Change Orders 101: Everything You Need to Know

A lot of unexpected events can happen in a construction project, and change orders are one of those things you can almost never predict. Although you can’t plan for them, you can make sure that you manage them efficiently to reduce legal risks and financial catastrophe.

In this article, you’ll find out how change order management can make or break your project finances.

What is a Change Order?

A change order is a contract that modifies an existing contract, whether it’s modifying the work, the contract sum, or the contract timeline. It’s an official document that gets approved or rejected for any changes that were not in the original contract.

Here are a few examples showing the use of change orders in construction:

Changing a specific material used in design, like the type of bolt used to build the foundation
Moving the location of a wall to make room for some other design element
Changing the finish of the floors
Redistribution of work during an ongoing project
Other unforeseen events that may happen

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The Importance of Change Orders for Financial Management

Change orders are essential to the financial health of a project because of the complex and unpredictable nature of construction projects.

In fact, a study done by Dodge Data & Analytics showed that change orders account for an average of 10% of the total contract value, with some projects experiencing as much as 25% in change order costs.

1. Protect Your Bottom Line

When unexpected changes in a project happen, they typically cause changes to the budget, and multiple change orders can quickly cause finances to go way over budget if you don’t carefully track them throughout the project.

Tracking change orders helps you to see exactly how contract changes are affecting your project finances so that you can catch financial oversights before they get out of hand. This includes factoring change orders into your estimate and final contract price, handling the procurement process of related items, and creating financial reports that allow you to see a breakdown of costs and expenses.

2. Handle Unexpected Changes

As a contractor, you know that anything can happen once you break ground, including necessary changes to the original contract.

An item you needed could get discontinued which would require a change in material being used; something could break during construction that would require ordering a different item which might change the timeline; or an architect might request a change in the type of material used for design.

You need to have a systematic way of handling these types of major changes so that your team can stay organized and track changes from start to finish.

3. Mitigate Legal Exposure and Disputes

Without an organized way of tracking and communicating change orders, you expose yourself to litigation usually by the client, especially if it comes up that they weren’t aware of any major changes to the contract. We all know that litigation often comes with a boatload of expenses that can hurt your bottom line.

Having a detailed log of all change approved, rejected, and pending change orders ensures you have all the documentation you need in the event of legal issues, so that you cover yourself, your business, and ultimately your money.

If you need a resource that will help you manage your project finances more easily, check out our free estimate templates by clicking the button below:

Common Types of Change Orders

There are different types of change orders for each type of unexpected change that can occur in a construction project.

Here are the most common types of change orders that you may run across in construction:

Substitution Change Orders:
These are used when specified materials or processes need to be replaced by alternatives, whether it’s because those things aren’t available or there are some cost considerations.
Addition Change Orders:
These are used when added work or materials are needed that were not included in the original contract. This may involve design changes, owner requests, or unforeseen events or conditions.
Time Extension Change Orders:
These are used to give additional time to finish a project, whether it’s caused by weather delays, changes in project scope, or some other unforeseen event.
Cost Change Orders:
These are used to modify the overall project cost which usually result from added work or changes in materials. These can include direct costs or changes for overhead and profit.
Owner-Initiated Change Orders:
These are changes initiated by the project owner, typically because of evolving needs or preferences.
Contractor-Initiated Change Orders:
These include changes proposed by the contractor because of unforeseen events or conditions, or necessary modifications to the original contract.

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What to Include in a Change Order Contract

Here are the essential details that a change order contract should include:

Identifying and Contact Information
Basic information including project name, relevant resources, the name of the change order, and the cost of the change order item(s). Defining these basic details ensures you and everyone involved have clarity from the get go.
Detailed Description
Clarity is a must in any construction project, and providing a detailed description of a change order allows for the client to know exactly what they are signing off on so there is no confusion down the line.
Cost of the Change
Including the cost of the change is crucial for financial transparency. This can include having a lump sum or a detailed breakdown of cost using line items.
New Contract Sum
One of the most important aspects of a change order contract is the new contract sum, because the client who is signing off on the changes needs to know exactly how the change orders are affecting the final contract cost.
New Contract Timeline
Including the new contract time in the change order contract provides transparency about how the change order will change the deadline, so that everyone is on the same page in terms of when the project will be completed.
Signature of Acceptance
The client’s signature of approval is required for a change order contract, otherwise you don’t have a way of documenting what was approved.

It’s important to include these fields in your change order contract to be as transparent and accurate as possible when these changes are communicated to your team and the client.

How to Efficiently Manage Change Orders

Because of the complex financial nature of change orders and the potential of change orders to hurt your pockets, you need to have an organized and streamlined way of managing your change order process so that there is no ambiguity among your team and your client.

Here are some best practices you can implement to ensure change orders don’t hurt your business financially or legally:

1. Create Repeatable Systems

A great way to ensure your change orders don’t cause you hassle is to have a repeatable system for handling the change order process. Without a system in place, you’ll end up with contracts and proposals that are spread out and can’t easily be found, you’ll risk legal exposure due to lack of documentation, and you could potentially lose money by losing track of how change orders affect the budget.

If you need a starting point on how to create a repeatable change order system, check out our recommended workflow for change order management.

2. Clearly Communicate Information

Clear communication is the backbone of any construction project, and without good communication both internally with team members and externally with outside stakeholders, your construction business is at risk of letting important information fall through the cracks, especially financial info like change orders.

Having a clear way of communicating change orders with all relevant parties ensures everyone knows exactly what’s going on with the project finances and the project timeline. This includes communication from the creation of a change order to its approval or rejection.

3. Use Change Order Software

The best way to manage and keep track of change orders is to utilize a change order software that can handle all of the details and necessary actions with ease.

If you’re looking for software that can handle change order management plus a lot of other estimating and project tracking features for your team, you can get your free trial or free demo of ConstructionOnline™ as soon as today!

Here’s what features you’ll have access to regarding change orders:

Create change orders for different projects
Input important details about cost, markup, timeline, type, due date, added workdays, images, and notes
Assign relevant resources to change orders
Give clients and team members controlled access to view relevant change orders
Create purchase orders directly from construction estimates and change orders
Seamlessly manage the approval and rejection of change orders
Get a summarized or detailed view of all change orders
Send and receive notifications regarding important change order actions
Create professional change order proposals and contracts to send online or print and share