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Change Orders

Follow the basic procedure for submitting change orders in the 2011 HUD memo, subject: Change Orders,

Types of Change Orders

Change orders can refer to work that must be done, or a "necessity" change order, or to work that is not required but is desired by the owner, known as a "betterment" change order. There also can be a change order that is required which has no financial result, such as a change order to extend the construction period. The cost of a necessity change order can be paid for with available project funds under contingency reserve (in the case of a rehab) and by available project contingency funds. A betterment change order is not paid for by HUD and HUD looks to the owner or sponsor to cover that cost.

HUD Processing of Change Orders

Once the change order has been completed and Form HUD-92437 has been signed by the general contractor, architect and owner (mortgagor), it is forwarded to the HUD project inspector for review. Sometimes, the development team will submit a number of change orders for HUD to review. The HUD inspector will review the change order to determine whether it is a necessity or a betterment. The HUD inspector will also determine if the change order budget is reasonable and will write the HUD-approved cost in the column "HUD Estimated Effect on Cost + or - ". HUD Mortgage Credit will then complete the bottom part of Form HUD-92437, which indicates whether there are sufficient funds remaining in available contingency lines to cover the cost of the necessity change order. HUD will number the change order and return the completed form to the owner or general contractor. If contingency funds are not available to cover the cost of the change order, HUD will indicate on the form that the amount of the shortfall must be escrowed by the owner.
To request HUD funds to cover the change order, the owner submits a standard requisition, Form HUD-92403-CA. List the number of change orders and the HUD-approved amounts to be paid from available contingency funds. Attach the fully-completed Form HUD-92437 for each change order that is to be submitted for payment. When the HUD inspector confirms to Mortgage Credit that the change order work has been fully completed, then HUD will advance the funds to the owner's construction account.

Escrow Requirement

If Mortgage Credit has determined that available HUD contingency funds from the project cannot cover the total cost of the change order, HUD will require that the owner escrow the amount of the shortfall and complete Form HUD-92464, Request for Approval of Advance of Escrow Funds, to provide evidence that those funds have been set aside in a bank. Three originals are to be submitted to HUD.

As an example of how this will work, say the total change order cost is $10,000 and that there are funds still available in contingency reserve in the amount of $7,500. HUD will use $7,500 from project funds and request that the owner escrow $2,500 for the balance needed. The owner's requisition, Form HUD-92403-CA will show a request for $7,500 and attached to the requisition will be the HUD-approved change order(s) on Form HUD-92437 and completed Form HUD-92464, Request for Approval of Advance of Escrow Funds. HUD will advance its portion into the owner's construction account and will send to the bank and the owner written approval on Form HUD-92437 authorization to release the $2,500 needed to cover the balance. The owner will write a check to the general contractor for the $2,500 amount.

The Form HUD-92464 is also used in the event that HUD has processed a change order as a betterment and will indicate to HUD that there is sufficient funds in the Sponsor's bank account to cover the amount of the betterment change order.

In the event that a bank is resistant to signing the form, HUD will accept the following:

1. a letter from the bank to HUD Mortgage Credit indicating that there are funds in an account of the Sponsor sufficient to cover the dollar amount of the betterment change order.

2. a letter from the Sponsor or Owner to HUD Mortgage Credit requesting that HUD approve payment to the General Contractor for the betterment.

3. a letter from the General Contractor to HUD Mortgage Credit indicating that the Contractor has been paid in full for the betterment change order.