What is a Change Order in Construction?
Change order.
Did you just get a headache? It's a common reaction. As a new contractor, the change order process can be overwhelming, but they're also crucial to the health of your business.
In this article, we'll help you learn to love the change order and provide a few tips for making the change order process a little less painful.
What is a Change Order?
In the construction industry, a change order is an amendment to the construction contract that changes the contractor's scope of work. This is sometimes also referred to as a variation order.
In most cases, change orders are "additive," meaning they expand the work or change it in a way that increases the expense.
Some change orders reduce the amount of work (and therefore the price), and these are called deductive change orders.
Why Do Construction Change Orders Happen?
Construction projects are complicated endeavors with many moving parts. It's pretty much guaranteed that challenges or unexpected variables will pop up and require a change of scope, timeline, price, or some combination of the three.
That's why change orders are common in construction.
Individual change orders can happen for many reasons, including:
- Omissions, errors, or ambiguities in the initial scope of work or construction plans
- Changes in job site conditions
- Regulatory or safety concerns
- Changes to or problems with the materials, their sourcing, or their delivery
- The need to reduce costs
- Aesthetic changes requested by the owner
Some of these things are unavoidable, but others can be prevented with a little extra planning.
Why Are Change Orders Necessary in a Construction Business?
If you're just starting out as a contractor, a lot of your work may be informal and trust-based. As you expand your business, formal agreements become more and more necessary.
Including a change order clause in your construction contract, establishing a consistent change order process, and formalizing every change order agreement are critical parts of protecting your business.
Change orders let you protect yourself from unpaid scope creep by giving you a way to negotiate changes in the contract price and schedule. Without a change order, you may end up eating expenses that should be the responsibility of the owner.
The Change Order Process
The change order process can look a little different in theory than it does on the ground.
In lawyerland, it goes like this:
- One party requests a change to the construction contract.
- The contractor prepares a change order proposal.
- The owner and contractor negotiate the scope, price, and schedule for the change order.
- A formal written change order is prepared and signed by all parties.
- The contractor performs the changed work.
Clean and simple, right?
In reality, the construction business operates under constant pressure to stay on schedule and budget. Changes can come up suddenly or require immediate action.
Sometimes the last step has to start before you get to the middle three. However, there are measures you should take to protect yourself from a change order dispute.
When Change Orders Go Wrong: Change Order Disputes
Construction change orders require the owner and contractor to agree on all terms, and often that's easier said than done.
The most common situation for a change order dispute is when the owner says something is part of the original contract scope (so they don't have to pay more) while the contractor thinks something is a change (and requires a price hike).
This disagreement can become more complicated when the change order process is handled out of order. When you start the work before a formal agreement is signed, it's easier for an owner to deny the need to pay for the change.
Managing the Change Order Process
Luckily, you can decrease the potential headaches of a change order with a little forward planning and a few good habits.
- Start with a Specific Scope of Work. If you have clearly and specifically defined the scope of work in your original contract, you'll have less trouble agreeing when something requires a change order.
- Mind Your "Changes in the Work" Clause. Similarly, you should pay close attention to contract language related to changes in the work, including any requirements. Negotiate a process for making changes and pricing them ahead of time. Look for conflicting language or clauses outside the official contract section.
- Set Clear Expectations. Set expectations about change orders early on in the process – not just in the contract, but in conversation. When an owner mentions a change, mention up-front that additional work may require additional money. Don't downplay, gloss over, or assume it's understood.
- Get a Formal Change Order Signed. When at all possible, you want a written agreement that's signed by both parties before any work begins. Starting work without a formal change order should be the exception, not the rule. This means you need to get the ball rolling right away when change requests arise.
- Protect Yourself with Words and Actions. If you have to start work before a written agreement is signed, you need to protect yourself from a change order dispute. Check the law in your area, but it's generally established in construction law that parties can waive written change order requirements by words or actions. That can work against you if your behavior indicates that you don't expect an additional payment, so make sure your words and actions indicate that you expect a formal agreement soon. Then…
- Document Everything. Document communications related to change. Document the work you do and what it costs you – direct, indirect, and consequential costs. Do this even with changes you think will fall under the initial scope of work, in case of scope creep. This documentation will be helpful in formulating a change order, but it can also be useful in court. Better yet, enough documentation can pressure the other party into avoiding a full-blown lawsuit.
- Communicate with the Owner/Authorized Agent. Make sure you understand the requested change, its scope, and the reason for the request. Remind the owner or their authorized agent of the change order process you agreed on. Iron out how the work will proceed.
- Communicate with Subcontractors and Others. Communicate clearly with all working parties how the changes might impact their work, directly or indirectly. Your change order agreement doesn't automatically apply to subcontractors, so negotiate a change order with them to avoid a gap in the scope of work.
These are only a few of the steps you can take to establish an effective change order process. It's important that every change order is handled consistently, but that doesn't mean it's set in stone. Once you've established a process, you should evaluate and change it as you learn from your mistakes.
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