Contractors, more than anyone, know that it’s impossible to foresee every challenge a construction project may face. Up to 35% of all construction projects will have at least one major change, and with those changes come adjustments to the scope of work and new expectations for contractors. For this reason, change orders are essential documents that must be handled with care.
This article will provide contractors with the necessary insights to improve the change order process. But first, we will quickly define what change orders are and when to use them.
What is a change order?
A change order is an amendment to an existing construction contract. When the scope of work is modified, either through a change in work requirements or time requirements (or both), a change order is used to initiate that change. For example, as part of a kitchen remodel, a client may want to install new cabinets that were not in the original plans.
In this case, a change order is needed to accommodate the request. Change orders typically result in a price increase, but in some circumstances, they can reduce the price if the change eliminates portions of the project.
When do you need a change order?
There are two major situations when you should use a change order in construction projects:
- When receiving a request to modify a project from the original plans after the contract’s effective date.
- Anytime unforeseen information is uncovered; for example, this could be a limitation to the project, such as running into an unknown gas line, structural issues, or laws and regulations that prevent work.
Any situation that causes a divergence from the original scope of work will need proper documentation for legal and organizational reasons. It’s important to note that all stakeholders need to sign off and agree on a change order. Change orders are needed to protect your company and clients from costly legal action.
Countless disputes and project delays can occur from an inadequate change order process. For instance, a contractor may perform extra work without getting written approval. The contractor will want payment for the new work performed, but if the client never agreed to the additional work, they will be unwilling to pay for any work performed outside of the original scope of work.
On the other hand, a client may decide to adjust project timelines without using an optimized process for change orders. In this situation, contractors may dispute the change as it alters a key aspect of the project and changes the contractor’s expectations. Anytime actions are taken outside of the original scope of work, a comprehensive change order is needed to avoid contention.
All stakeholders must be on the same page regarding what the change is, how it affects the project, and how it affects everyone’s responsibilities.
How to improve your change order process
Understand the SOW
To improve your change order and overall construction process, start with the contract. Ensure you have a complete understanding of your client’s expectations. A thorough review of the project scope of work will allow you to identify issues related to the plans and specs of the job before work begins.
Do your due diligence here. To the best of your ability, anticipate any issues or concerns that might arise due to site conditions, equipment to be used, the nature of the construction project, and uncontrollable factors such as labor shortages. With that said, it’s impossible to predict the future. So don’t falter when an unexpected problem does eventually happen.
A thorough change order process will give contractors something to fall back on by mitigating some of the confusion and frustration caused by unanticipated changes.
Ensure you have complete clarity around the following:
| Who is responsible for handling change orders? | |
| Who should request them? | |
| What is the process for submitting and fulfilling them? |
Outside of the scope of work, understand if construction contracts will limit profit markup percentages. This can drastically impact your bottom line, especially if a change significantly changes the scope of work.
Don’t delay & get written approval
If, during the course of a construction project, a change order is needed, don’t delay. Whether the request comes from you or someone else, get the process started as soon as possible. Sitting on a change order request can result in schedule delays, further disputes, and increased costs.
Once the request is initiated, it’s pivotal that you get written approval when required. For example, a client may request that you start work on a change order before the process has been finalized.
If the contract states that work cannot begin without written authorization, however, the contractor should not perform any work until those contract documents are provided. As a contractor, you should always be willing to notify the client of any actions that go against the contract.
It’s critical that you have a keen understanding of the contract so that you can protect yourself in such situations. If the contract does not state that written approval is required, look to get it anyway. This will establish a paper trail.
But why is a paper trail important? If there is no written record, contractors may find it difficult to win disputes and receive payment for additional work. Written documents will be a source of truth and will hold all stakeholders accountable.
If the change order will impact the contract price or project schedule, ensure the written approval includes how the change will precisely impact the project. You may need to amend the contract and scope of work at this point as well.
When negotiating the contract before the project starts, consider working in a clause that puts a time restraint on change order approvals. For instance, a clause could state if a change order is not approved or denied within five days, it’s assumed the change has been approved. This can help speed up the process and ensure the change gets the attention it needs.
As with any legal contract, we strongly recommend that you seek the advice of a legal professional before signing any contract.
Prepare to communicate and negotiate
Once a change order is requested and approved, proper communication from here on out is paramount. If you request the change, ensure you can back up everything included in the change; such as projected hours, materials costs, equipment costs, etc. Be prepared to discuss how and why you arrived at the costs and details that you did.
As a contractor, clearly communicate if the change will cause rework or specialized work moving forward. Show how the change may affect your labor productivity and material costs. Have a well-thought-out answer for every aspect of the change, and be prepared to defend them.
From there, establish a consistent unit production rate for labor and materials. If this wasn’t detailed in the contract, use this time to come to an agreement.
If the project owner or client initiates the change, don’t be afraid to confront the client on how this will impact your schedule or expectations. If the change will impact your deadline and you are not receiving additional time, reference the original contract and clearly state your rights. Be transparent, and don’t be afraid to refer back to the contract for support.
To further improve communication, consider scheduling a change order review meeting. Collect all details and information about how this change will affect price, resources, and scheduling. Review this information with all relevant parties.
If a stakeholder has thoughts or comments during the meeting, write them down and address them in that meeting or a follow-up meeting. This may seem tedious, especially for larger projects with many change orders, but it ensures everyone is on the same page and helps build trust and transparency.
Implement technology to automate and organize
Construction industry-specific software can significantly improve the efficiency of your change order process.
With the right software, you can:
| Create, distribute, and track change orders across jobs | |
| Make the process paperless with e-signatures | |
| Seamlessly connect to your quoting and invoicing systems |
Information and proper communication are critical to a smooth change order system. Contractors need to be able to capture all backup information and have it accessible when they need it. Construction project management software can go a long way in helping you keep all changes organized.
You’ll never have to worry about misplaced change orders again, and you’ll also save a considerable amount of time as the process can be done entirely online.
Takeaways
Change orders need to be handled with tact. What’s most important is that you document and communicate anything that will fundamentally alter the original scope of work. Stay honest, be transparent, and do your due diligence every step of the way.
Understand the scope of work (SOW) before a project is started to anticipate potential issues or concerns. Don’t delay when a change order is requested; be sure to get written approval, and always consult with construction lawyers or a legal representative if you’re unsure of what to do next. Have a consistent unit production rate for labor and materials, and be prepared to communicate and negotiate your reasoning for issuing a change order. Finally, utilize construction industry-specific software to automate and organize the process.
To see more about how Knowify can help you improve your change order process, schedule a 30-minute demo today!