The $35,000 Question: Understanding SED’s Change Order Intricacies
Anyone that has been through a construction project likely knows about change orders. While architects and engineers strive to minimize them in a project, there are almost always conditions during a project that require a change of some type. As such, it’s important for all parties involved with a project to have an understanding of the implications of change orders; public works projects in particular have their own set of requirements pertaining to change orders that must be followed. This article aims to shed light on the change order process in construction, with specific focus on the process and procedures required of the New York State Education Department (NYSED).
Change orders are a common, anticipated part of the construction process. They allow for an owner to address unforeseen conditions that inevitably arise; they also allow an owner to add or remove scopes of work from the project as needed. At face value, a change order is simply a formal document that alters the work and/or schedule of a project, agreed upon and executed through signature of all parties involved. A change order does not always result in a cost change, and sometimes a change order can actually result in a credit toward the project cost. If your project is utilizing contracts from the American Institute of Architects (AIA), your change order document will likely be form G701, though variances in the form exist when there is a construction manager involved. A change order is not inherently a bad thing in a project; however, as many experienced owners know, more often than not a change order is accompanied by an increase in project cost.
In the case of a cost increase, there is an implied need for additional materials and/or labor to complete the change in scope. On all New York State public school district projects, NYSED requires a specific change order certification be provided along with all other change order paperwork. This particular form, designation FP-COC, requires the architect or engineer of record to provide detailed information pertaining to the circumstances surrounding the reason for the project change. The form itself is not a change order, but a document NYSED uses to track cost changes in a project that has direct implications and impacts the state aid the school district will receive upon completion of the project.
To recap, a change order is the execution of a change in contract between an owner (in this case, a public school district) and the prime contractor performing the work in a project. A SED change order certification is a tracking mechanism that allows the state to monitor the construction change process, as well as to determine the legality of the change in terms of cost amount…and this is where things get a bit more complicated.
New York State General Municipal Law, Section 103 pertains directly to advertising for bids and offers, letting of contracts, and criminal conspiracies. Luckily we’re not discussing conspiracies here, but our interest does fall within the law’s requirements for bidding publicly funded work projects (tax-payer funded projects). Section 103 states very clearly the following:
“Except as otherwise expressly provided by an act of the legislature or by a local law adopted prior to September first, nineteen hundred fifty-three, all contracts for public work involving an expenditure of more than thirty-five thousand dollars and all purchase contracts involving an expenditure of more than twenty thousand dollars, shall be awarded by the appropriate officer, board or agency of a political subdivision or of any district therein including but not limited to a soil conservation district to the lowest responsible bidder furnishing the required security after advertisement for sealed bids in the manner provided by this section, provided, however, that purchase contracts (including contracts for service work, but excluding any purchase contracts necessary for the completion of a public works contract pursuant to article eight of the labor law) may be awarded on the basis of best value, as defined in section one hundred sixty-three of the state finance law, to a responsive and responsible bidder, or offeror in the manner provided by this section.” 1
Pardon the long legal jargon, but it’s necessary to understand the law at face value. The primary take-away from this section is the requirement to bid all public contract work in excess of a value of $35,000. Not surprisingly, the threshold for an allowable change order cost from NYSED is…you guessed it…$35,000. NYSED matches the requirements of the municipal law, and as a result all change order certifications that are sent to the state for review are checked against this amount. Any certification submitted in excess of this amount will nearly always be flagged, with the district requested to provide rationale as to why the work was not publicly bid.
The law is designed to protect the interest of the public whose money is footing the bill for the work; unfortunately, the law does not accommodate the varied, and sometimes extenuating, circumstances that occur during a project. Construction and renovation projects at existing school facilities can be unpredictable, with many unforeseen conditions presenting themselves throughout the work. In many cases, an unforeseen condition can result in a change order cost that far exceeds the $35,000 threshold. Now what? Projects in full swing, faced with a daunting, unexpected condition rarely have the flexibility to stop and publicly bid the work to address the condition. School superintendents and district school boards must rely on their architect and engineer in these circumstances to navigate the SED requirements.
A typical NYSED change order certification requires basic information about the project change, including who requested the change, how the change is related to the original project scope, the basis of the need, and the cost. When the cost exceeds the allowable threshold, there is additional information required from the architect and engineer before NYSED will consider allowing the change. According to NYSED’s Office of Facilities Planning, “change orders which exceed the NYS bidding threshold of $35,000 must include, on the change order certification, an explanation of why it is in the best interest of the school district and the public to award a change order instead of putting the work out to a public bid.” 2 This explanation must include the following, detailed set of information:
- A compelling justification as to why this work could not have been bid. 1
- Evidence of due diligence in evaluating change order costs versus potential bid amounts. 2
- An analysis showing how the cost of the work by change order would have been competitive with costs received if the work was bid, and why it was a benefit to the taxpayers to complete the work by change order, including but not limited to: 3
- Would the bid process delay duration of project? If so, would the delay increase costs to project? If so, by how much?
- Is the additional cost reasonable?
- How does cost to design, bid, and mobilize construction crews compare to using contractors already under contract and onsite?
- How is the district saving money when using a change order rather than a bid?
- What due diligence has been performed by the architect in evaluating a change order versus a bid? 3
There are two primary risks involved with change order cost amounts that exceed municipal law limits. The first risk is the potential for the district (superintendent and board) to be found in violation of the municipal law, should proper justification and due diligence not be provided. The second risk is there is a chance the change order cost will be disallowed by an NYSED auditor upon review of the final cost reports submitted for the project. In this instance the district would not receive state financial aid on the change order work, and as such would be responsible for paying the full amount of the cost. This is of particular importance because it can present a district with an unanticipated, unbudgeted cost in the project. NYSED recommends that any district considering such cost changes in a project consult with their legal counsel and financial advisor for a thorough review of the change before a change order is executed and the work performed.
Additionally, in nearly all cases, it is recommended that districts consider the aforementioned process an exception rather than a rule, applied to unforeseen and mitigating conditions discovered during a project. Change orders for work that is added at the district’s request that also exceed municipal law cost limits will most likely be disallowed by NYSED and expose the district to legal liability if not properly bid.
In circumstances where a district would like to add scope to the project work via change order (as an owner-directed change and not an unforeseen condition), NYSED allows for this to occur, provided the additional work falls within the parameters of the original project. In this case, a district could also have such a change exceed the $35,000 threshold, so long as they bid the additional work.
NYSED states, “the most common improper change order presented to the Office of Facilities Planning is one expending unencumbered funds. Most often this occurs near the end of a project and the proposed change order introduces types of work which was not included in the original plans and specifications.” 4 If the work desired was not previously reviewed and approved by NYSED it will not be allowed; if the work was not included in language presented to the voters as part of a referendum it will not be allowed; and if the work was not previously reviewed as part of the required State Environmental Quality Review (SEQR) it will not be allowed. NYSED notes, “…had a ‘shopping list’ of desirable items been included in the original plans and specifications as ‘add’ alternates, change orders to effect such alternates would be approved.” 5
In rare instances, NYSED has been known to allow previously unreviewed work to take place in a project as a change order, provided the following occur:
- The district confirms the language of the proposition presented to the voters (who authorized the use of public funds for the project) is inclusive of the scope of work being requested. If not, the only way the work will be approved, and money encumbered for its execution, is by way of a new public referendum.
- The district provides NYSED with an updated project scope form (SED form FP-SC), inclusive of the additional work, signed by the superintendent and board president.
- The district provides NYSED with an updated project financial form (SED form FP-F), inclusive of the additional work, signed by the architect, superintendent, and board president.
- The SEQR for the project is amended to include the work, and is presented to and approved by the school board. (The date of the resolution will need to be updated on the SED FP-SC form.)
- An updated State Historic Preservation Office (SHPO) review is completed for the additional work, and a SHPO Determination Letter or updated form FP-OPRHP-LOR is submitted. 6
Navigating the myriad of NYSED and municipal law requirements on capital projects requires the effort of experienced professionals. The educational facilities architects and engineers at LaBella work with NYSED on a daily basis, and our many school district clients benefit from our relationships with the state education personnel. If considering construction change order requests within an active capital project, be sure to consult with your architect, engineer, and NYSED before moving forward with any work, regardless of its anticipated cost. A thorough understanding of the district’s options and responsibilities will mitigate financial and legal liability.
For additional information on the change order process in public school capital projects, please contact us, and we’ll be happy to talk through the intricacies.
- Information provided by a NYSED project manager within the Office of Facilities Planning
- Information provided by a NYSED project manager within the Office of Facilities Planning