Hey friend! If you’re involved in a construction project, you’ve probably heard the term “change order” thrown around. But what exactly is a change order, and why are they so important in construction?
In short, a change order is a written document that formally changes some part of the original agreement between the owner and contractor. It amends the contract to account for changes in the scope of work, schedule, or cost.
Change orders are a fact of life in construction. According to industry surveys, over 90% of projects end up requiring at least one change order. So buckle up, because we’re going to walk through everything you need to know about change orders today. Understanding this process is crucial for anyone in the construction game!
When Are Change Orders Needed in Construction?
Construction projects are complex beasts with many moving parts. Despite everyone’s best efforts, changes frequently become necessary during the course of a project. Common triggers for change orders include:
Changes in Owner Requirements
The owner decides they want to revise the design, finishings, or functionality of the building. These changes in scope often result in extra work for the contractor.
Errors and Omissions in Design
If flaws in the plans and specifications are discovered, a change order can authorize fixes. For example, a structural design error that requires additional steel to remedy.
During demolition or excavation, the team discovers existing conditions that differ from what was expected, like unsuitable soils or hidden utilities. Addressing these issues requires a change order.
The contractor identifies a way to reduce costs or improve constructability or performance through a change in materials or methods. The owner can opt to implement the change via a change order.
Modifications to building codes or other regulations may force changes during construction. For example, a change to the energy code adopted mid-project.
Clearly, change orders provide important flexibility to keep projects on track when the inevitable curveballs arise. But how does the change order process actually work?
The Change Order Process
When the need for a change crops up, the change order process kicks into gear:
Identifying the Need for a Change Order
The first step is recognizing that a change to the agreed-upon scope of work, schedule, or contract price is required. This can be identified by the owner, contractor, or design team.
Preparing the Change Order
Next, the contractor typically prepares a change order package including a change order form and supporting documentation like drawings, photos, or cost details. Common forms used are the AIA G701 or the ConsensusDOCS change order forms.
Submitting for Approval
The contractor submits the change order to the owner or their rep (usually the architect or construction manager) for approval. They review it to ensure the justification is valid and pricing is acceptable.
If approved, the change order gets signed by both parties, making it a legal modification to the contract.
Incorporating the Change
Finally, the contractor can proceed with implementing the change per the agreement.
Seems straightforward, right? Now let’s look at what key info needs to be included in a change order form.
Key Components of a Change Order
A change order is a contract modification, so it must specify all elements of the change clearly. Information commonly covered includes:
- Change order number – Lists how many change orders have occurred on the project so far.
- Description of change – Details the specific change to the work and the reason it is needed.
- Impact on schedule – Notes any adjustment of the project end date due to the change.
- Impact on contract price – States the increase or decrease to the overall contract value from the change.
- Revised completion date – Specifies the new substantial completion date if impacted by the change.
- Signatures -needs to be signed by both owner and contractor to take effect.
Seems simple, but different types of changes call for different kinds of change orders.
Types of Change Orders
Not all change orders are created equal. Here are some of the most common varieties:
Additive change orders increase the scope and cost, while deductive change orders reduce scope and cost. Pretty self-explanatory.
Very large changes that alter the fundamental nature of the work are “cardinal changes”. Courts may deem these changes so extreme that the original contract no longer applies.
A change directive is issued unilaterally by the owner ordering a change, without the contractor’s agreement on price and schedule details. Used as a last resort when speed is critical.
Value Engineering Changes
Changes submitted by the contractor to reduce cost by altering the specified methods or materials. Requires owner approval to implement.
Change orders authorizing overtime or other extraordinary measures to meet a completion deadline. Usually initiated by the owner.
Additional work necessary but not specified under the original contract. One of the most common types of change orders.
With so many flavors of changes, how do you determine a fair price for each change order? Let’s find out.
Change Order Pricing Methods
When a change impacts the cost of the work, the change order needs to spell out the adjustment to the contract value. Some common pricing approaches include:
- Lump sum – A single fixed amount for the work. Requires a defined scope.
- Unit price – Preset rate for units of material/labor from the contract applied to the change.
- Cost-plus – Direct cost of labor, equipment, materials plus overhead/profit markup.
- Time and materials – Paying for actual costs incurred according to hourly rates and material costs.
The contract will specify which pricing method the contractor should use for pricing change order work.
Okay, so you’ve got the change order approval and pricing nailed down. But effectively integrating changes during construction requires diligent change management.
Change Management Process
With changes come chaos. Keeping things orderly is key:
- Use a change log – Record all proposed changes and track their status.
- Track cumulative impact – Assess the combined effect of multiple changes on total budget and schedule.
- Update schedules – Issue revised construction schedules factoring in approved changes.
- Coordinate with subcontractors – Ensure they are apprised of and agree to any changes affecting their work.
- Maintain change order balance – Make sure additive and deductive changes even out to maintain the overall profit margin.
Staying on top of these factors helps turn change orders from headaches into solutions.
We’ve covered a lot of ground, but it’s not over yet. You need to be aware of some legal considerations surrounding change orders too.
While change orders modify a contract, the contract still governs the rules of the game:
- Waiver of written change order requirements – Failure to follow contract change order procedures (like obtaining a signed written order) may waive those requirements, binding the parties to an oral modification.
- Cardinal change doctrine – As discussed earlier, some extreme changes can nullify the original contract entirely.
- Flow down to subcontracts – Prime contractors should get change orders signed by impacted subcontractors to avoid disputes.
Stick to the contract protocols and keep proper documentation to avoid issues down the road.
Best Practices for Change Orders
After all this, you’re a change order expert! Here are some best practices to take with you:
- Act promptly to identify and prepare changes
- Follow the contract requirements to avoid problems
- Get all change orders signed by both parties before work begins
- Maintain thorough documentation of every change for your records
Construction may be riddled with surprises, but you’ve got this change order thing on lockdown now. Kick butt out there!
Change orders are a necessary reality on construction projects. By formally modifying the contract terms, they provide flexibility to address changes while keeping everything legal and billable.
While the change order process may seem complex, just remember to follow the contractual requirements, get proper signatures, provide sufficient documentation, and maintain good records. Mastering change orders is a must for any construction pro!