Change Orders: What Are They?

Change order
 

As a contractor, change orders can leave you feeling like you’re trapped between a rock and a hard place. When it's requested, you can’t tell a project owner no and you can’t simply ignore the change; you have to find a solution (and fast). First, change orders while painful at times, are almost expected. According to some estimates, an average of 35% of projects experience at least one major change throughout the life of the project.

Construction contracts are notoriously long and complicated, but the two most important components to understand are change orders and scope and price. 

A change order is needed when something significant needs to be modified in the original scope of work. It serves as a legal record of the agreement between the customer and the contractor to the new work and the price to perform it. 

If you are working with a client who submits a request to modify the contract in a meaningful way, the change order process will begin immediately. You’ll need to have the estimating and takeoff team crunch the numbers quickly so that the schedule is not held up, waiting for the signed-off change order.

What we cover:

What is a construction change order?

A change order is work that is either added or removed from the original scope of a project assigned by a contract that the contractor and client agreed to.

When a contractor enters an agreement with a client for work, there should be an understanding that change orders will likely be required at some point in the construction process. This is just part of the game.

Field conditions may vary, especially soils or groundwater; the client may change their mind on a wall’s location or want to remove a portion of the building footprint.

The primary takeaway with change orders is that legal agreements are related to changes to the original design and contract between the construction team and the client.

The importance of chance orders

Change orders are essential for construction contractors. They protect contractors from being pressured into doing extra work beyond the agreed-upon terms of the contract. This can be a big deal if your client asks you to add more work without being agreeable to paying for it.

While it may seem easier to make a handshake agreement on price for additional work with a client, that is a dangerous game for a contractor.

Without change orders, there will be no record of the contract’s changes with the client, and you may end up being left holding the bag. A change order also provides cover from accusations of work left unperformed and holds both sides accountable.

How much do change orders cost?

The cost of change can add up if owners want to make constant project changes. Commonly, contractors will include a change order markup in the construction contract up front. On average, this markup percentage is about 10-15% for overhead and profit.

What is a change order request (COR)?

A change order request (COR) is a formal document compiled by a contractor to let a project owner or client know the scope of work has changed, why it has changed, and that changes to the contract are being requested as well.

In short, the contractor groups related potential change orders (PCOs) by issue and scope of work, and turns them into a more comprehensive change order (CO). Once all parties understand and agree to the change order request, the changes can be executed contractually.

This is a more efficient way for normal, contractual conflicts with cost and schedule to surface rather than requiring a change order every time a new issue is discovered.

Writing change orders

The contractor should create a change order as soon as the client comes to you with a request to revise their design and contract.

Doing so will allow your team to stay on track and begin preparing for the project’s changes by procuring necessary materials and updating the schedule with subcontractors where necessary.

The written change order is relatively simple and should include the following:

  • Contact information
  • Dates for when the change was requested and approved
  • The overall cost of the change as well as how that impacts the overall project costs
  • Any updates to the contract from the change
  • Changes to project delivery timelines

Some contractors might want to make a handshake agreement and get to work on the new work right away, especially if they have the materials on hand. That’s a big mistake. It is important to have any contract changes in written form and signed by all parties involved. If not, it’s the contractor who could be left trying to chase down payment from a difficult customer.

Not having the changes in writing could also lead to disputes over the actual work performed if the client continues to change their mind.

Writing a change order doesn’t have to be a daunting process, especially if your team uses construction software to manage their bids and estimates. Cloud-based tools makes it easy to determine changes to the cost estimate quickly.

Who creates change orders?

The contractor or subcontractor is responsible for preparing the change orders.

Several team members may be involved in estimating the new work’s cost before turning it over to the project manager to sign off with the client. Prime contractors and subs may need to coordinate on the change order process to make sure they are effectively communicating the changes that may affect different phases of construction.

How do you start a change order?

The change order process begins when a client comes to their contractor to make changes to the building or site. This could be something like needing to updates the limits of earthwork or foundation design based on unforeseen complications with bearing soil or a decision to revise the layout of a room to serve a different purpose.

Representatives from the owner and contractor meet to discuss what needs to be changed and how stakeholders can accomplish it. From there, the contractor will work up an estimate of the cost of the additional work. People working on the project can accelerate this entire process if the original contract includes standard unit costs for work that help make the change order more transparent. Once both parties sign the change order, work can begin.

Types of Change Orders

Types of change orders

There are three main types of change orders that all contractors should be familiar with, which are:

  • Additive change orders
  • Deductive change orders
  • Partial termination.

All three types of change orders involve different contractual revisions. 

Additive change order

An additive change order is the most common.

In this scenario, a client will ask you to provide them with a price to supplement the original contract with additional tasks.

Ensure that the expectations are clearly outlined in the change order so that you and the client fully agree on the additional work you will perform.

Deductive change order

A deductive change order will remove a specified portion of work from the contract, lowering the total price.

Deductive change orders typically address minor reductions in the overall scope of the work. If your contract allows for deductive change orders, you and the client will have to negotiate the contract’s value based on the removed work. This may not be easy, depending on how you and the clients have structured the contract.

Partial termination

Construction contracts typically include language allowing for partial termination.

This is used when a client seeks to delete large portions of the scope of work. A client cannot utilize widescale change orders to alter the scope of work dramatically. If the customer tries to make too many reductions to the contract via change orders, it could ultimately void the contract.

Utilizing ProEst for your bids and takeoffs can take the headache out of negotiating deductive change orders and partial termination because your team will be able to quickly verify the items and work to be eliminated and support your proposed terms.

What to include in a change order

The following should be included in a change order;

1. Project and contract information

  • Project name and address
  • Contract number
  • Owner’s name and address
  • Change order number
  • The main contractor’s name and contact
  • Name and contact information of the contractor submitting the change order

2. Description of the requested change compared to the original contract 

    The proposed change of work, reasons, and details are outlined in this section. 

    3. Updated schedule

    The new schedule should be put down showing all the changes. The number of days needed to complete the change and the date when it will be finished should be included in the new schedule.

    4. Cost of the change

    The change order involves changing tasks, leading to varying costs than earlier projected. The costs to be accounted for are the tax, profits, overhead, insurance, and all other adjustments that the change brings.

    5. Updated contract value

    The document should include the original and proposed contract value. The cost of the current change order and the value of all previous ones is also detailed.

    Change order process

    The following is the process for carrying out the change order.

    Step 1: Contract is signed

    The construction contract showing the budget, schedule, and scope of work is signed by agreeing parties after bidding and negotiation.

    Step 2: Issues are raised

    The contractual agreements begin to have arising issues from some changes. The changes could come from new regulation changes, owner changes, procurement issues, or design errors and omissions.

    Step 3: The change is proposed

    After the changes are proposed, the subcontractors estimate the change’s impact on the project’s timing, the scope of work, and budget.

    Step 5: The change is reviewed

    The owner reviews these changes within a limited time frame and may ask for additional information to accept or reject the proposal. 

    Step 5: The change is agreed upon

    The owner and contractor agree upon the proposed changes, and the amendment document begins to be prepared.  

    Step 6: Amending the original contract

    The parties involved signing the amended document. The workers are updated on the amendment by the contractor for implementation. The new scope of work is shared with timelines to help the crew adjust.

    How to improve change order management

    Proper change order management enables teams to mitigate the significant construction costs and schedule disruptions. Still, for many construction companies, effective management is a major paint point. Preventing change orders from occurring and managing them when they occur requires a cultural and procedural shift.

    Nonetheless, through the proper use of technology in the construction industry, good communication, and better data collection practices, construction companies can reduce the amount of time and money wasted on change orders.

    Better designs and visualization

    Building information modeling (BIM) technology is a model-based process that provides insight to architects, engineers, and designers as they plan the construction of buildings and infrastructure. BIM helps in the design phase by providing more accurate visualizations before the building phase begins.

    Furthermore, BIM can also be bridged into the field during construction. While changes that occur during actual construction will be significantly more expensive than in the design phase, BIM can help provide a more accurate analysis of the total impact. BIM integrated tools also provide better data during the construction phase, which enables project managers to better predict how changes will affect the overall project.

    Improve communications throughout construction

    Good communication is essential for large construction projects. Many companies now use specialized software to link teams of unconnected parties and promote collaboration throughout the design and construction process. The adoption of such software facilitates better communication across the board. This ensures that everyone is up to date on the latest developments. If a change occurs, all members of the team are alerted and can participate in the discussion, thus preventing miscommunications or missed information that can lead to even more project delays.

    The right construction cost management software can be used to link involved parties on the jobsite or where ever they happen to be. This is crucial during the construction phase when different members of the team are working from different sites and environments. Increased documentation of the change also improves the ability to manage future change and consequential costs.

    Cloud-based document management adds visibility and accountability to a project. Electronic communications management also enables companies to get rid of manual tracking of change orders via Excel, email, and paper. This ensures that documentation is available instantly to anyone who needs it and speeds up the spread of information to ensure maximum efficiency.

    Empower better change order management with more data

    Successful change management is often a decision making process. With more information and data available, project managers are better able to minimize the cost and schedule impact when a change order occurs. As mentioned, BIM and communications software improves data collection efforts.

    Robust data collection and data management come back to the use of proper technology and software. Companies that use multiple disjointed applications for managing their data run the risk of missing important pieces of information. With all of the information available through one organizing source, project managers are able to see the sum total of data available and make informed decisions based on that information. In order for the data to be made available to project managers, everyone must use the same software to share their information.

    Change order restrictions

    Of course, change orders have their limitations which would most likely be stated in the original contract. Commonly, change order percentage limitations are put in place. For instance, there will be limits for change orders to exceed a specified percentage of the original contract value.

    Scope limitations can also be set by the owners in the contract. Any proposes change outside of the scope limitations could result in going back to the drawing board on contract negotiations. 

    Avoiding change orders

    Change orders aren’t necessarily a bad thing for the contractor.

    If the change order process is followed correctly, they’ll be paid for additional time, labor and materials.

    Change orders aren’t great for the project owner, however. Too many change orders will drive up the cost of the project and could blow up the budget. Some change orders are unavoidable, but contractors can take some steps to limit them.

    Most importantly, double and triple-checking the contract before signing it. Clients need to have a complete understanding of what the contractor agrees to do. Don’t just assume they’re going to paint your bathroom after installing the fixtures. If it’s not in the contract, that’s a change order.

    Additionally, it’s essential to make sure that all engineering documents have been thoroughly vetted. All field investigations and testing should have also been completed to avoid any surprises related to something like a roof’s soil or condition.

    Key takeaways

    The construction contract that attracts change orders does not mean that the process will progress smoothly. The owner and other parties could decline to approve the change orders. It, therefore, needs a lot of negotiation and persuasion, with details on the changes being made.

    Coming up with new strategies is needful when change orders are released as ways to get a consensus in agreeing on what changes are necessary. 

    Documenting the whole process, from bidding to the needs at the beginning of the project, is crucial so that the change orders case is strong enough. All details of the construction process are meant to be attached for ease.

    Agreeing on the scope of work in detail is an incredible way of ensuring that change orders do not arise, which often could be costly to the owner. Contractors and clients should agree on everything to be done before any project starts.

    Frequently Asked Questions

    FAQs

    Can a change order be refused?

    Stubborn owners might fight over price or refuse to sign change orders when presented because they feel the initial contract should have covered the work. It is essential to document everything that led to the change order – field conditions, design flaws, conversations with site engineers, and owners. Take photographs as well. If the owner continues refusing to acknowledge the change order, it may ultimately lead to a legal battle. Contractors need to build a strong case to make sure they get paid for their hard work.

    How do you deal with large change orders?

    If a change order is so large that it completely changes the contract’s size and scope, it may be rejected because it is so far beyond what both parties initially agreed to.

    Continuous or large change orders can be complicated for contractors to handle, especially if payment is not upfront. If the client is continually pushing for changes to the contract, make sure they are reasonable.

    Anticipate construction change orders

    As you know by now, change orders will happen at some point on your projects, and the worst thing you could do is be ill-prepared. Instead of taking a defensive approach, or worse, ignoring them completely, get out in front of potential changes before they become an issue and always anticipate the potential for a change. With a streamlined change order process adapted for your company, you’ll reduce the frustration of the dreaded change order and be able to work more efficiently in the event of the unexpected, keeping your project moving forward as a result.

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    Grace Ellis

    As Manager of Content Marketing Strategy at Autodesk and Editor in Chief of the Digital Builder Blog, Grace has nearly 15 years of experience creating world-class content for technology firms. She has been working within the construction technology space for the last 6+ years and is passionate about empowering industry professionals with cutting-edge tools and leading strategies that improve the quality of their jobs and lives.