Change orders in construction are documents used to indicate changes to a project’s scope.
As part of the creation of a change order, stakeholders typically discuss the change’s magnitude and determine whether adjustments should be made to the project’s schedule and/or budget. Keep reading to learn more about change orders in construction, including how they’re created and best practices for addressing them.
What is a change order in construction?
A change order in construction is a document specifying multiple parties (i.e. the project owner, general contractor, and subcontractors) have agreed to modify an existing agreement related to a particular project.
As Contract Counsel states, change orders only become binding when all affected stakeholders agree to the changes and terms by notarizing the document. In other words, it’s atypical for a single stakeholder to prepare a change order and have all other parties bound to it without some sort of collaborative process having taken place beforehand. Rather, they would prepare a change order proposal to initiate discussions.
Core elements of a change order include:
- a description of the change
- detailed documentation regarding the change’s financial impacts (i.e. additional material costs)
- an indication of if and how the project’s timeline will be affected by the change
- notarization from stakeholders agreeing to and authorizing the change
When does a change necessitate a change order?
Of course, as every construction professional knows, changes are quite common on projects, especially large ones. This raises the question of when change orders are required (as opposed to verbal, or at least less-formal, agreements).
The answer ultimately varies based on factors such as:
- the nature of the relationship between stakeholders (if all parties have a lengthy and trust-filled relationship, for example, they might forgo the more formal change order process)
- the significance of the requested change
- who is initiating the change request =
- whether there are other avenues the requester would like to take to initiate requesting (or forcing) a change
Related to that last point, it’s worth highlighting that a change order isn’t the only way owners can go about requesting a change to the scope of a particular project.
According to the American Bar Association, most construction contracts allow owners to bypass the change order process completely and issue a construction change directive. Such a directive can force the contractor to complete the required changes without even knowing how much they’ll be paid.
If the contractor disagrees, their recourse would be to sue the client (although they cannot refuse to do the work as that would constitute a breach of contract on their part).
This doesn’t give project owners absolute authority to request unreasonable changes, mind you. The American Bar Association highlights the cardinal change doctrine, which prevents clients from forcing changes that would make the project’s scope fundamentally deviate from what the contractor originally agreed to. In this scenario, the owner would be better off working on a change order with the contractor.
Change orders are also useful in scenarios where the contractor, not the owner, would like to request changes to the project’s scope.
Construction change order template
Here’s a common format for construction change orders, along with information about what goes in each section.
Section 1: Project details
In this section, the change order will typically specify the project’s name, location, key points of contact, and client. It will also identify the party making the change request and specify a date.
Section 2: Change order details
In this section, the change order will provide an itemized list of the requested adjustments to the project’s scope. For example, if the changes amount to additional deliverables (i.e. additional materials), the change order would list those deliverables and the costs associated with them.
If the changes require additional labor, the change order will identify the number of additional hours required and specify any overtime pay that needs to be accounted for.
The same goes for additional equipment that must be purchased or rented to accommodate the change.
Section 3: Financial details
This section identifies any changes to the project’s financials, whether or not the requesting party will be billed for them.
Section 4: Notarization
This section is where stakeholders sign to indicate they agree with the changes outlined in the change order. Each of the following parties typically gets its own section to sign:
- the requester
- the party recommending the change (i.e. an external consultant)
- the project owner
- the individuals or parties that have reviewed and accepted the change order
Best practices for change orders in construction
Know your rights, as specified in the contract
Most construction project contracts include some sort of change order clause specifying what types of changes are permissible without the creation of a new contract and what processes must be followed to request changes.
Whether you’re the requester or some other party involved in the change order, it’s important that you understand the contract’s change order clause (if one exists) before getting too deeply into negotiations.
Try to understand the impact on your bottom line before completing work
Many contractors have been burned by satisfying “small” change requests before completing their full due diligence during the change order process. This is a problem since “small” changes can easily spiral out of control and lead to cost overruns.
Opting for a less-formal process (unless you have a very good reason to) can also backfire since small misunderstandings (such as who should ultimately pay for changes) can lead to huge expenses.
Document changes and negotiations
Proper documentation detailing the conversation around a change order can help smooth over disagreements and misunderstandings later on. You may even want to develop a change order template of your own that highlights key pieces of information.
Account for the possibility of change orders in your estimating
Smart construction management professionals know change orders are a possibility on just about any project. This influences how they conduct estimating in that it prompts them to leave more flexibility in their budgets (and perhaps use historical data to predict the impact of likely change orders).
Construction change order: Conclusion
We hope this article has helped you understand change orders in construction, how they’re used, and some of the best practices for handling them. For more articles on topics related to construction project management, visit our blog.