said. Long
explained that prime contractors typically expect the cost
of a project manager be included in the allowance provided
for overhead and profit in the change order. But without
that job, the company would not incur that person's salary. "Common contract language pushes direct cost into
the overhead percentage and does not allow the electrical
contractor to charge for them separately," Long said.
Impacts on interruption of work present the third area of
conflict. "It affects their rhythm, their schedule and their
productivity," Syal said. "Because of this impact, there are
extra costs, consequential costs." Syal considers impact
factors the most controversial cost because the burden
of proof falls on the contractor. But, he said, legal cases
have supported including these costs in a change order.
Guideline process
The ELECTRI Guidelines are patterned after the "Change
Order Protocol" developed by the Greater Toronto
Electrical Contractors Association and research conducted by the ELECTRI International Research Project
Report in 2014. The authors took into account currently
used standard documents, such as ConsensusDocs and
the American Institute of Architects (AIA) standard document A201-2007. Syal described both as vague when it
comes to change orders and leave it to the owners and
contractors to figure it out.
After reviewing best case scenarios, middle cases and
worse cases, Syal said, "We found out contractors need
a higher percentage as a part of doing business." The
authors analyzed job costs, case studies and the standard
documents to determine what items should be recoverable in direct costs, which ones should be disallowed,
and a few items in a gray area, which may or may not be
recoverable, depending on whether the contractor can
make a strong case for inclusion.
The Guidelines provide templates that electrical contractors can fill out to help them determine direct costs.
For fair mark-up on overhead and profit, the researchers
reviewed actual job costs, contract documents, legal cases
and federal regulations. They also surveyed contractors
asking what they thought they needed in this category
and, why. They reviewed literature and financial performance annual reports. The researchers then calculated

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Table of Contents for the Digital Edition of Surety Bond Quarterly - Fall 2016

NASBP Upcoming Meetings & Events
2016-2017 Executive Committee
From the CEO: Success Comes with Sharing Perspective and Knowledge
Practical Insights: A Contractor’s Risk Management Portfolio Should Include a Commercial Crime Policy
Rethinking the Change Order Process: NECA Foundation’s Guidelines Offer New Approach, Substantially Reducing Change Order Costs
Six Considerations in Underwriting Subdivision Bonds (Part 2 of 2)
Affirmative Action and the Office of Federal Contract Compliance Programs: What Surety Professionals and Their Contractors Should Know
Surety Data Standards: What are They, and Why Should Surety Professionals Care about Them?
2016 NASBP Resource Directory
Index to Advertisers
Surety Bond Quarterly - Fall 2016 - cover1
Surety Bond Quarterly - Fall 2016 - cover2
Surety Bond Quarterly - Fall 2016 - 3
Surety Bond Quarterly - Fall 2016 - 4
Surety Bond Quarterly - Fall 2016 - 5
Surety Bond Quarterly - Fall 2016 - 6
Surety Bond Quarterly - Fall 2016 - 2016-2017 Executive Committee
Surety Bond Quarterly - Fall 2016 - From the CEO: Success Comes with Sharing Perspective and Knowledge
Surety Bond Quarterly - Fall 2016 - 9
Surety Bond Quarterly - Fall 2016 - Practical Insights: A Contractor’s Risk Management Portfolio Should Include a Commercial Crime Policy
Surety Bond Quarterly - Fall 2016 - 11
Surety Bond Quarterly - Fall 2016 - 12
Surety Bond Quarterly - Fall 2016 - 13
Surety Bond Quarterly - Fall 2016 - Rethinking the Change Order Process: NECA Foundation’s Guidelines Offer New Approach, Substantially Reducing Change Order Costs
Surety Bond Quarterly - Fall 2016 - 15
Surety Bond Quarterly - Fall 2016 - 16
Surety Bond Quarterly - Fall 2016 - Six Considerations in Underwriting Subdivision Bonds (Part 2 of 2)
Surety Bond Quarterly - Fall 2016 - 18
Surety Bond Quarterly - Fall 2016 - 19
Surety Bond Quarterly - Fall 2016 - Affirmative Action and the Office of Federal Contract Compliance Programs: What Surety Professionals and Their Contractors Should Know
Surety Bond Quarterly - Fall 2016 - 21
Surety Bond Quarterly - Fall 2016 - 22
Surety Bond Quarterly - Fall 2016 - 23
Surety Bond Quarterly - Fall 2016 - Surety Data Standards: What are They, and Why Should Surety Professionals Care about Them?
Surety Bond Quarterly - Fall 2016 - 25
Surety Bond Quarterly - Fall 2016 - 26
Surety Bond Quarterly - Fall 2016 - 2016 NASBP Resource Directory
Surety Bond Quarterly - Fall 2016 - 28
Surety Bond Quarterly - Fall 2016 - 29
Surety Bond Quarterly - Fall 2016 - 30
Surety Bond Quarterly - Fall 2016 - 31
Surety Bond Quarterly - Fall 2016 - 32
Surety Bond Quarterly - Fall 2016 - 33
Surety Bond Quarterly - Fall 2016 - 34
Surety Bond Quarterly - Fall 2016 - 35
Surety Bond Quarterly - Fall 2016 - 36
Surety Bond Quarterly - Fall 2016 - 37
Surety Bond Quarterly - Fall 2016 - 38
Surety Bond Quarterly - Fall 2016 - 39
Surety Bond Quarterly - Fall 2016 - 40
Surety Bond Quarterly - Fall 2016 - 41
Surety Bond Quarterly - Fall 2016 - Index to Advertisers
Surety Bond Quarterly - Fall 2016 - cover3
Surety Bond Quarterly - Fall 2016 - cover4
Surety Bond Quarterly - Fall 2016 - outsert1
Surety Bond Quarterly - Fall 2016 - outsert2
Surety Bond Quarterly - Fall 2016 - outsert3
Surety Bond Quarterly - Fall 2016 - outsert4
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