Construction contracts can be long and complicated, but the two most important components to understand are change orders and scope and price.
A change order is needed when something significant needs to be modified in the original scope of work. It serves as a legal record of the agreement between the customer and the contractor to the new work and the price to perform it.
If you are working with a client who submits a request to modify the contract in a meaningful way, the change order process will begin immediately. You’ll need to have the estimating and takeoff team crunch the numbers quickly so that the schedule is not held up, waiting for the signed-off change order.
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What is a construction change order?
When a contractor enters an agreement with a client for work, there should be an understanding that change orders will likely be required at some point in the construction process. This is just part of the game.
Field conditions may vary, especially soils or groundwater; the client may change their mind on a wall's location or want to remove a portion of the building footprint.
The primary takeaway with change orders is that legal agreements are related to changes to the original design and contract between the construction team and the client.
The importance of change orders
Change orders are essential for construction contractors. They protect contractors from being pressured into doing extra work beyond the agreed-upon terms of the contract. This can be a big deal if your client asks you to add more work without being agreeable to paying for it.
While it may seem easier to make a handshake agreement on price for additional work with a client, that is a dangerous game for a contractor.
Without change orders, there will be no record of the contract's changes with the client, and you may end up being left holding the bag. A change order also provides cover from accusations of work left unperformed and holds both sides accountable.
Writing change orders
The contractor should create a change order as soon as the client comes to you with a request to revise their design and contract.
Doing so will allow your team to stay on track and begin preparing for the project’s changes by procuring necessary materials and updating the schedule with subcontractors where necessary.
The written change order is relatively simple and should include the following:
- Contact information
- Dates for when the change was requested and approved
- The overall cost of the change as well as how that impacts the overall project costs
- Any updates to the contract from the change
- Changes to project delivery timelines
Some contractors might want to make a handshake agreement and get to work on the new work right away, especially if they have the materials on hand. That’s a big mistake. It is important to have any contract changes in written form and signed by all parties involved. If not, it’s the contractor who could be left trying to chase down payment from a difficult customer.
Not having the changes in writing could also lead to disputes over the actual work performed if the client continues to change their mind.
Writing a change order doesn’t have to be a daunting process, especially if your team uses ProEst to manage their bids and estimates. ProEst makes it easy to determine changes to the cost estimate quickly. The cloud-based software is easier to update on the fly than the old-school spreadsheets still favored by many contractors. With ProEst, the change order process doesn’t have to be a nightmare.
Who creates change orders?
The contractor or subcontractor is responsible for preparing the change orders.
Several team members may be involved in estimating the new work's cost before turning it over to the project manager to sign off with the client. Prime contractors and subs may need to coordinate on the change order process to make sure they are effectively communicating the changes that may affect different phases of construction.
The change order process
The change order process begins when a client comes to their contractor to make changes to the building or site. This could be something like needing to updates the limits of earthwork or foundation design based on unforeseen complications with bearing soil or a decision to revise the layout of a room to serve a different purpose.
Representatives from the owner and contractor meet to discuss what needs to be changed and how stakeholders can accomplish it. From there, the contractor will work up an estimate of the cost of the additional work. People working on the project can accelerate this entire process if the original contract includes standard unit costs for work that help make the change order more transparent. Once both parties sign the change order, work can begin.
Types of change orders
There are three main types of change orders that all contractors should be familiar with, which are:
- Additive change orders
- Deductive change orders
- Partial termination.
All three types of change orders involve different contractual revisions.
Additive change order
An additive change order is the most common.
In this scenario, a client will ask you to provide them with a price to supplement the original contract with additional tasks.
Ensure that the expectations are clearly outlined in the change order so that you and the client fully agree on the additional work you will perform.
Deductive change order
A deductive change order will remove a specified portion of work from the contract, lowering the total price.
Deductive change orders typically address minor reductions in the overall scope of the work. If your contract allows for deductive change orders, you and the client will have to negotiate the contract’s value based on the removed work. This may not be easy, depending on how you and the clients have structured the contract.
Construction contracts typically include language allowing for partial termination.
This is used when a client seeks to delete large portions of the scope of work. A client cannot utilize widescale change orders to alter the scope of work dramatically. If the customer tries to make too many reductions to the contract via change orders, it could ultimately void the contract.
Utilizing ProEst for your bids and takeoffs can take the headache out of negotiating deductive change orders and partial termination because your team will be able to quickly verify the items and work to be eliminated and support your proposed terms.
What to include in a change order
The following should be included in a change order;
Project and contact information
- Project name and address
- Contract number
- Owner’s name and address
- Change order number
- The main contractor’s name and contact
- Name and contact information of the contractor submitting the change order
- Description of the requested change compared to the original contract
The proposed change of work, reasons, and details are outlined in this section.
3. Updated schedule
The new schedule should be put down showing all the changes. The number of days needed to complete the change and the date when it will be finished should be included in the new schedule.
4. Cost of the change
The change order involves changing tasks, leading to varying costs than earlier projected. The costs to be accounted for are the tax, profits, overhead, insurance, and all other adjustments that the change brings.
5. Updated contract value
The document should include the original and proposed contract value. The cost of the current change order and the value of all previous ones is also detailed.
Change order process
The following is the process for carrying out the change order.
Step 1: Contract is signed
The construction contract showing the budget, schedule, and scope of work is signed by agreeing parties after bidding and negotiation.
Step 2: Issues are raised
The contractual agreements begin to have arising issues from some changes. The changes could come from new regulation changes, owner changes, procurement issues, or design errors and omissions.
Step 3: A change is proposed
After the changes are proposed, the subcontractors estimate the change's impact on the project's timing, the scope of work, and budget.
Step 4: The change is reviewed
The owner reviews these changes within a limited time frame and may ask for additional information to accept or reject the proposal.
Step 5: The change is agreed upon
The owner and contractor agree upon the proposed changes, and the amendment document begins to be prepared.
Step 6: Amending the original contract
The parties involved signing the amended document. The workers are updated on the amendment by the contractor for implementation. The new scope of work is shared with timelines to help the crew adjust.
Avoiding change orders
Change orders aren’t necessarily a bad thing for the contractor.
If the change order process is followed correctly, they’ll be paid for additional time, labor and materials.
Change orders aren’t great for the project owner, however. Too many change orders will drive up the cost of the project and could blow up the budget. Some change orders are unavoidable, but contractors can take some steps to limit them.
Most importantly, double and triple-checking the contract before signing it. Clients need to have a complete understanding of what the contractor agrees to do. Don’t just assume they’re going to paint your bathroom after installing the fixtures. If it’s not in the contract, that’s a change order.
Additionally, it’s essential to make sure that all engineering documents have been thoroughly vetted. All field investigations and testing should have also been completed to avoid any surprises related to something like a roof's soil or condition.
The construction contract that attracts change orders does not mean that the process will progress smoothly. The owner and other parties could decline to approve the change orders. It, therefore, needs a lot of negotiation and persuasion, with details on the changes being made.
Coming up with new strategies is needful when change orders are released as ways to get a consensus in agreeing on what changes are necessary.
Documenting the whole process, from bidding to the needs at the beginning of the project, is crucial so that the change orders case is strong enough. All details of the construction process are meant to be attached for ease.
Agreeing on the scope of work in detail is an incredible way of ensuring that change orders do not arise, which often could be costly to the owner. Contractors and clients should agree on everything to be done before any project starts.
Can a change order be refused?
Stubborn owners might fight over price or refuse to sign change orders when presented because they feel the initial contract should have covered the work. It is essential to document everything that led to the change order – field conditions, design flaws, conversations with site engineers, and owners. Take photographs as well. If the owner continues refusing to acknowledge the change order, it may ultimately lead to a legal battle. Contractors need to build a strong case to make sure they get paid for their hard work.
How do you deal with large change orders?
If a change order is so large that it completely changes the contract’s size and scope, it may be rejected because it is so far beyond what both parties initially agreed to.
Continuous or large change orders can be complicated for contractors to handle, especially if payment is not upfront. If the client is continually pushing for changes to the contract, make sure they are reasonable.