What are Change Orders in Construction

What is a Change Order in Construction?

In construction, a change order alters the original contract to add or remove work or extend the schedule, typically resulting in changes to the cost.

Change orders are common—by some estimates, impacting 35 percent of all projects. While all projects begin with an agreement between owners, clients, and contractors, it’s common for one party to decide an alteration is necessary once the project is underway. That’s because in real life, unforeseen hurdles arise—for example, realizing a wall needs to include complex electrical wiring and cannot contain a large window—and contractors must adjust their plans.

While a change order sounds like an immediate decision by the builders, it’s actually a process that legally requires consensus from all parties before the changes can move forward. If that process is inefficient, a change order can result in project delays.

An Example of Construction Change Order

A few common reasons for change orders include adverse weather conditions affecting the project timeline, miscalculations and incorrect specifications in the design phase, delays in availability of workers or materials, and budget miscalculations.

For example, an owner of an airport has contracted a project to expand the main terminal building but before renovations can begin, an unexpected plumbing issue must be resolved. The owner will likely approve a change order to fix the faulty pipes, however the timeline of the original project and added costs for labor and materials may necessitate a change order.

While the reasons for the change orders will vary per project, each one must:

• Describe the needed change(s) in detail, contrasting them with the original bid or contract
• Provide precise cost documentation for subcontractors
• Deliver an estimate on how the change(s) will affect the project completion date
• Be clearly communicated to all parties with the appropriate signatures collected

It’s important to recognize that there will often be multiple change orders per project—and as this occurs, the owner and parties involved must decide to approve, counter or reject the proposed changes to keep the project moving.

Types of Change Orders

Change orders can differ depending on the type of project, who is involved, and the type and extent of changes needed. However, there are three types of change orders that are most commonly seen in the industry:

• A fixed sum or lump sum change order is used when changes to the project scope can be accurately quantified, thereby resulting in an overall cost increase for the project.
• Time and materials (T&M) change orders are generally needed when the full scope of the proposed changes are unknown. Labor, materials and equipment will be calculated as the project occurs with a detailed description of T&M provided to the owner for sign-off.
• Combination of T&M and lump sum where changes are initially handled by T&M, and later negotiated for a fixed sum based on work completed during the T&M phase.

Regardless of the type of change order applied, it is an essential part of any construction project and allows the parties to agree in advance to a process for making changes to the scope.

Why Should I Prepare for Change Orders?

Because they’re so common, every contractor and owner should plan ahead for change orders—but the truth is, many fail to take them into account. When construction companies don’t have a streamlined process in place to handle change orders, they end up with communication problems, overruns, and delays. To safeguard against these negative outcomes, contractors should include specific instructions in their original contracts about how change orders will be managed.

But even with a protocol in place, the change order process can be complicated, especially when many stakeholders are involved. It’s not uncommon for 25 or more individuals to collaborate on a single change order. Without a project management system in place, email is the primary communication method—and it can result in missed messages, forgotten approvals, and stalled progress. When no one knows the status of the change order, the results are often project delays, escalating costs, and client frustration.

What Happens if a Change Order is Disputed?

Unfortunately, it’s more common than not for change orders to be disputed, even rejected—most notably when it’s time to pay the bill. However, there are some steps you can take to avoid having to place a call to the lawyers office.

• Determine if the change order is warranted. For example, did the final airport terminal design plans include the additional 100ft of openings that require special glazing material, or is that a scaled-up version of the plans in circulation? When in doubt, always refer back to the pre-bid documents, responses to RFIs and field work orders. If an order-of-precedence clause is available, this may also help decide whether written specifications or drawings trump in a dispute.
• While it’s not common for contractors to move forward with out-of-scope work without a change order approved, it does happen. If this is the case, consider whether the parties may have waived the requirement through their words or actions, or contractually with a "construction change directive" or CCD.

While change orders give owners and contractors the flexibility to address the unexpected during a project—that flexibility can come at a high cost if a dispute is left unresolved. Set expectations that a detailed change order with thorough supporting documentation is to be provided for each occurrence and be proactive in your evaluation.

How Can I Simplify the Change Order Process?

The most common pitfall in change order management is a complicated or undefined change order request process. If those requests are communicated via email or paper documents, the data can become siloed—resulting in confusion and delay.

A project management system can avoid this problem. With a digital construction management solution like e-Builder Enterprise, every workflow contributor can login and quickly identify which stage the change order workflow is in. They can see whether the design has been approved, change has been submitted, or funding has been allocated, and check on the status of any other step in the process. The workflow process is standardized within the system, routing change order requests to the correct stakeholders in a pre-ordered sequence. All documentation, cost projections, approvals, and reports are synched automatically based on the change order updates.

For example, let’s say an owner adds an additional baggage reclaim area in the terminal and the project cost increases by $100,000 with added work that delays the project completion date by two weeks. When the change order request process takes place via the digital workflow in e-Builder, those changes are automatically reflected in the overall project cost and schedule reports in real-time.