Change Order vs. Construction Change Directive.
Change Orders...Construction Change Directives.
Each may seem to describe the same change - but there are important differences between the two. Differences that all parties need to understand, so as to minimize confusion, delays - and potential liability.
First, there is the need to identify whether the change is a major change, or a minor one. If the change is minor, the Architect generally has the authority to order minor changes in the work via a Construction Change Directive, as long as it does not involve adjustments in the contract sum, the contract completion time, or the collateral performance.
But, if the change does involve adjustments to time, money, or both - these requests for adjustment result in the contractor generating a Change Order Request (COR) . The result of these requests become either a Change Order (CO), or a Construction Change Directive (CCD).
Change Order - is a written order completed by the Architect, and signed by both the Owner, and the Contractor. This form describes the date, the change (sometime by reference to other forms such as construction bulletins or requests for information), the amounts involved, the time increase or decrease, and a recap of the status of the original contract as affected by cost or time - and requires agreement among the Owner, Architect and Contractor. Each change order is a contract that requires the same legal consideration as any contract.
Construction Change Directive - is a written order prepared by the Architect - and signed by only the Owner and Architect, directing a change in the work, as well as a proposed basis for adjustment in Time, Cost - or both. The Construction Change Directive is used in the absense of total agreement on the terms of a Change Order.
The Contractor executes the CCD, although they may not agree with the terms of the directive. Disagreement may be centered around Time, Cost, or both - but the agreement is to complete the work based on the terms of the Directive - and work out the final terms of the adjustment after the work has been completed.
How does this affect the Lender?
As a Lender, you need to keep in mind the following:
1. You need to stay on top of all construction Change Order Requests.
Realize that these requests may turn into Construction Change Directives, that may impact the filing of liens against the property if agreements cannot be made by the end of the project. This is no place for micromanagement - but, you need to determine where funds will come from to rectify disagrements.
Funds generally come from 4 sources:
- Other Line Item Savings (no net change in contract amount)
- Equity (i.e. Borrowers pockets)
- Contingency Funds
- Loan Increase
