The City of Chicago Office of Inspector General (OIG) has issued an audit report recommending improvements to the way the Public Building Commission (PBC) ensures that construction change orders are justified and reasonably priced. A change order is an agreement between a contractor and client that authorizes a departure from the originally-approved contract terms. Rigorous attention to change orders is thus an important control feature for construction contract management.
OIG found one or more problems in 99 of the 228 (43.4%) change orders it reviewed, including proposals that lacked the necessary detail and instances where contractors overbilled PBC clients. Among other things, the audit encountered documentation suggesting possible out-of-sequence approvals, instances in which mark-ups for overheard and profit were charged and paid at levels that exceeded Board-imposed caps, and inconsistent efforts to recover damages attributable to architect “errors and omissions.” OIG concluded that PBC designed a robust process to review and approve change orders. However, ineffective implementation permitted errors and inconsistencies in the recording of information and recovery of damages.
OIG recommended that PBC:
1. Ensure that each change order proposal includes all critical information and that the information is maintained electronically.
2. Immediately end the practice of allowing contractors to recover overhead and profit at rates exceeding those provided in the contract.
3. Strengthen its process for checking the accuracy of contractor change order proposals.
4. Consider creating a system for tracking projects in which each subcontractor participates in order to facilitate efforts to audit invoices and cost proposals in the future.
5. Use an electronic system for change order review and approval, similar to the system used for its other business processes.
6. Update and consistently enforce the policy for errors and omissions damage recovery.
PBC agreed with all of OIG’s recommendations and proposed several corrective actions to improve the way it manages change orders. PBC has already begun to utilize a standardized electronic cost proposal form that facilitates accurate calculations and requires contractors to itemize labor and material costs. PBC has also conducted internal change order trainings and begun to require additional staff to review change orders.
“We appreciate the robust process PBC had established to review and approve change orders and their willingness to improve the system,” said Inspector General Joe Ferguson. “Consistent enforcement of the process will signal to architects and contractors that PBC applies a fair and transparent standard, but also intends to hold them accountable for all work performed.”
The full report can be found online.
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