By Paul Emanuelli

This article is an excerpt from the 2020 edition of The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.

In its June 2019 report entitled Phase Two: Construction Contract Change Management Controls Should Be Strengthened, the Toronto Auditor General raised concerns over the City’s construction-related change order practices. By way of background, the Auditor General noted that between “2013 and 2017, the City’s Engineering and Construction Services Division (ECS) delivered approximately $460 million annually in capital projects for the construction of vital infrastructure including bridges, expressways, roads, streetcar ways, watermains, sewers, water and wastewater treatment plant upgrades, and water supply systems.”

The Auditor General concluded that while the City had policies and procedures in place for dealing with change orders, the City needed to strengthen its change order management practices:

From our review of the 10 contracts and an examination of the 90 change orders, we noted that ECS has policies and procedures in place, but it must strengthen compliance with those procedures. Specifically, ECS needs to focus its efforts on:
  • Improving oversight over consultant-managed construction projects, and on ECS project managers overseeing large and complex projects; and
  • Strengthening controls over change order approvals, documenting pricing negotiations, liability assessment for errors and omissions, verification of work, and in maintaining appropriate change order documentation.

In fact, the Auditor General found that 46 of the 90 reviewed change orders were caused by design errors and omissions, and that 30 of those change orders were due to errors and omissions caused by the City’s consultants. However, while the Auditor General noted that the City should assign responsibility and accountability for errors and omissions that resulted in the change orders to recover the costs from the parties at fault, City staff repeatedly failed to hold its design consultants accountable for those design errors:

We noted two key issues:
  1. ECS staff do not consistently assess consultant liability for errors and omissions, and
  2. In cases where ECS has identified consultant liabilities, there was no evidence that these liabilities were pursued.
In 14 out of 90 change orders reviewed, ECS staff had determined partial or full consultant liability, but no further follow-up on recoveries has been made to date.
ECS needs to establish criteria to effectively assess consultant liability and provide guidelines to staff on the protocols to follow when pursuing claims against consultants. In addition, ECS should track and analyze the reasons for change orders on an ECS-wide basis as this may be useful to assign accountability and assist with process improvements.

In addition to finding that the City needed to do a better job in keeping its design consultants accountable for their errors and omissions, the Auditor General also found lax practices in respect to the oversight of change order approvals, with over one-third of the reviewed change orders initiated before the change order was approved:

We found 32 change orders (36 per cent) where the contractor did not obtain written approval prior to commencing change order work. In these cases, the work started prior to obtaining a change directive or change order.

The report also found weak record-keeping, as well as multiple instances in which external consultants delayed the submission of change order requests to the City, thereby contributing to the high percentage of retroactively approved change orders that were processed after work had already commenced:

In 21 change orders, there was no documented evidence of price negotiations by ECS on the contractor’s price proposal. This was often because the consultants submitted the change orders for approval months after the work commenced or had been completed (17 change orders).

The Auditor General also noted that the City has no established guidelines to assess change order pricing, that change order delegated signing authority limits were not always followed, that the work performed under change orders was not always verified, and that documentation for externally managed contracts was not readily available.

Given these flaws in its change order processes, the Auditor General recommended that the City establish specific service standards for the timely approval of change orders in accordance with established signing authority limits and proper record-keeping practices. While directed at the City of Toronto, these audit recommendations provide useful guidelines for all public institutions for the administration of their change order procedures.