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Industry Insights

The Ultimate Guide to Construction Change Orders

Even the most meticulously laid construction plans are subject to change—which is precisely why change orders exist. Of course, managing change orders in construction is no easy feat, especially for trade contractors, as they carry the most risk during a project. This process becomes even more convoluted when managing multiple change orders across just as many projects, each with its own GC-specific requirements.

Without a smooth and efficient process for submitting and managing change orders (especially pending ones), subcontractors may experience cash flow issues—or even legal problems—down the line. With that in mind, we’ve created this guide to help you get up to speed on all things change orders, starting with the most fundamental question:

What is a change order?

A change order is an amendment to a construction contract that alters the contractor's scope of work. It's important to note that you cannot simply submit a change order on an invoice. Instead, a change order request is an official document that: 

  • records all the details of the change, 
  • provides evidence that the change was necessary, and 
  • must be approved by all parties involved in the contract.

How is a change order different from a change directive or an ASI?

Another way the project’s scope can change is through a change directive (or work request directive). Change directives are top-down requests from the owner that the contractor must follow—regardless of their input or approval. These often arise from disagreements between the owner and contractor, enabling the owner to override the contractor’s opinion to move the project forward.

Architects can also alter work on a project without the contractor’s consent through an Architect’s Supplemental Instruction (ASI). ASIs carry significantly less weight than a change directive or order, as it should not affect the project schedule or cost in any way.

When is a change order necessary?

All modifications to the project’s contract terms require a change order. These include:

  • Any additional work that is expected to be reimbursed on a project; or
  • Any work that is removed from the project (a.k.a. deduct change order).

There are also change orders that just change the schedule but might not add or deduct work. We provide an example of this in the next section.

What are some reasons for a change order?

Change orders don’t always mean a mistake was made on the job (although this sometimes happens). In reality, most change orders are caused by one (or more) of the following reasons.

The design was altered.

These types of changes typically occur when:

  • The project owner or architect changes their mind about a design or a specific material;
  • The project owner or architect requests new or additional work; or
  • The project can’t successfully be completed without changes to the original designs.

Example 

The owner has discovered that there isn’t enough money to purchase the custom glass included in the initial drawing set. Consequently, they will issue a deduct change order to the glass and glazing contractor, which will allow for the replacement of the original glass with a more affordable alternative.

The project faced unforeseen conditions.

Setbacks resulting from events outside a team’s control, such as inclement weather, the discovery of hazardous materials onsite, workforce problems, and shipping issues, are all too common in the construction industry. These events can delay a project beyond the agreed-upon completion date, potentially leading to financial losses and additional costs. Liquidated damages clauses exist to help clients receive compensation (typically from the contractor) for such losses. In the event of a major delay due to an unforeseen condition in the field, contractors should submit a change order to extend the project’s completion date.

Example

A trade contractor is working on a project to build a commercial office complex for a client. The original contract specifies a completion date of one year from the project start date, with significant liquidated damages for each day of delay due to the importance of the building's timely completion. However, the contractor discovered contaminated soil on the site, which will require extensive additional assessment and excavation, significantly delaying the project. The contractor must submit a change order to the client to secure additional time—and effectively remove the liquidated damages clause from the additional time granted.

Work was redistributed.

Change orders are also necessary if work is redistributed among contractors during a project. This is especially common in larger projects where multiple contractors from the same trade are involved to speed up progress. In such situations, the GC would direct each subcontractor to submit a change order to document the change of scope to their specific workloads.

Example 

Two separate electrical contractors were hired to work on a large project, each with their own set of responsibilities. Halfway through the project, one of the contractors encounters a labor shortage, making it impossible to complete their upcoming job. In this scenario, the owner or GC may redistribute responsibilities from the struggling contractor to the other, ensuring the project continues without delays. To formalize this transfer, a two-step change order is required:

  1. First, the subcontractor who cannot fulfill their original obligations will issue a deduct change order to the GC for review, outlining the removal or reduction of their scope of work and the associated cost adjustments.
  2. Concurrently, the subcontractor assuming the additional responsibilities will issue a change order to the GC detailing the increased scope of work and the corresponding adjustments to their contract terms and compensation.

Why are change orders important?

Predicting every potential roadblock from the beginning is impossible for most construction projects. This is especially true as projects grow in size and complexity; the larger the project, the more variables to which it’s exposed. As such, change orders are essential in helping all stakeholders (e.g., owners, GCs, trade contractors) adapt to the unforeseen with minimal negative consequences. 

More specifically, effectively managing your change order process provides construction businesses with two primary benefits: 

1. It helps protect your revenue.

Changes to a project’s scope can significantly affect the costs and profits of everyone involved in the project. For trade contractors specifically, changes mean additional costs for the work you’ve either already done or will perform. You can’t bill for these additional costs until the GC approves the change order request, which can take weeks or even months. This can result in serious cash flow problems, which can adversely affect profits—and that’s without factoring in all that can go wrong during this process (more on that later).

2. It helps mitigate risk exposure and disputes.

Unfortunately, not all owners and GCs make it easy for trade contractors to get change orders approved. Therefore, having a detailed log of agreed-upon and pending changes made to a project goes a long way in minimizing risk, preventing disputes and other legal issues between stakeholders, and providing you with leverage should you ever need to demand payment from a GC or owner.

What should a change order form include?

The goal of a change order is to outline the details and impact of the change on the scope of work specifically and thoroughly. This helps to avoid misunderstandings and ideally reduces the time spent on negotiations. Smartsheet’s change order guide recommends including the following information (at minimum) on the change order form to achieve this goal:

  • The name and address of the project
  • The owner’s name
  • The name and phone number of the person requesting the change
  • A complete description of the planned work
  • The price of the change (including the breakdown of costs as well as the total)
  • The signatures of all necessary representatives and relevant third parties
  • The date on which all necessary representatives (and other relevant third parties) sign the change order
  • The revised project completion date

These details are subject to change depending on the type of project as well as the GC’s and owner’s change order specifications (make sure to read the contract to see what those are).

What different types of change orders are there?

Generally speaking, there are four types of change order forms that are commonly used in construction: 

  1. Lump Sum: This is used when the change can be quantified with a concrete price. Lump sum change orders typically increase or decrease the overall cost of the project’s expenses.
  2. Zero Cost: This type of change order denotes scope-of-work changes that do not affect the project’s expenses but may impact the schedule.
  3. Time and Materials (T&M): This is used when the cost of a change can’t be quantified at the outset—usually when changes occur due to unforeseen circumstances. Contractors must keep track of the time and materials (hence the name) used to complete the work to calculate its true cost at the end.
  4. Unitary Cost: The contractor negotiates this type of change order upfront before the work begins. This method is commonly used for projects the contractor is familiar with and therefore knows what scope-of-work changes to expect before going in. 

Who’s responsible for managing change orders?

The project manager (PM) is typically the best candidate for the role as they’re onsite and in contact with the GC. PMs are also responsible for keeping the accounting team apprised of when each change order is approved so they can update the Schedule of Values (SOV) along with the next pay application. 

What we see most of our clients do is keep a folder of all change order logs and backup materials organized by project. This serves as a central source of truth for both the field and back-office teams, helping enhance communication and transparency around change orders.

How does the change order process work in construction?

Adhering to a standardized process is critical to ensuring no one (read: the subcontractor) is left holding the bag. With that in mind, here’s how the change order process typically works.

Notify—or better yet, meet—with stakeholders.

Once a change is identified, it’s beneficial for the key parties (e.g., owner, contractor, and trade contractor) to meet and discuss the proposed change. The aim here is to let everyone know that a change is in the works and to potentially reach an agreement on the scope and cost of the change. Additionally, the GC will direct the subcontractor to:

  • move forward with work with the plan to submit a time and materials (T&M) change order or negotiate a change in the future; or 
  • submit a change order before proceeding with work. 

If the subcontractor is unable to meet with the GC in person, they should send them a notice of the change via text or email and begin to track the exposure in their change order log. In this case, the subcontractor still needs the GC to acknowledge the change and let them know how to proceed.

Keep in mind that anything discussed or agreed upon during this stage isn’t legally binding—an official change order form is always required. 

Make a case for the change and submit it to the GC.

Once the GC acknowledges the change, the subcontractor will compile all the details in the change order proposal. During this step, remember that trade contractors are typically fighting for more money with change orders—money that the GC or owner may not be willing to part with. Therefore, the main objective is to present a strong argument that the GC cannot easily refute or dismiss.

In addition to a complete description of the planned work, the change order should also include:

  • A detailed pricing estimate,
  • Schedule changes, and
  • Any backup material to substantiate the reason for the request. 

Submit the change order to the GC.

Submitting a change order is fairly straightforward but with a few caveats. The two big rules to abide by are:

  1. Submit change orders with the original contract so that the GC and owner can easily compare the costs between the two to identify the difference; and
  2. Know how long you have to submit a change order, as some GCs impose tight deadlines that you can easily miss if you’re not paying close attention. 

A quick glance back at the contract will help you plan accordingly and ensure a seamless submission.

Negotiate with the GC.

Despite your best efforts, there are times when the GC will come back with additional questions, revisions, or requests to the change order. That’s OK—they’re within their right to do so, just as you’re within your right to negotiate back until an agreement is reached. 

During these negotiations, our best advice is to: 

  • Keep a cool head, 
  • Seek to understand what the GC is asking (and ask clarifying questions if need be), and
  • Lead with objective data (e.g., the prime contract, additional backup materials, previous project data).

At the end of the day, neither you nor the GC wants negotiations to get ugly. No one wins in this scenario, and you’re likely out of a partner for future projects.

The GC sends the change order to the owner for approval.

After you and the GC agree on the change order amount, the GC will add their fees and send it to the owner for final approval. If the owner wants to negotiate further, remember those pointers included above.

Share approved changes with the A/R team.

Once all parties have approved the change order (phew!), the subcontractor PM is responsible for sharing it with the accounting team so that they can update the SOV and bill for it on the next pay application (and every other pay app moving forward).

What are some common change order issues?

Now that we have the process down let’s focus on what can go wrong during the change order process. As mentioned earlier, spotting the cracks in your system is not always easy. So, before you sign the next contract, take a moment to review these common change order pitfalls and check your current process against them. 

1.  The contract wasn’t reviewed thoroughly.

Change orders are legally binding documents and, therefore, require careful consideration to ensure that each change order is submitted per the requirements listed in the construction contract (as discussed in this blog post). If you submit it late, without proper notification, or inaccurately, you won’t be eligible to bill for the change order—full stop. So, review your contract at the onset and throughout the project’s lifespan to ensure you’re not caught unawares.

2. New additions to the drawing set weren’t caught.

It’s not uncommon for the project’s design to change over time. This is particularly true today as most construction teams use the design-bid-build method, which often generates more mid-project change orders because stakeholders aren't involved early on. So, with each new revision, check for new materials or finishing details—anything, really, that can alter your fees and cause scheduling changes.

3. Doing the work before the change order has been approved.

Change order negotiation can take a long time. However, you should not start any work related to the change order until it has been approved and signed by the owner. The moment you start doing work without knowing whether it will be compensated, you lose all your leverage and could be out a lot of money. 

4. Poorly communicating with the back office.

It is unfortunate, but not uncommon, for contractors to miss out on billing for a change order due to the field team's failure to notify the accounting team about the change in time. What’s more, most of the change order negotiations happen in the back office, and thus, timely and accurate information is crucial to arriving at a mutually beneficial agreement.

Fortunately, a well-structured change order process can easily solve this issue without much hassle. It’s also good practice to keep all change order requests in a centralized folder (as mentioned above). This can help prevent any confusion and ensure that all parties involved are aware of any change orders that need to be billed and any coming down the pike. 

5. GCs weren’t kept apprised of ongoing and upcoming change orders.

Effective communication—to the point of overcommunication (if that’s even a thing)—is also key to cultivating a successful partnership with the GC. A good practice to get into the habit of is to send the change order log to the GC every month. This will ensure they’re aware of all the changes that have been approved, in progress, or outstanding. The last one is particularly important as it helps each of you understand your level of exposure. 

6. Not including the right backup materials—or any at all.

Nobody wants to hand over more money than what’s already been estimated in the original contract. So, when changes are necessary, present a strong case with objective data to support your request for additional funds. Essentially, your goal is to ensure every potential objection the GC could raise is countered with solid evidence.

How can contractors streamline the change order process?

Change orders can be a hassle, even when everything goes smoothly. Teams often spend hours reviewing spreadsheets and tracking down updates, leading to errors and delays. But Siteline's change order log streamlines the process, allowing teams to: 

  • compile required forms and backup, 
  • sign and submit professional paperwork, and 
  • add approved line items to the SOV with just a few clicks. 

Our platform also enables easy review of coworkers' changes and internal notes between departments. 

With round-the-clock visibility into the status of each change order, Siteline helps teams stay ahead of the curve as change orders become more frequent and complex. See for yourself by booking a demo of Siteline today.

Head of Construction Solutions
@ Siteline

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