Change Orders are an inevitable part of construction. Due to the complexity of the construction projects today, it is almost impossible not to have at least one change order. Two elements can make managing change orders painless. First, following a solid change order process will ensure your budget & schedule remain up-to-date and reflect the changes. Second, setting expectations early and immediately communicating the need for the change. This will help to alleviate any potential disputes around the change order. The good news is that change orders don’t always increase the budget and/or the schedule. In some circumstances, a change order can decrease the budget due to a deletion or material change.
What are Change Orders?
Simply stated, change orders are an industry term to describe a change in the base contract of a construction project. Change orders can happen for many different reasons. A few of the most common reasons for a change order are:
Scope addition under the existing contract
Not buying the full scope at the beginning of the project. Requiring the contractor to buy along the way.
Design change. Either client or design team driven. Adding to or taking away design features.
Owner change. These typically occur after a walk-through and seeing the space in real life for the first time.
Unforeseen field conditions. One of the most common issues when you are working with an existing space.
Errors and omissions. These do happen from time to time due to human error.
Construction error or Back charge. These are rarely used.
Processing a Change Order
How a change order is processed can either positively or negatively impact a project. For example, most construction contracts have a ‘changes in work’ clause to establish procedures for revising the scope of work. Following these processes and maintaining open lines of communication leads to success in the world of change orders. 1
There are three ways a change order can originate.
The architect originates it, the contractor prices it, and the owner and/or owner’s representative approves or rejects it.
The contractor initiates it, the architect reviews changes and approves or rejects the change. If approved, it is then presented to the owner and/or owner’s representative, who then review for the final approval to move forward or, in some cases, reject the change order.
An outside vendor can also present the owner with a change order for services procured outside of the main construction contract.
Note: It is essential to have a strong contract that outlines the process and pricing structure for change orders. This is important because change orders will not be competitively bid due to the contractor already being engaged. Also, due to the long-standing relationships between contractors and subcontractors, there can be a conflict of financial interests. Ideally, the contractor’s interests should align with the owner’s interests over the subcontractor’s.
Approving a Change Order
Change orders must be reviewed and approved by all parties before they can be implemented. As noted above, communication is the key to a successful change order process; the order in which they can be initiated and subsequently approved can vary from project to project. This being said, all change orders must be in writing and tie back to the original contract. The AIA contract documents are an excellent tool for the main contract as well as subsequent change orders.
The architect responsible for construction administration (CA) will typically review the change order to approve or reject it and then send it along for the owner’s and/or owner’s representative’s review and approval.
Note: Engaging an experienced OR streamlines the process for busy owners by keeping them focused on the larger change orders while managing the daily small changes independently.
If the architect is not responsible for CA, the change order will go straight to the owner or owner’s representative for approval. If the change impacts the space or design, the architect will need to review and study the change to understand the feasibility and make changes to the drawings.
Note: Be sure to review each change order and make sure it is captured in its entirety. Many times a contractor will send a change order over in pieces rather than as one complete change. Look at the change from every subcontractor’s perspective and make sure all the work that needs to be done to add or subtract work is accounted for in the CO. An example is adding millwork that houses a small fridge. The contractor may send over a change for the addition of millwork and then sends over another change for the electrical this millwork requires later. The complete change should include all elements as one change order.
Financial + Schedule | The Two Parts to a Change Order
It is important to remember that there are two parts to every change order: the financial component and the schedule component. There is so much sensitivity to an increase in project cost that the schedule portion is inevitably forgotten. The schedule extension needs to be reviewed and communicated across all parties. If there is a cost for a schedule extension, this should also be included in the overall change order.
The other issue that can arise from a schedule adjustment is missing a hold-to delivery date. Again, it all comes back to communication and process to achieve success in handling change orders. When something is missed, like a schedule extension or something is not communicated, that is when disputes arise, and change orders become a problem.
Dubrow Group Recommends
We have partnered with Northspyre to track all project financials. Our proactive approach requires monitoring all approved and potential change orders from the very beginning of the project. This gives us the ability to forecast and update our Total Anticipated Cost in real-time as the project progresses. In addition, this capability provides us with the information we need to evaluate each change order related to the project as a whole.
The ways we plan for change orders are:
Negotiating a formula for calculating costs at contract signing.
When initiating a change order, we ensure all aspects of the change are included.
We also add potential change orders to the project budget before they are fully approved to give us a clear understanding of Total Anticipated Costs.
Most importantly, we ensure every change order is approved in writing.
This proactive approach to change orders gives our clients peace of mind knowing they have the total financial picture when making decisions.