Make-or-break during production: shedding light on change-orders, rework and contractors margin in construction

Abstract

A considerable amount of research has examined the cost performance of construction projects, yet there has been a paucity of studies that have examined the impact that client initiated change-orders and rework have on contractors. This paper seeks to add further clarity to this issue by replicating previous empirically-based research to establish the validity and reliability of the key issues influencing a contractor's cost performance. A total of 98 projects were used to examine the value of rework and change-orders and their influence on a contractor's margin. Only 65% of projects experienced a cost increase, though a mean rework cost of 0.39% of the contracted value was incurred. The difference between approved client change-orders and those by the contractor for subcontractors was 0.5% of the total costs incurred, which adversely impacted the organisation's profit. Margin losses may well have been higher as rework is seldom formally documented and reported.

Keywords:

• Construction
• change-orders
• contractor’s margin
• rework

Acknowledgements

The authors are particularly indebted to the contracting organization for providing the data presented in this study. Data will be made available upon request in SPSS file format.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

Notes

1 A change-order is typically a client or their representative’s written instruction to a contractor, issued after the signature of a construction contract, which authorizes a change to the work being undertaken and thus to the contract time and/or amount (Love et al. 2017a).

2 Defined as the ‘unnecessary effort of re-doing an activity or process that was incorrectly implemented the first time’ (Love, 2002, 19).

3 Defined as ‘an amount or proportion added for profit and additional overhead costs (including administration, supervision, establishment and attendance costs) incurred solely as a result of a variation, but not including any overhead costs relating to delay, disruption or interference caused by the variation’ (Tozer 2007, 49).

4 Reproducibility has been a core mechanism used to help establish the validity and importance of scientific findings since Philosophical Transactions of the Royal Society was established in 1665 (Allison et al. 2018). Progress is made within a field based upon a foundation of reliable results with reproducibility being core. Therefore, the replication of studies forms an integral part of science and is needed for the advancement of knowledge. The process of replication involves a study to be repeated using the same methods, different subjects and experimenters. Replication, therefore, is important for a number of reasons, which include: (1) provide assurance that results previously obtained are valid and reliable; (2) determine their generalizability or the role of extraneous variables that have been examined; (3) apply the results to real world situations (e.g. to practice work); and (4) identify new research directions in consideration of previous findings from similar studies (Heffner 2016).

5 Uncomfortable knowledge is ‘that knowledge which is in tension or outright contradiction with those versions [and] must be expunged’ (Rayner 2012, 107). Four strategies to deal with uncomfortable knowledge are: (1) denial – there is not a problem; (2) dismissal – it is a minor problem; (3) diversion – I am working on it; and (4) displacement – the model we have developed tells us that real progress is being achieved. In this case, the focus is on denial.

6 Costs reported are in Australian Dollars.

7 Again, data pertaining to rework that arose due to changes-orders and design omissions was not made available for this study.

Additional information

Funding

The authors would like to acknowledge the financial support provided by the Australian Research Council under its Discovery program [DP160102882], which enabled this work to be undertaken.

Notes on contributors

Peter E. D. Love

Dr. Peter E.D. Love is a John Curtin Distinguished Professor in the School of Civil and Mechanical Engineering at Curtin University. He holds a Higher Doctorate of Science for his contributions in the field of civil and construction engineering and a PhD in Operations Management. His research interests include operations and production management, resilience engineering, infrastructure development and digitization in construction. He has published over 450 scholarly journal papers, which have appeared in leading journals such as the European Journal of Operations Research, Journal of Management Information Systems, Journal of Management Studies, IEEE Transactions in Engineering Management, International Journal of Operations and Production Management, Production Planning and Control, and Transportation Research A: Policy and Practice. He tweets at: drpedl

Lavagnon A. Ika

Dr. Lavagnon Ika is an Associate Professor of Project Management (PM) and Program Director for the MSc in Management at the Telfer School of Management (Ottawa). His research focuses on how projects work. His work appeared in journals including World Development, Production Planning & Control, the International Journal of Project Management (IJPM) and the Project Management Journal. He is an Associate Editor for the IJPM. He received the Emerald Best Reviewer Award in 2018, Outstanding Paper Award in 2017 and Highly Commended Paper Award in 2011; the IPMA Research Award in 2017 and IPMA Research Contribution of a Young Researcher Award in 2012.

Dominic D. Ahiaga-Dagbui

Dr Dominic D Ahiaga-Dagbui is a Lecturer of Construction Management at the School of Architecture and Built Environment, Deakin University, Australia. He gained his PhD from the University of Edinburgh, UK (2014) and a Masters in Civil Engineering and Construction Management from Heriot–Watt University, UK (2010). Dominic is keenly interested in practical and transformational research that is of direct benefit to the civil and construction industry. His research focuses on delivery of large and complex infrastructure projects, taking into consideration future operational costs, adaptability and end-user needs. His academic contributions are in the areas of infrastructure cost overrun, front-end project governance, client-capabilities development for cost-effective asset delivery and future-proofing infrastructure.

Giorgio Locatelli

Dr. Giorgio Locatelli is an Associate Professor of Infrastructure Procurement and Management at the University of Leeds (U.K.). He has a Bachelor and Master of Science degree in mechanical engineering (2006) and a PhD in industrial engineering, economics and management from the Politecnico di Milano (Italy) (2010). His research and teaching focuses on Project Management in Infrastructure/Megaprojects with a particular emphasis on benchmarking cost-benefit analysis, risk management, ethics and corruption, governance and temporary organizations, financing, modularization. Giorgio also acts as a consultant and visiting academic for several institutions. He is the author of more than 100 international scholarly journal and conference publications. His membership includes: Member of the CEO Council on Transformational megaprojects – World Economic forum; Editorial Board of International Journal of Project Management.

Michael C. P. Sing

Dr Michael C. P. Sing is an Assistant Professor (Research) in the Department of Building and Real Estate at Hong Kong Polytechnic University. He has Master’s degree in Building Engineering from City University of Hong Kong and PhD in Construction Management and Engineering from Curtin University, Australia in 2012. His research interest includes: (a) infrastructure delivery and asset management, (b) project performance and evaluation using machine learning and modelling (equivalent to construction business), and (c) sustainability in design and construction. Dr Sing is currently undertaking several industry-funded research projects that focuses on risk management of infrastructure projects and sustainable building design.