Crafting Effective Change Orders: What You Need to Include

It’s important to understand how change orders work because most projects require some type of change during their life cycle.
  October 5, 2022
Bricks, Design Pages and a Laborer on Construction Site

Change orders are commonly used in the construction industry to help contractors keep track of changes to a project. They can cover a variety of situations that change the original contract of the job, hence their name, “change order.”

Creating these orders, however, requires a detailed understanding of your project and contract. You need to include specific information on these forms to ensure you’re covering the contractual requirements and providing enough information to accurately relay the change in scope.

In this blog, we’ll look at the importance of change orders in the construction industry, as well as what you should include on them, how to track changing costs, the effects of different contract types and the benefits to creating accurate change orders.

Why Are Change Orders Important?

It’s important to understand how change orders work because most projects require some type of change during their life cycle. The frequency and likelihood of changes depends on your company’s seat at the table — owner, general contractor or subcontractor. The higher your position, the more likely you are to deal with changes.

No matter what your position, however, there are some core reasons change orders are an important part of any construction project:

  • Streamline communication between contractors and owners when the scope of the work is adjusted
  • Ensures the originally contracted work is completed
  • Protects your budget, as the contractor, by allowing you to bill for unexpected costs due to a change

The original job contract will always dictate how a change order can be issued and approved. So you need to ensure that, over all else, you fully understand the original contract and what changes are allowed within it. This will help you plan and estimate your budget so you can stay on track throughout the project.

What to Include on a Change Order

When you create a change order, you need to include three items:

  • Scope of work – clearly notes how the scope of the project will change
  • Cost of change – difference in costs due to changes, payable by owner or general contractor
  • Timeline adjustment – detailed outline of how the change will affect the project timeline and a new estimated completion date

All or some of these items may be affected by your change, but it’s important to always include all three on your change order, even if some are not affected.

For the scope of work, you need to very clearly communicate how you will add or subtract from the planned scope of the project. This alleviates any confusion when it comes to the cost of changes.

You can calculate cost changes in a variety of ways, depending on the type of contract and what is required in the change order. For example, you might have to break down the materials, labor and other direct costs associated with the change instead of listing a single price.

Finally, ensure you can explain the proposed timeline adjustment. Delays are often inevitable in construction, but that doesn’t mean your client will understand. Clearly explain how and why the timeline is affected by a change to avoid issues with disgruntled customers down the line.

What to Track on Change Orders

As you create and manage your change orders, you’ll need to track the cost, revenue and completion date associated with the change once it’s approved. Although back and forth between a general contractor and owner is a normal process in change orders, you want to ensure you document as much relevant information as possible to minimize pushback.

Including these items helps you substantiate your reasoning for requesting a change. When that change is approved, tracking the costs, revenue and completion date will tell you if you’ve hit your desired profitability.

Tracking these items can be difficult if you’re trying to do it manually or fighting a difficult computer system. The best way to ensure accurate reporting is to use a quality accounting software built specifically for the construction industry, like Crewcost. This will help you track changes and their costs more accurately during a project.

Types of Changes

Projects can require all kinds of changes, depending on the work at hand. However, typically changes will fall into one of three categories: timeline, scope and materials.

Here are some examples of each type of change:

  • Timeline – typically this is an extension of the timeline. This might occur because of a weather delay or late deliveries of materials or appliances that need to be installed. Extended timelines normally involve increased costs.
  • Scope – this could be a reduction or expansion of the scope of the project. This usually occurs when an owner determines that they either want to add something or that they no longer need a specific portion of the project. It’s not likely to happen on every job, but it can occur when there are large input cost increases, such as the cost of materials hikes we’ve seen with the COVID-19 pandemic.
  • Materials – this is most likely to happen in long-term projects that happen in phases. As you purchase materials for each phase, the price may rise or fall depending on the market and mean you need to submit a change for the final cost of your work in certain types of contracts.

The type of contract is another consideration that affects your change order. Certain contract types could make change orders more likely and others less so. For example, in a time and materials contract you likely wouldn’t have a change order unless a new area was added or the timeline was extended.

The Benefits of Creating Change Orders

You may be tempted to make handshake agreements with the project owner when you need to change the project. However, change orders are a much more reliable and protective way to adjust your project. If there is ever a dispute about your work, you can fall back on that change order to show you explained the reasoning and the change was approved.

Change orders protect your revenue, plain and simple. Even if your relationship with a project owner turns negative, you can still ensure you’re paid the full amount for your work and time. So always take the time to create change orders for your projects and fill them out properly.

Along with creating change orders, you need a way to track your progress and the associated costs. That’s where Crewcost can help. Try our purpose-built software FREE for 14 days to see how it can improve your construction accounting.

Yancy Lassiter

Written by Yancy Lassiter

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.

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