They say a change will “do you good.” However, the feeling is often anything but good when a change order construction note comes through the pipeline. Change orders don’t have to be the big, scary monsters many contractors and clients think they are. The first step is having an agile system for handling construction projects! Take a look at how to make sense of change orders without stress.
The Effect of a Change Order in Construction
What are change orders used for? A change order is used to either exchange or modify some aspect of the work, materials, or scope of a project. Don’t confuse a change order with an addendum. Addendums add additional work and labor to a project. The easy way to say it is that change orders are either “deleting” or “swapping” work.
Yes, a change order can still make it seem like the blueprint from start time to project completion is being thrown into tailspin even if they aren’t quite as exhaustive as an addendum. Contractors may find themselves grasping at variables to try to determine the next step. They may also be concerned about backlogs trickling into all other contracted projects. The truth of the matter is that change orders aren’t rare. They also aren’t impossible to recover from. Let’s talk about how building contracts look different after a change order comes through.
Let’s make sure the definition of a work order is fully clarified before moving forward with construction change order best practices. A work order is the result of a decision to make a change after work has started. The call to implement a change order can either be made by the owner or contractor. The most common reason for a change order is a need to accommodate a set of unforeseen circumstances.
Once a change order comes through, it can affect:
- The total project budget
- The project timeline
- Validity of permits
- Project scope
The first instinct when a charge order happens should be to stop the bleeding. While the contractor knows that a delay is probably inevitable, the handling of a change order can determine everything. Having a formalized construction change order process is the best strategy for making change orders less painful on a consistent basis.
What Is the Purpose of a Construction Change Order?
The purpose of a change order can be boiled down to altering the original contract to reflect updated needs. A change order is a legal and contractual documentation of a request to change work, subtract work, revise scheduling, or veer from a project’s original scope and design in some way.
Common Reasons for Change Orders in Construction
Change orders happen for hundreds of reasons. In many cases, change orders happen as the “inner circle” of a project expands. Design experts, engineers, and architects may all provide insights that compel either the contractor or client to pivot from original plans.
Disagreements, errors, omissions, and misunderstandings can also cause change orders. Of course, the most common cause of change orders is simply the fluid, variable-filled environment of a construction project. Here’s a look at the common variables that trigger work changes:
- Errors, omissions, or inaccurate specs that weren’t caught in the initial plans and blueprints.
- Out-of-date budgets.
- Design changes based on limitations of the construction site’s terrain.
- Design changes based on client preferences.
- Worker shortages.
- Material and supply shortages.
- Ambiguous, poorly defined scope.
- Poor communication and coordination.
- Quality-control issues.
- Vandalism.
- Storm damage.
- Permit-based or regulatory changes.
- Insurance changes.
- Approved substitutions.
While there are hundreds of variables that can lead to change orders, change orders in construction are divided into two categories. Change orders can either be additive or deductive.
Additive changes are changes that add work to a project. This could mean anything from higher ceilings to a bigger closet. It could also entail updating a paint color to a different shade.
By contrast, a deductive change order requests a deletion of work. Deductive change orders almost always result in a scaled-down scope with a lower cost for the client. Deductive changes also generally shorten project timelines.
Change orders are only change orders if they have been signed off on by both parties! If a client is pushing a change in scope on a contractor after failing to reach a consensus, this is accomplished through a legally binding order called a construction change directive.
The Four Methods for Change Orders
Change orders can be handled in four ways. Many people are familiar with something called a zero-cost change order that merely documents changes instead of changing prices. Here’s the full rundown on change orders:
- Lump Sum: With the lump-sum change order, the changes being made can be quantified into a concrete price that increases the overall project expense.
- Zero Cost: A zero-cost change order merely documents a change in a project’s scope without altering the price.
- Time and Material: A time-and-material change order is used to document individual costs when the changes made cannot be quantified into a single concrete cost the way they can with a lump-sum change order.
- Unitary Cost: Unitary-cost change orders quantify additional costs based on specific units of measurement required to complete the newly defined scope of work.
Having a tight handle on project costs is what enables contractors to determine which charge-order method is required to satisfy updated scope. In many cases, contractors use historical data to determine how many additional labor hours will be needed to enact the required changes. The (American Institute of Architects) AIA change order form is a simplified, easy-to-use change order form template.
Why Properly Documenting Scope of Work Is Crucial
Properly documenting scope of work serves two purposes. The first is to manage liability. The other is to manage expectations.
Including a detailed scope of work in a contract is necessary for clarifying what’s in scope versus what’s out of scope. This clarification becomes the basis for managing everything required in a change order.
Failing to have a solid scope of work hurts projects because it leaves lines blurry. When contractors don’t define what is out of scope from the start, they open themselves to being liable for not completing in-scope work. It’s also important to make sure a contract has a change-order clause that describes the change-order process.
What a Good Construction Change Process Looks Like
Start by knowing the original construction contract on a front-to-back basis. This will require going over any clauses regarding the change-order process. You’ll need to follow all requirements regarding the following points:
- Permissible timeframes for initiating change orders.
- Specific documentation and information needed to initiate a change order.
- Necessity for an authorized agent to approve details in change orders.
In many cases, it’s forbidden to begin work without having a written, approved change order. Other contracts may allow work to begin without any formal agreement. Change orders must be executed in adherence to what’s contained in the original contract.
When implementing a change order, it’s important to clear up any errors, omissions, or ambiguities that led to the request. Failing to address underlying flaws in the plan could create a need for subsequent change orders.
Who typically initiates a change order? Both the contractor and project owner have rights for initiating change orders at any point during a construction process. However, contractors and project owners are far from the only people involved in the process of bringing a change order to fruition.
When grasping the updated scope of a project, it’s essential for the contractor to consult with all stakeholders. Discuss changes before solidifying them on a change-order form. It can be helpful to reach a formal agreement about cost and schedule prior to putting pen to paper as long as it’s understood that this oral agreement isn’t legally binding.
When discussing updates, communicate how they will ultimately cause ripple effects in a project’s overall cost and timeline. It’s also important for contractors to remember that negotiations are still possible during the change-order phase. Contractors may be obligated to continue work under the stipulation that they retain a right to seek additional compensation upon completion. The simple truth is that a contract may legally require a contractor to perform work specified on a change order even if a consensus has not been reached during negotiations.
Certain practical steps must be taken by a contractor independent of the contractor-client conversation. It is the responsibility of the contractor to communicate all details of the change with crew members, field managers, foreman, subcontractors, vendors, and city/permitting officials.
Finally, the responsibility to keep good records for self-protective purposes rests on the shoulders of the contractors. Do not rely on the record-keeping ability of the client. Retain all documentation related to the change order in a carefully organized, fully accurate log. This log may be called upon during disputes and audits.
What Three Things Must Be Agreed Upon for a Change Order?
Finalizing a change order is similar to finalizing any contract. First, both client and contractor must review the updated plans and agree on the:
Once an agreement has been reached, a formal change order can be signed by all relevant parties.
What You Should Include in a Change Order Form
There’s no such thing as too much specificity with change orders. A change order should include the following fields:
- Title and address of the project.
- Date of signing.
- Project owner’s name.
- Name and telephone number of the party requesting the change.
- Revised completion date.
- A description of the requested change in contrast to the original scope included in the contract bid.
- Itemized documentation of direct costs tied to materials, labor, rented equipment, owned equipment, redesign fees, fuel costs, administrative staff hours, additional permit fees, safety measures, cleanup, utilities, and more.
- Statement of contractual basis for the change’s impact on a project’s completion.
- Signatures of all parties.
One of the most complicated aspects of calculating costs for a change order is updating labor costs. Labor includes work hours, insurance, benefits, and employer taxes. In addition, costs and depreciation for all equipment and resources allocated to the updated work scope must be calculated on the basis of the allotments needed for the updated scope.
Considerations When Pricing Construction Change Orders
Ideally, a contractor already has a consistent system for costing jobs that can be carried over to work specified by change orders. Contractors can easily lose money when they don’t have a method for factoring in true costs.
Do change orders include overhead and profit? Yes, contractors need to factor their margins into change-order pricing. Failing to do so will erode the overall profit margin on a project. If your target profit margin was 15%, it’s important to follow a pricing scale that reflects that target through the change-order process.
Tracking Change Orders
Yes, it’s necessary to have a system for tracking change-order requests. If your construction firm handles multiple contracts at once, it’s possible to have a revolving docket of change order requests ranging from minor to massive at any given time. It’s also possible to manage individual change orders on a granular level.
When zooming out, these requests and approvals are the two big factors requiring tracking. A system for tracking actuals within change orders is also important. That means that change-order tracking is divided between managing a “Change Orders” list and “Project A” list simultaneously.
Time may be the most important tracking point. Ask these tough questions if you’re noticing that change orders always seem to result in losses:
- Are you able to accurately quantify how much time you’re spending on change orders?
- Are your time-based cost quotes accurate?
- Are you actually losing money because your time-based quotes are inaccurate?
Don’t let a change order always mean a change for the worst for your bottom line. Like any aspect from initial bid to completion, a change order can negatively affect your bottom line if you don’t have the right data. Contractors are handling change orders without losing ground with help from Workyard. The construction workforce management software trusted by contractors around the country, Workyard lets you account for every minute worked, mile covered, and labor cost accrued on every project.
Workyard doesn’t force you into providing “ballpark” cost estimates for labor on change orders. This fully integrated platform provides time tracking, time management, job scheduling, job costing, GPS location/mileage tracking, and integrations with the project and financial-management software you’re already using to run your construction business. Every second of labor time devoted to a change order is fully tracked, documented, and ready to be integrated into your updated bill.
Stop losing money on change orders! Get paid for every minute worked to meet your updated project scope with help from Workyard.
