What Is a Change Order in Construction & How Do They Work?
You’re working on one of your biggest projects as a new subcontractor. You couldn’t be more excited.
The only problem is that the client has requested a major change in the project, and it’s definitely outside of the original scope of work.
You’ve heard about change orders before, but now you need to know everything about them.
This article explains what a change order is, how they work, and everything you need to do to get through this process with your customer.
Flexbase: Our Cash Flow Management Solution Streamlines the Change Order Process
When you’re thinking about the best way to put together a change order for your current job, consider using Flexbase. Flexbase is a construction software that can streamline:
- Construction contracts
- Construction invoices
- Financing applications
- Change orders
- And more
You can schedule a Flexbase demonstration here.
Construction Change Orders: First There Must Be a Contract and a Defined Scope of Work
For change orders to even exist, there must first be a contract with a defined scope of work.
Listen to your instincts. If you have a potential customer who is wary about signing a contract, you might want to reconsider taking the job.
Signing and maintaining a contract with a defined scope of work protects both the contractor and the customer by holding both parties accountable to the terms you agree upon.
The ‘changes in the work' clause
One of the most important contract elements of a contract is the ‘changes in the work’ clause.
If...
- Something impacts your ability to meet the schedule or budget
- The customer wants to add an element outside of the agreed-upon scope of work; or
- There are unexpected project restrictions
… then you will need to call upon the contract clause addressing changes in the work, which outlines the process for how change orders should be submitted and approved.
Change Order Definition
A change order outlines work that marks a change from the original contract in a construction project.
The change can come from the client, from an unexpected issue during construction, or even from regulatory agencies. The change should be assessed, documented, and approved before the new work can be completed.
If you haven’t been deeply involved with construction or project management in the past, then “change order” might be a new term for you.
What Does a Change Order Mean?
A change order is an agreed-upon change to the original plan or contract. When something causes a change in the contract, a change order needs to be created for both the client and contractor to understand the new schedule, plan, and associated costs.
Change orders usually fall into one of three categories:
- Add to the scope of work in the contract
- Remove from the scope of work in the contract, or
- Change an element in the scope of work in the contract
The most common change order is option number one which is called the “addition change order.”
The client tells you they want a window in a wall where the architect didn’t plan to put one? You need to create a change order because now you have to:
- Order a window you weren’t expecting,
- Move electrical wiring that’s in that section of the wall out of the way, and
- Frame out and install the new window.
That’s quite a few hours of planning and work to add to the schedule, plus the cost of additional materials.
Creating a written change order means that you and the client have a written understanding of how this will impact the schedule, the final product, and the project cost.
Change Order: Construction Examples
Let’s break down the three types of construction change orders into some real-life examples:
- Addition change order: Adding a gas burner to the kitchen island, which means you will have to run a gas line under the flooring.
- Substitution change order: Instead of extending the roofline over the back patio, the owner wants to erect a pergola to save on costs.
- Deductive change order: To reduce project costs, the client wants to eliminate a skylight installation from the bathroom remodel.
Who Usually Initiates a Change Order?
While change orders must always be written by the contractor, the change order can be initiated by anyone directly associated with the project.
Typically, the client will request a change due to an aesthetic shift or to reduce project costs.
A change order coming from the contractor usually means there is an unexpected problem. This usually arises from an issue not discovered during an initial inspection or an obstacle that will make the contractor deviate from the original plan.
Typical Reasons for the Creation of a Change Order
The most common reasons for the creation of a change order include:
- The customer or project team discovers obstacles or efficiencies that will alter the cost or schedule
- Project work was incorrectly estimated
- Additional features or options are perceived and requested
- The customer or project team need to request additional money, time, or resources to complete the required deliverables
- If work items must be added to the original scope of work to achieve the customer’s vision, then a new price and schedule must be negotiated
How Common Are Change Orders in Construction?
Handling change orders is a normal part of the job in construction.
Whether it’s a customer who changes their mind halfway through or your team finding structural termite damage under the decking, there’s usually a plan in place for changes of some kind.
Around 40% of construction contracts saw a change order resulting in 5-10% contract increases, in a 2011 study.
That’s why it’s so important to understand what a change order is, and how they work.
How Do Change Orders Work?
If you’re asking yourself “How do change orders work?” at this stage, that’s completely understandable. They’re not common outside of project management and construction projects, so keep reading to learn more about how they work.
Understanding the purpose and importance of a change order is vital for the success of a project. It helps you:
- Manage customer expectations
- Successfully complete contractual obligations
The Effect of Change Orders on the Schedule of Values
One of the biggest impacts a change order can have on your project is seen through the schedule of values (SOV).
The schedule of values portions the original contract sum out among different parts of the work to be completed. When taken as a whole, the schedule of values shows how the value added from each phase or sub-project adds up to the contract price.
How do you create a schedule of values? The easiest way is to use Flexbase to automate your paperwork, including the schedule of values.
Flexbase’s ability to integrate with all other software also makes it easy to quickly update an SOV after a completed change order.
What Should a Change Order Include?
A change order should include:
- The revised scope of work
- Pricing for the revised work
- Relevant modifications that may alter the original contract
- Signatures from the contractor and client
Revised Scope of Work
The change order needs to account for the new plan or path forward.
This includes:
- What was scheduled to be done previously
- What will now be done instead
- The new schedule to accommodate the change order
Pricing for the Revised Work
Depending on the type of contract used for the project, the final cost of a change order will vary based on the amount of work and the contract type you’re using. See how a change order would impact these common contract types:
- Lump-Sum Contract (also called a Fixed Price Contract): Perhaps the most common type of contract for smaller jobs because costs and time are mostly known, a change order will be important to maintain profit margins if something big changes.
- Time and Materials Contract: In this contract where time and materials are flexible, a change order helps manage expectations with the customer, since the more time a change order takes, the more they pay.
- Cost-Plus Contract: The direct and indirect costs (i.e. labor, materials, office space, and travel) are the client’s responsibility, plus an agreed-upon amount as profit. A change order in this contract means the costs and the profit amount should be reconsidered.
- Unit Price Contract: In this contract, the project is broken down into multiple phases or “units,” where the price is predetermined. In this type of contract, a change order may affect the agreed-upon price of one or multiple units that must be renegotiated.
Relevant Modifications Which May Alter the Original Contract
In any project, the scope, schedule, and budget are all invariably linked. A change to any one part will inevitably affect the other two.
That’s why the contractor will need to address all three subjects with the client. All three need to be fully understood before the change order is completed and approved.
Signatures
Putting a clause in the original contract is expectation management step one in regards to possible change orders.
The formal request for their signature on a change order is the even-more-important step two. It says two things:
- Getting the client’s signature on the change order means that they understand the changes in scope, schedule, and cost.
- Putting your signature on the change order means that you are contractually required to follow the new scope and schedule, and it means that you understand how this will impact what you will be paid.
An Outline of the Change Order Process
For the greatest chance at a dispute-free change order process, stick to the following steps.
Step 1: A Change Is Identified
Step 1 in the change order process can come from the client, the contractor, or even a regulatory agency. While you hope to never be told by the permitting department that the architect did something wrong, it could still happen.
Depending on where the change comes from, it might be necessary or simply desired.
Either way, if it’s possible to accommodate satisfactorily then you should move forward in the change order process.
Step 2: Consult the Contract
Step 2 is to check the contract — remember, this is why you have a clause addressing changes in the work.
Make sure that you understand and follow all the steps outlined in the original contract. The worst outcome would be if you missed or skipped a step and then the client disputed changes in the schedule or contract amount later.
Step 3: Determine Additional Costs and Changes to the Project
Next is to account for all impacts this change will have on the project. The changes may include changes in the amount of:
- Labor required: amount or type
- Materials or equipment required
- Time required: parts of the project may need to be delayed or rescheduled
When completing this step, remember to take a comprehensive approach. If you have already contacted subcontractors and that team won’t be available in the new timeframe, what will it cost to hire a more expensive team?
Step 4: Generate a Change Order
Document all the expected changes into a new change order. Confirm that the change order meets all requirements laid out in the contract.
Flexbase has a great option to complete this in less than 2 minutes.
Step 5: Obtain All Required Signatures
Make sure that everyone who needs to approve the change order has signed. Without these signatures, the change order will be useless in the case of a future dispute.
Failing to get all required signatures before starting the revised work could end up being a costly mistake in any dispute.
Step 6: Complete the Work
Once all 5 of the previous steps have been successfully completed, then you can begin the revised work. Don’t start the work before the change order has been fully approved.
Save Time on Your Change Orders With Flexbase
Flexbase can save you time and money in many ways, but especially with change orders.
- Automate the process with the schedule of values in 2 minutes
- Communicate clearly by streamlining the communication process throughout the change order.
All parties involved are notified in real-time, which ensures that nothing gets missed.
Schedule a free demo with Flexbase today to see how you can automate the change order process, get paid faster, and avoid costly delays.
