Time and material change orders: the controls an owner should insist on

Some changes cannot be priced in advance. Nobody knows how much rock is in the ground, how far the unexpected pipe runs, or how long the remediation will take. For those, the contract allows the work to proceed on time and material, sometimes called force account, with the cost determined as it happens.

Time and material is honest when the scope is unknown. It is also the pricing method with the least pressure on the contractor to be efficient, because every hour is paid. An owner who allows it should attach conditions. Under most AIA A201 based agreements the owner has the right to those conditions, and the contract often lists them. The hard part is enforcing them on a Tuesday afternoon in the field.

When time and material is appropriate

Use it when the quantity is unknown and cannot be reasonably estimated, when the work must start immediately, or when the contractor's lump sum proposal includes so much contingency for the unknown that the owner is better off paying actual cost. Do not use it for work that could be quantified with a day of effort. A rerouted duct can be priced. Excavating an unknown obstruction cannot.

The decision should be made at the owner's level, not the superintendent's. A construction change directive is the usual instrument, and it should state that the work is on time and material, state the not to exceed amount, and reference the contract's cost of work definition.

The five controls

Each of these is simple. Together they turn an open ended change into one the owner can audit.

A not to exceed amount

Every time and material directive carries a ceiling. When the contractor expects to reach it, the contractor stops and asks for an increase, with a reason. The ceiling is not a price. It is a checkpoint that forces a conversation before the number gets large.

Daily tickets signed in the field

Each day of time and material work produces a ticket listing labor by name and classification, hours, equipment with hours, and materials with quantities. The owner's representative or a designated inspector signs it that day or the next. An unsigned ticket is an estimate. A signed ticket is a record. The sign off is the single most important control and the one most often skipped.

Rates fixed before work starts

Labor rates by classification, including burden, and equipment rates by type should be agreed in writing before the first hour is worked. Many agreements attach a rate schedule. If yours does not, ask for one and keep it in the owner's register. Disputes about rates after the fact are rarely resolved in the owner's favor.

Markup per the contract, applied once

The fee, general conditions and insurance percentages on time and material work are the same as on any change, and they are applied to the ticketed cost. Check that subcontractor tickets are not already marked up before the construction manager's markup is added, and that general conditions are not charged on work that does not extend the schedule.

A weekly running total

The contractor reports ticketed cost to date against the not to exceed every week. The owner's register records it. When the running total crosses a set fraction of the ceiling, the owner is told, not surprised.

A fictional example from a renovation

Picture a fictional $17 million renovation of a 1960s classroom building. Demolition reveals asbestos containing pipe insulation in chases the survey did not reach. The owner issues a directive for abatement on time and material with a not to exceed of $120,000, a rate schedule from the abatement subcontractor, and a requirement that the owner's inspector sign daily tickets.

Three weeks in, the running total is $84,000 and the abatement contractor estimates another two weeks. The contractor requests an increase to $180,000. The owner's representative reviews the signed tickets, sees that crew sizes have grown from four to seven without any change in the daily production, and asks why. The crew returns to five. The final cost is $151,000, converted to a lump sum change order with the tickets attached. Without the tickets and the ceiling, the same work would have arrived as a single PCO for whatever the contractor's books said.

Converting to a change order

When the work is done, the time and material directive becomes a change order at the ticketed total plus contract markup. The owner's register should keep the directive, the ceiling history, the tickets, and the final change order linked, with the cause recorded as unforeseen, design gap or owner scope like any other change. Costwitness keeps the directive and the change order as linked entries with the running total against the ceiling, and flags a directive with no ticket activity recorded for a set period. The owner's inspector still has to sign the ticket. The software tracks whether that happened.

In the product

Change order register, Contingency ledger, Anticipated final cost. Free tool: Change Order Exposure.

Keep reading

Earlier: Who changed the cause, and when: the audit table behind every change. Later: Change order exposure by cause: splitting owner cost from contractor cost. All articles on change orders.