If you’ve been around construction for any amount of time, you know how fluid a project can be. A would-be straightforward scope can morph and adapt several times before the project receives its Certificate of Occupancy.
Because a construction contract can be so rigid, and a project so fluid, there needs to be a mechanism that owners, general contractors, architects, and subcontractors can use to alter the scope officially. That mechanism is the change order, and it helps a project stay on course when the course itself changes.
This guide will help you understand what a change order is and how it works. You’ll also learn how you should be handling change orders to ensure the project continues smoothly from start to finish.
What is a change order?
A change order is an official document used to submit and approve changes on a construction project. They can be a result of a mistake, budgetary concerns, a change of heart or design, or an unforeseen and uncontrollable issue.
When a construction project begins, the owner signs a prime contract with the General Contractor. The General Contractor then signs contracts with subcontractors. All of these contracts contain the scope of work to be done, as well as the price of the project. These contracts start everyone off on an even keel and with a goal in mind.
Along the way, things change. Materials change, ideas evolve, designs scale back or grow, or an emergency pops up. For any number of reasons, the scope of the contract may have to change. As the scope of the contract changes, so should compensation.
This is where the change order comes into play.
While a change order is actually a contract amendment, it’s helpful to think of them as miniature contracts. They essentially change the scope, schedule, or compensation of the original contract, replacing it with new details, timelines, and values.
The party requesting the change order needs to include the same type of information as the original contract, plus some extras. It will include the changes requested, the reason, and the price change. It can also include other important information like changes in the timeline or issues it may cause. If there’s supporting information like materials quotes or pictures, the requesting party should submit them as well.
Once approved, the change order becomes the new contract for that aspect of the project.
Different Types of Change Orders and Their Uses
There are a few main types of change orders, and they have different uses throughout a project. The main types are internal and external change orders.
Internal Change Orders
Depending on how your firm runs your projects, transferring unused money from one budget line to another could require a change order. For example, if you shifted $5,000 from the permit budget line to the drywall budget line, an executive may need to approve that shift.
In order to propose that change, you need to create an internal budget transfer change order.
You can handle any other changes made to the project that does not cause or create revenue by creating an internal change order, as well.
External Change Orders
External change orders are for changes involving the customer. Most frequently, these are adjustments to the budget, scope, and timeline that the customer has to approve. External change orders almost always cause or create revenue.
If a material change occurs, or the project changes direction, you’ll create an external change order that documents the customer’s approval. This external change order will allow you to move forward under the new change in scope.
Why are change orders important?
Change orders are incredibly important for the success of a construction project. They allow for flexibility, collaboration, and a fair deal for everyone involved.
Change Orders for Owners
Change orders allow owners to make changes to the plan as it progresses. While these changes are often frustrating for contractors, they allow the owner to achieve the exact project they were imagining at take off.
When a project jumps from plans on a page or computer screen to a piece of land, the owner gets their first chance to actually envision the project. They can walk the decks, see how the plan lays out the walls, windows, and doors, and get an idea of what the finished project may look like.
They may not always like it, or something new may enter their mind. Or, maybe their budget changes. By creating a change order, they can alter the plan, discuss it with the contractor, and set a new course for completion. As long as the contractor agrees and the timeline works, everyone wins.
Change Orders for Contractors
Whether you’re a General Contractor or a sub, change orders are absolutely essential on a project. Everyone knows things come up and projects change, and a change order can help.
For instance, let’s look at material availability on a roofing project. When you signed the original contract, you specified that you’d use ABC roofing shingles for the project. But, when it was time to order your materials, only XYZ shingles were available.
It’s cases like these where change orders are absolutely essential.
If the XYZ shingles are more expensive than ABC, your job cost forecast could go out the window. You’ll be working just as hard for less money, and the costs will eat into your profit and your bottom line. A change order can request approval for the changes, saving your profit on the project.
If XYZ shingles are less expensive, and you purchase them anyway without a change order, you’ll be in breach of contract. If the owner or General Contractor finds out, they could withhold your payment or take you to court. A change order will alter the contract officially, clearing you from any wrongdoing compared to the original contract.
What should a change order include?
Regardless of which side of the contract you’re on, a change order is a request to alter its scope. It’s an extremely important document and, as such, needs to include a lot of important information.
While some contracts may specify that you use a particular change order form, other contracts leave it up to the requesting party to create their own. If you’re creating your own document, here are the basics it needs to include.
Project and Contact Information
First and foremost, your change order needs to include the basic information about the contract. This includes the names and addresses of the parties involved.
Aside from your own business name and address, you need to include the other parties. You want the owner’s name and contact information, as well as the prime contractor’s name and contact information in your change order. You also need to specify the project’s name and address, as well as the contract number.
Be sure to include the change order number on the project as well. You may only be expecting one change order, but things happen. Keeping track of change orders and the order you submitted them in can be important.
When it comes to submitting change orders, dates can go a long way to protecting both owners and contractors in the event of a dispute. They can be the paper trail you need to ensure things go smoothly, so don’t leave them out. While the signature date does signify approval, it may not be enough.
You need to include the date that you completed the change order on the document. It will help you establish that you knew there was an issue or change on a specific date and were taking the appropriate steps towards a solution.
You also need to include the date that you’re submitting the change order on, should it be different from the day you completed it. This can often be your signature date.
Also, if you discussed the change order previous to completing the document, you should include that date and the name of the person you spoke with in the supporting details. This date establishes a timeline for the project change, which can become important in a dispute. Most contracts require notice of changes within a specified timeframe, so including the date of the discussion in your change order is always a good idea.
The changes are really the heart of the change order, so you obviously need to include them. Changes can occur for many reasons and can take many shapes. If they change the cost, timeline, or scope of work, you need to include it.
As an owner, this is your opportunity to be very specific about the project change. If you’re changing the flooring in a commercial building’s lobby, you should specify how you’re altering the agreement. If it’s a different material, a different layout, or a different pattern, be sure to include it in the change order so there is no room for errors and misinterpretation.
Remember, contractors sign contracts based on plans. Change orders can come on the fly, with nothing but an idea to describe them. Be descriptive and detailed.
Contractors should also be very specific so there’s no room for confusion when payday arrives. If you’re switching materials, give exact units and product numbers. If you’re adjusting man-hours, again, be descriptive about it.
Most importantly, if the general contractor (or owner, in some cases) requests a change from you, be sure to describe it in detail.
For a contractor, it’s important to explain the reason for the change order request. If you’re using the “miniature contract” mentality, a change order submission is like a bid. It needs to be compelling so it receives approval.
If there’s a change in material price or availability, be sure to state so. If the inspector was on the site and requested changes, make sure you mention that. If the General Contractor made a judgment call, be sure to include it. If a labor strike or force majeure scenario caused the changes, absolutely be sure it’s in the change order.
If there’s a price change, which there usually is, include it in your change order. While this guide will not go into the act of pricing your change order, it will touch on the importance of its inclusion.
Regardless of whether you’re an owner or a contractor, you need to include the difference in cost that the change order will cause. If the scope changes to include less work, the price will decrease. Include it so everyone is on the same page. If the materials are increasing the price, put it in the change order.
It’s best to include these increases in dollar amounts instead of percentages. Taking the guesswork out of the change order process will help speed up the approval.
Also, your price change needs to follow the format of the original contract so it’s easy to compare the two. Both owners and contractors will have an easier time understanding the changes and the costs involved when they can compare it to the old contract.
If you have any documents that support the need for the change order, be sure to include them with it. As a contractor, they can strengthen your case, and as an owner, they can clear up any confusion.
Supporting documents can include requests from inspection reports, pictures, price quotes, and any other number of other ways to prove the change’s necessity. If you have something that supports your request, make a copy and include it in the change order packet.
For a change order to be official, both parties need to sign it. Be sure to include room for two signatures (yours and the other parties) on the page with the materials, scope, and price change, if at all possible. There should be a signature line, a line for print, and also a line for the date.
Be sure to include a line directly above the signatures that states something along the lines of “This change order is approved to proceed.” This indicates that the signatures serve as approvals for the work to move forward under these new parameters.
How can I keep track of change orders?
Whether you’re an owner, general contractor, project manager, subcontractor, or clerical staff, keeping track of change orders can get confusing. You need to stay on top of what’s coming in, what’s received approval, the dates of submission, and the impact they’ll have on the project’s financials.
Hard Copy Systems Are Confusing
While it’s possible to create a hardcopy system for tracking your change orders, it can quickly become overwhelming for you or your clerical staff. Papers can go missing, people can be a challenge to get a hold of for signatures, and sorting through a large project’s worth of change orders can get confusing.
Adopting a Construction Software Project
Adopting a construction software program that helps you and your staff automate the change order process can help avoid some costly errors. These programs can take a pile of loose papers and turn them into a spreadsheet that’s easy to read, track, and adjust as the project continues. They can track outstanding change orders and the dates they were submitted or received. These programs can generate internal change orders as well, allowing you to shift budgets and receive approvals instantly.
Instant Approvals and Automatic Updates
Possibly most important of all, adopting the right software will allow you to automate and streamline your approvals. Typically, change orders are first sent to project managers for approvals before sent to architects followed by the customer. Instead of going through the hassle of tracking down physical signatures on a hard copy, you can send a batch of proposals via email to be signed electronically. There are software that even allows for flexible workflows such as restricting who requires approval signatures by $ thresholds or a % of the budget. Once the customer reviews the proposals and signs them electronically, the software will automatically update the rest of the system.
Streamlined change order approvals and signatures, and real-time system updates can make your project management team’s job much easier.
Change Order Reports
Keeping track of where money is going, and why it’s going there, can help you maintain transparency and profitability in your change order process. By locking the estimate, the software will require staff to create change orders anytime they shift a budget or transfer funds. It can help keep everyone honest and the project above board.
A change order report can also point out inefficiencies. If line items and funds are shifting back and forth constantly, you might be able to determine your weaknesses on the project. With the ability to filter and run by change order type and reason. The report might help set a better course on the next project with new personnel or practices.
Month to Month Variance Reports
Keeping track of your change orders, approved or otherwise, is essential for effective management and forecasting as the project moves forward. With the right construction software, you can generate a variance report automatically, showing you what changed, how it changed, and was the change affected.
A variance report is also an effective way to compare your project’s actual costs to its estimated costs. You’ll be able to keep a better track of the project’s bottom line and make adjustments to maintain profitability.
For a project to reach a successful completion, some flexibility and cooperation along the way are almost always necessary. While legally binding contracts are rarely flexible, the change order process aims to keep things fluid, ensuring a desirable outcome for all parties involved.
While the process of completing a change order can be a bit confusing, or even nerve-wracking if it’s your first time, it’s a relatively straightforward principle: Here’s the change, here’s why, and here’s how much it’s going to change the price.
By understanding how they work, why they’re so important, and how to keep them organized, you’ll be able to leverage the change order process in pursuit of a better project outcome for everyone on the contract.
About Premier Construction Software
Premier Construction Software is a true cloud, all-in-one accounting, job cost, project, document and drawing management solution designed to meet the needs of GCs, Developers, Design Build, and Homebuilders. Trusted by thousands of companies, Premier partners with forward thinking, progressive construction companies to provide a fully integrated solution for office and field staff operating on Mac, PC and any mobile device. Premier operates in North America as well as Australia, providing a true cloud solution that meets the needs of both markets today.
Tom Scalisi has over 15 years of experience working in the trades. Since moving to full-time freelance writing, he has developed a passion for helping construction companies grow. He enjoys teaching contractors how technology can streamline their businesses and educating them about their rights during payment disputes.