Change orders, also known as variation orders, are common in the construction industry, but they're also a common reason for construction disputes and lost profits. How can construction businesses manage the change order process for more efficient, cost-effective, and cordial contract changes?
A change order, or variation order, is a request to amend the original construction contract that changes the contractor's scope of work. Change orders often come up when the designs are incomplete or incorrect or are missing important elements, an owner requests a change in the design of the original plans, or if something unexpected comes up on the job site.
A change order alters the contract agreement between the contractor and owner. It describes the changes from the original plans along with resulting additional costs and schedule changes.
Types of Construction Change Orders
Change orders don't all operate the same way. Here are some of the most common change orders on a construction project.
Added Scope or Additive Change Order
Additive change orders commonly add something new for a contractor to complete on a construction project. Examples of added scope are requests to add a window where there wasn't one in the design in the original plan or add a wheelchair ramp so the project will be compliant with accessibility laws. Additive change orders usually incur additional consequential costs and contract time compared to the original agreement and require a contract modification.
Smaller Scope or Deductive Change Orders
If the contractor or owner wishes to remove an element from the design, the project scope of work is smaller than described in the earlier contract. The total price for the work may come down as a result of lower material costs or labor hours. Depending on the changes made, a change order resulting in a smaller scope is called a deductive change order or a partial termination. An example of a deductive scope change is a reduction in the size of a deck. The removal of the deck altogether might be considered a partial termination.
Sometimes, either the owner or the contractor has change requests that won't affect the original scope, contract sum, or schedule. Regardless, the construction project team or project manager will put together a variation order to get the new work down in writing.
Any change order work can alter the final project's design, contract price, and schedule. The contractor must lay out all resulting impacts in the change order paperwork.
Best Practices to Avoid Change Orders
The best way to deal with change orders is to avoid as many of them as possible. Adequate preconstruction planning and project management is a preemptive strike against the unexpected. By completing due diligence, preconstruction teams can uncover local regulatory requirements, soil conditions, and other factors that could impact the construction plan.
Collaboration with other stakeholders on the project team can help identify design errors or omissions, though some project delivery models limit this collaboration until after construction work begins.
No matter how much and how effective the planning, contractors and owners should expect some changes during the construction process.
Process for Requesting a Construction Change Order
Change order proposals should follow a specific and preset process to help avoid disputes down the line. The process should include clear lines of communication and be efficient to avoid project delays. Here are the steps owners and contractors can take to manage change orders.
1. Identifying the Necessary Change
After project construction has begun, an owner, contractor, inspector, or regulatory agency may come across a design element that needs to be changed. This is where the change order process begins.
2. Submitting a Request for Change
Following the change order process, submit the change order request to all other project stakeholders. Some contracts identify a specific change order form to fill out. In any case, change orders should include all the same relevant information as project contracts, including:
- Business information for all stakeholders, including addresses and contact numbers
- Project name and address
- Original contract value and delivery date
- Value and schedule change resulting from all past approved change orders
- The cost and schedule change resulting from the current change order
- Supporting documentation
- The new proposed contract value and delivery date
3. Receiving Approval for the Change
The owner reviews the change order proposal. Any additional information can be obtained through a Request for Information (RFI). The contract should spell out how long the owner has to mull over the changes. The owner will then sign off on the proposal, effectively amending the contract.
4. Implementing a change order
Construction contracts should include clear and specific change order processes, the chain of communication for them, and clear deadlines for each step of the process.
Too many contractors, fearing project delays and the resulting increased costs, go ahead with changes without waiting for owner approval. The risk is that the owner will reject or alter the change order, leaving the contractor on the hook for the extra construction work and costs.
Even after approval, many contractors fail to invoice for change order costs. Contractors must invoice clients promptly for change orders through their regular invoicing channels. By acting quickly and thoroughly, contractors can ensure they don't miss billing for the extra work and expense of changes.
Truss makes it easy for contractors to invoice for change orders, and easy for clients to pay. With Truss, contractors can build payment links into invoices or emails. Customers follow the link and log in to the bank or credit union of their choice to pay the bill. The money is available to the contractor as soon as customers complete this process.
Common Challenges Contractors Have with Construction Change Orders
While construction change directives are common on construction projects, they're not altogether welcome. By their nature, change orders are an unexpected alteration of the original agreement, and they can cause some disruption for general contractors and owners alike.
Potential construction delays
The change order process can take time. Contractors must identify a need, fill out the paperwork, and submit it to owners, and owners have to read the requested change, get all the details, and sign off on the altered plans. All this can delay the construction schedule and move the project completion date. Construction delays bump up contractor expenses through equipment rentals and opportunity costs.
Construction documents should specify deadlines for owner approval of change orders to help speed up the process and avoid potential delays in the construction timeline.
Uncertain impacts on the project schedule
Along with the delays of the change order process, the additional work often represented through change orders could set back the schedule for the remainder of the project. That creates uncertainty for everyone, from project managers to subcontractors down the line.
A clearly defined variation order process can streamline the approval process and set expectations for the rest of the project schedule, providing a clear path for all stakeholders.
Increased financial burden
Change orders often bring increases in project costs. Additional material, labor hours, and administrative burdens can all bump up construction cost for a project.
A general contractor must ensure they bill appropriately for the added costs they incur thanks to change orders, or they risk eating into their already narrow profit margins.
Handling Change Orders Effectively
Change orders alter construction contract documents to change the scope of contractor work. They arise because of owner requests, unexpected issues with the construction site or regulatory changes, or design errors or omissions.
Pre-construction planning can go a long way to avoiding change orders, but it's unlikely they'll go away entirely. Proper change order management and planning is critical so that when changes arise, everyone involved in the process knows what to expect. Careful planning can also help avoid change order disputes.
Too often, general contractors lose the thread on change orders and forget to charge for all the extra costs they cause.
Billing and receiving payment for change orders through Truss can make sure contractors don't accidentally foot the bill.