Construction projects are no stranger to change. In fact, with things like material prices, weather, and client needs always in flux, you could say that change is the only constant in construction. Because of this, being able to navigate change orders is a must for any contractor. And while change orders aren’t fun, having the right processes in place to deal with them and their ramifications when the scope of the project changes will help you fulfill all the contract requirements and protect your profitability.
Here you’ll find our complete guide to change orders in the construction industry, from a refresher on what they entail, to how to avoid them when possible.
What is a Change Order in Construction?
Change orders are an agreement between you and your client to alter the construction contract. Depending on how the job has progressed, they can make changes to the original contract, or a contract that has been previously changed. These amendments can be for additional work, changes in materials, or to reduce the scope of work through a deduction or partial termination.
Change orders can be requested for a lot of reasons, some of which include: omissions in the original contract, unexpected job site conditions, or certain materials being unavailble when the construction process begins. Change orders can also be the result of an RFI (Request for Information), where the contractor is clarifying something or requestion additional information about the construction plans with the designer.
Typically, a change order represents an adjustment to to at least one of these three areas:
- Cost
- Timeline
- Scope of work
The details of the change order cover how each one of these elements will be affected based on the proposed change. As the contractor, you want to try to stick to your original construction schedule and scope as much as possible to ensure profitability, so only consider changes to project scope when truly necessary.
💥 Download our free change order template
Standard vs. Deductive Change Orders
While every contractor is familiar with standard change orders, where you’re scoping and charging for extra work, there are actually a couple different types of change orders. Deductive change orders are required when a portion of the work in the original scope needs to be removed from the overall job. As you can imagine, this can greatly reduce the scope of work, project costs and duration of a job.
Whenever you alter a job like this, it can have a significant effect on your profitability. Thankfully, making a proactive plan can help you navigate these change orders when they inevitably happen. Here’s a more in-depth guide to deductive change orders we recommend bookmarking.
What Should You Include on a Change Order?
While it may be tempting to make handshake agreements with the project owner, going through the process of submitting a change order that outlines everything about the requested change is a much more reliable and financially safe way to adjust a project. When it comes to creating change orders, you’ll want to make sure you thoroughly understand the details of both the job and contract. You’ll need to include specific information on the change order forms to ensure you’re covering both the contractual requirements and providing enough information to accurately relay the change in scope.
Every change order should include three items:
- Scope of work – Clearly note how the project scope will change including cost, materials, and timeframe.
- Cost of the scope change – Make sure to account for difference in costs due to changes or substitutions, payable by the owner or general contractor.
- Timeline adjustment – Include a detailed outline of how the change will affect the timeframe for project completion and offer a new estimated completion date.
All or some of these items may be affected, but it’s important to include all three on your change order proposal. You should also consider including a change order number, the new contract price and a place for both parties to sign off so everything is as clear as possible.
For the scope of work, make sure to clearly communicate how you’ll add or subtract from the planned scope of the project and how that will affect the contract value. This will alleviate any confusion when it comes to the cost of changes.
You can calculate the cost of changes in a variety of ways, depending on the type of contract and what’s required in the change order. For example, instead of listing a single price, you might have to break down the material costs, labor costs, and other direct costs associated with the change.
Lastly, make sure you can explain the proposed timeline adjustment. Delays are often inevitable in construction, but that doesn’t mean the project owner will understand. Clearly explain how and additional time is needed for project completion to avoid issues down the road.
👉🏼 Get more tips on submitting change order requests.
How to Implement an Effective Construction Change Order Process
The best change order process is one that’s simple to implement and easy for the whole team to follow. There’s no need for complexity here – the simpler you can make the workflow, the better you’ll be able to avoid cost overruns, delays, change order disputes, and other issues. Your goal is to build a plan that’s standard enough to duplicate, but specific enough to keep all stakeholders accountable and aware of their responsibilities.
Below is a quick overview of our seven step system to creating a clear and standardized change order process:
Step 1: Define Your Procedures – Before you do anything else, take the time to write out your procedures for initiating, reviewing, and approaching the change order process. Identify your stakeholders, outline team roles and responsibilities, and establish where people can find relevant information.
Step 2: Standardize Documentation – One of the goals of this system is to help you develop a process that can be easily replicated from project to project. To do this, we recommend creating standardized templates for change order requests, proposals, and logs. That way, you can plug and play as needed.
Step 3: Perform Accurate Cost Estimation – Before you submit any change order, make sure to understand all of the costs involved. A thorough cost analysis will give you a bird’s eye view of not only materials and labor/subcontractor costs, but of any internal cost changes that might affect your budget as well.
Step 4: Outline Detailed Scope Descriptions – Each change order should clearly define the scope of work. By taking care of this early, you’ll be able to reduce the chance of misinterpretation or disputes. Include specific details and timelines on things like materials, dimensions, sketches, and more.
Step 5: Execute Timely Communication – Never underestimate the importance of a solid communication plan. Keep the methods and channels you use to communicate change orders uniform to keep information organized and easily accessible.
Step 6: Streamline Review and Approvals – If change orders move too slow, there’s a real risk of needing to front costs to keep the project moving forward. Anything you can do to streamline the review and approval process – like outlining key stakeholders and their responsibilities – will help speed things up.
Step 7: Document Everything – Record keeping can make or break your ability to recover costs. Decisions can happen quickly in construction, so make sure to document everything as it happens if you want to be able to justify evolving costs.
While this is a good overview to start with, we explain these seven steps in more detail here.
How to Reduce Change Orders
The best way to reduce change orders is to do your homework early on. Pay attention in particular to the drawings and specs and note any potential conflicts that could arise from one trade’s obligations to the next (for example, electrical requirements for plumbing equipment). For extra help in this department, we recommend construction companies take a look at a book called RediCheck. While it’s time consuming, the book outlines interdisciplinary checklists that can help with coordination.
What’s more, making use of a submittal register and collecting shop drawings/product data sheets early on can help you get ahead of any questions on materials or installation. While these practices might not fully eliminate a change order if done after the contract is signed, they’ll at least mitigate the impact of a change order on both the owner’s budget and the project schedule.
One important thing to note is that change orders may be approached differently depending on the contract type:
Cost Plus with Guaranteed Maximum Price (GMP): Part of the strategy of using this type of contract is acknowledging that there are some unknowns in the design. This way, the owner can accelerate the schedule while accepting a slightly higher price to account for those unknowns. An accelerated schedule generally means less time for design and pre-construction, which in turn means there will likely be more change orders as the scope gets refined.
Additionally, you and the design team could have made different assumptions where scope was not fully defined, or where design documents are in conflict, so you can probably expect more disagreements on whether a clarification of the design intent merits a change order. Lastly, there will be more distinct categories of change orders; some scope will be net new to the project and should raise the GMP, while others should make use of contingency.
Lump Sum: In a lump sum contract, the owner cannot assume that you as the GC are holding any type of contingency. The onus then is on you to include all costs in your initial bid, which is based very strictly on the construction documents provided by the owner and the design team. The hope is that there was more attention paid to detail during the design phase, which means fewer potential change orders. In theory, any scope that is not explicit in the drawings or specs should more clearly require a change order. And when negotiating change orders, you should generally get the benefit of the doubt, particularly if the bidding was competitive.
Final Thoughts
In an ideal world, you’re able to keep change orders to a minimum, but construction work is never predictable. It’s how you navigate and manage these changes that can make the difference between profitability and growth – or costly setbacks. We hope this in-depth guide helps clarify some of the finer points of change order management, so you can feel prepared to adapt, react, and successfully complete any change order needed. For more on navigating change management in construction, check out our guide here.
Further Reading: Understanding Job Costing: A Comprehensive Overview