Change order exposure by cause: splitting owner cost from contractor cost
Ask a project team for change order exposure and you get one number: everything open, pending and approved, added together. It is a useful number for the contractor, who will be paid for most of it from one source or another. It is a misleading number for the owner, who will pay for some of it, and not the rest.
Exposure by cause splits that one number into the parts the owner will fund, the parts that should come from contractor contingency, and the parts that are still unknown. It is a small piece of arithmetic on top of a register that already has a cause on every line. Without the cause, it cannot be done.
The one number and what it hides
Suppose a fictional $44 million student center reports $2.2 million of change order exposure at month fourteen. The board hears that figure and reads it as $2.2 million the owner may have to find. The owner's contingency is $1.8 million. The meeting is about where the other $400,000 comes from.
Split by cause, the same $2.2 million looks different. About $900,000 is owner scope, mostly a late decision to add a commercial kitchen. About $500,000 is design gap, which the owner will pay the contractor for but which sits on the design side of the record. About $600,000 is coordination, which under the agreement belongs in contractor contingency and should not reach the owner. About $200,000 is unclassified. The owner's likely share is closer to $1.4 million, with $200,000 in doubt. The meeting is now about the unclassified items and the coordination claims, which is the right meeting to have.
Building the split
The split has two dimensions: cause and state. Cause says who should pay. State says how certain the amount is. Exposure by cause is a small table with causes down the side and states across the top.
Cause rows
Owner scope, design gap, unforeseen condition, coordination, unclassified. Each row sums the amounts of every register entry with that cause. Design gap and unforeseen condition are owner funded under most contracts, so they sit with owner scope when computing the owner's share. Coordination sits with the contractor. Unclassified is shown on its own, never folded into either side.
State columns
Executed, approved but not executed, open PCO, identified but unpriced. Executed amounts are certain. Approved amounts are nearly certain. Open PCOs are uncertain, and the owner should choose a basis, such as the owner's estimate or a stated fraction of the contractor's figure. Identified items carry a rough owner allowance or are shown as a count with no value.
Reading the table
Three things stand out quickly in a cause by state table. The first is the owner's funded exposure: owner scope plus design gap plus unforeseen, across all states. That is the figure to compare against owner contingency. The second is the coordination row. If it is large and growing, the contractor's contingency is under pressure and the contractor may begin proposing coordination items as owner changes. The third is the unclassified row. If it is more than a small fraction of total exposure, the register is behind and the owner's share is unknown.
The table also makes the anticipated final cost defensible. An AFC that adds executed changes plus a single exposure number cannot be explained. An AFC built from this table can be walked through row by row, with the basis for each uncertain amount stated on the page.
Keeping it current
The table is only as good as the register beneath it. An entry that moves from PCO to approved should move columns the same day. A cause that is changed should move rows, and the change should be logged. A register kept in a spreadsheet can do this, but usually does not, because the spreadsheet is rebuilt monthly from the contractor's log and the causes have to be reapplied each time.
An owner's ledger that stores cause and state on every entry produces the table as a by product. Costwitness shows exposure by cause as a standing view, with owner funded and contractor funded totals and a flag on the unclassified row when it exceeds a threshold the owner sets. The arithmetic is simple. The value is in the register being kept.
What to do this month
- Take the current change order exposure figure and split it by cause using whatever causes are already in the register, with unclassified shown separately.
- Decide the basis for valuing open PCOs and write it on the report so readers can disagree with it.
- Replace the single exposure number in the owner report with the owner funded total, the contractor funded total, and the unclassified total.
Questions on this
Should exposure include changes the contractor has said it will absorb?
Yes, in the coordination or contractor row, with a note that the contractor has agreed to absorb them. They are still exposure for the project and they still consume contractor contingency. They are not owner exposure, and the table should make that clear.
How should disputed causes be shown?
At the owner's cause, with a flag. If the contractor says owner scope and the owner says coordination, the entry sits in the coordination row with a marker, and the report can show the total value of disputed entries as a separate line so the reader knows how much of the owner's position is contested.
Does the lender need exposure by cause?
Most lenders ask for the owner's funded exposure against owner contingency and remaining equity. The cause split is how that figure is produced, and showing the split makes the figure credible. A single exposure number with no breakdown invites the lender to assume the worst.
In the product
Change order register, Anticipated final cost, Contingency ledger. Free tool: Change Order Exposure, Contingency Runway.
Keep reading
Earlier: Time and material change orders: the controls an owner should insist on. Later: Design errors and omissions: recording them so recovery is possible. All articles on change orders.
See the cause register on a project like yours.
Thirty minutes on a call. The change order register with causes, the audit trail, and the notice clock, on a fictional project.