Change orders are an important part of the construction process because they help you understand what your project will require for completion and how much it will cost. Issuing change orders, with agreement from the client, makes it easier to estimate timelines, track costs and protect your profitability.
In this blog, we’ll go over what every contractor should know about change orders to maintain a profitable business.
In This Article
What Is a Change Order?
Change orders are an agreement between the client and the contractor to alter the construction contract. It could make changes to the original contract or a contract that has been previously changed, depending on how the project has progressed. This amendment could be for additional work, changes in materials or to reduce the scope of work through a deduction or partial termination.
Typically a change order notes an adjustment to three areas:
- Cost
- Timeline
- Scope of work
It’s important to know that a change may affect one or all of these items. The change order will provide details about how each one will be increased or decreased based on the proposed change. As the contractor, you want to try to stick to your original construction schedule as much as possible to ensure your profitability, so only consider changes when truly necessary.
With this definition in mind, let’s move on to how issuing and implementing a change order works.
The Change Order Process
It’s imperative that you use the same process every time you create, submit and manage construction change orders. This allows you to better track where the request is in the approval process and document the changes you make to a contract.
A quality change order process can be broken down into five basic steps:
Step 1: Format
Any time you request a change, you need to use a proper change order form. This could be on paper or online, but it needs to allow you to record the same information for every job so you can consistently track progress and costs.
Change order templates can help you record changes in the same format and level of detail every time. This helps you properly record information so it’s easily accessible when you’re tracking project costs, adjusting your budget and billing for overages.
Plus, with construction project management software, this consistent information allows you to see your change orders over time and assess how they’re impacting your overall business.
Step 2: Define the Change
The next step is to meet with your team and define the change. Are you adding sections to the project, making substitutions or reducing the scope? This should be clearly outlined in your change order so you and the project owner are on the same page.
If you’ve been creating documentation along the way, you can use those as your starting point for the change order discussion. Meet with the subcontractors, teams and stakeholders that will be affected by the changes and explain why the adjustments are necessary. Gather their input before presenting anything to the client to help the approval process go smoothly.
Step 3: Assess the Impact on Your Budget
After you’ve defined the requested change, you need to assess how it’s going to affect the project’s budget. You’ll need to calculate the estimated cost of the extra work or deduction for every cost category in your business, including:
- Labor
- Materials
- Subcontractors
- Equipment
- Administrative and overhead costs
Break each of these categories out as appropriate costs to accurately track them and integrate them into your existing budget. This will create a revised budget that shows you how close you are to target profitability.
The process of assessing and revising your budget will continue over the course of the job as other change orders are issued and approved.
Remember, the revised budget is different from your original estimated budget. You want to keep your original estimated budget so you can compare it to the revised budget over time. This allows your estimating process to improve over time so you can continually create better, more accurate estimates for clients.
Step 4: Submit Your Request
With your budget assessed, it’s time to submit the change order to the client. You should have previously agreed what items would be changed during your meeting in Step 2. When you submit your change order request, include your best estimate for how the changes will affect your costs and add it to your budget on a pending basis.
After the client signs off on the changes, you need to approve the change order. Only then should you start executing changes. Never assume the change order will be approved as written; there are many reasons a client might push back at the last minute or request final adjustments. Always enter these as pending orders until you receive the approval signature so you don’t charge for work that gets terminated.
Step 5: Tell Your Team
When the client has signed off and returned the change order, you can communicate the adjustments to your project team. Be sure they understand the new expectations and how they fit in with the overall project schedule and change the original scope of work. This communication is critical to implementing the changes quickly and effectively so the project can continue moving forward.
Why You Need Change Orders
There are a handful of reasons you might need to issue a change order during a project, such as:
- Errors in planning or scheduling
- Unrealistic price estimations
- Design changes
- Weather delays
- Unanticipated client needs
- Conflict between a contractor and the client
As you can see, many of these situations happen regularly during a construction project, so you might end up writing quite a few change orders. Before you issue an order, however, you need to ensure you have a thorough understanding of the original contract. The contract should outline what can and cannot be changed, which will help you determine if a change order is allowed in your particular situation.
Not understanding the original contract is one of the most basic problems many general contractors run into. You don’t want to submit a change order and plan work for something that can’t be changed. Instead, you want to know what your options are within the original agreement so you can propose the correct course of action when you meet with the client.
Unfortunately, meeting with the client doesn’t always go as smoothly as you’d hoped. Some of the most difficult change orders to issue are those that include a major conflict between the contractor and the client. In some cases, the conflict prevents any work from being done and you might have to terminate the contract. Always make sure you agree with the termination clauses in your contract before starting work, in case you have to use them.
How to Avoid Disputes with Clients
No contractor wants to end their project before the job is done, which is why it’s imperative to know how to avoid disputes with clients. The construction industry is confusing and stressful for those outside of it. That uncertainty can lead your clients to feel on edge even when there’s nothing to worry about.
As the construction professional, you need to know how to handle situations where your client might find reason to argue with you. We recommend two basic practices: communication and documentation.
Communication
It’s critical to communicate the progress of your project with clients. This lets them know how the job is going and how you plan to move forward. The best way to manage this communication is through a project management system that keeps the flow of information consistent and documented.
An example of proper communication would be sending automated daily reports to the client. These would be automatically triggered by your project management system and include certain data and information about the project, such as percentage complete, timeline versus reality and if weather delays kept you from the site that day. With this document, your client feels “in the know” about their project and develops a level of trust in you as their contractor.
You should consider other avenues of communication to close any information gaps if you have a particularly challenging project or client. You might implement one-on-one meetings once a week to give an in-person update and ensure there are no problems on their end. This would also be a chance to let them know what is and isn’t working for you and make adjustments to help the project reach completion.
Documentation
The most important part of a change order is accurately documenting the problem that requires a change. You don’t want to wait to start documenting troublesome conditions because that could push back your entire project timeline.
As you document potential issues, you can send those to the client in your daily report. If they know what’s happening on-site, then they won’t be surprised when you propose changing an element of the project. Communicating a potential change with documented evidence drastically improves your chances of having a change order approved.
Proper documentation is the key to success in the construction industry, in all cases. It will benefit you beyond just your change orders. It helps you to justify project decisions, manage your workforce and plan for future jobs and concurrent projects.
How They Work Together
Although both communication and documentation are important in their own right, you also need the two to work together. If you’re communicating often with a client, make sure those emails, phone calls or messages are documented. This will help you prove that you notified the client of a change before making it, which can be helpful if they suddenly change their mind.
Having verbal conversations with a client is okay if it’s immediately followed up with an email or signed paperwork that recaps what was discussed. It’s often tempting to rely on the word of your client, but that can put you in a tricky position. You might get a verbal go ahead one day that’s revoked later on. In that situation, you would have no proof that you had permission to proceed and could potentially lose money and time on a project.
The final, and most important reason, to clearly communicate and document conversations and changes during a project is because it will protect you in court if a client decides to take legal action. Your documentation substantiates the cost, scope of work and duration of changes in a project, as well as shows what the client did and didn’t approve. Having these pieces of information makes it much more likely that the court will rule in your favor and you’ll be paid for your work.
Software That Can Help
Change orders are a big part of your construction business, so you don’t want to risk one slipping through the cracks. Use a purpose-built project management software to help you create, manage and track change orders throughout your project.
Crewcost was designed specifically for contractors with the goal of making documentation and project management easy. Start your FREE trial today to see how Crewcost can help your business.
Yancy Lassiter, a CPA with a degree from the University of Texas, has 12 years under his belt as a Controller and CFO in the construction industry; he’s your go-to guy for finance in the building industry.
