As in many areas of life, change is inevitable when it comes to construction projects. The owner decides to alter a design, a hurricane hits and knocks off delivery deadlines, a subcontractor underestimates its costs — the list of reasons goes on. But uncontrolled change can quickly eat into profits, even derail a project.
That’s why savvy construction firms have a hard-and-fast rule: Anything that requires a modification to an existing construction contract requires a change order, which details revisions in a project’s scope of work, cost and schedule. Executed well and consistently, change orders keep clients and contractors on the same page and prevent disputes, unpaid bills and even legal action.
What Is a Change Order?
A change order is an official, documented modification to an existing construction project contract. It can be initiated by either the owner or the contractor. When a project expands or elements are upgraded, the details are captured in an additive change order. When a project shrinks or elements are downgraded, these changes are noted in a deductive change order. In all cases, the order specifies how the modification impacts the scope of work, price, timeline or some or all of the above. Both the client and contractor must agree on the terms and sign off for a change order to be valid.
- The scope and cost of construction projects change after work begins for a variety of reasons.
- Change orders document these adjustments and are formal, legally binding amendments to construction project contracts.
- Change orders are most effective when they are used consistently as part of a documented process.
- Technology can dramatically improve project visualization, data quality and collaboration, all of which improve the change order process.
Change Orders Explained
Change orders are a routine part of construction projects. They amend the scope of work set forth in an original contract and are signed by all involved parties — the project owner, the contractor and possibly the lender and/or one or more subcontractors. Reasons for change orders include plan design errors, an underestimation in the time or budget needed to complete a project or unforeseen conditions at the job site. The change order contains these details, their impact on the scope of work — perhaps extra time will be needed to meet new requirements — as well as revised pricing. While change orders typically reflect additional work, they can also be the result of downsizing or substitutions.
Most construction contracts contain a clause that specifies how change orders will be handled. Formalizing the process up-front can keep a project running smoothly and on time, ensure cash flow to the contractor and protect everyone involved. Construction companies need a process in place to make sure change orders are handled expeditiously so that projects continue without undue delays.
Note that large change orders may trigger an increase in the project’s retainage, that is, the portion of the final payment that is withheld for a defined period to assure a contractor or subcontractor has finished a construction project completely and correctly.
How Do Change Orders Work?
A change order may be initiated by a project owner or contractor anytime during the construction process. The project’s original contract will typically stipulate the use of a particular change order form; if not, one may be created in a document, spreadsheet or even be handwritten. All parties meet to discuss the proposed change and its impact on the scope of work, cost and schedule. Once everyone has agreed and formally signed off, work can get underway.
Change orders are legal documents, so their use should not be haphazard. Experts advise using a consistent, transparent process with the following best practices in mind:
Address the change process in the original contract. This is typically included in a “changes in the work” clause. The contract should spell out how change requests, including the change order process, are to be handled. It may also specify a particular change order form to be used or state a review process over a certain dollar amount, for example.
Focus on true change. Change orders are intended to address changes that fundamentally alter the scope of a project or substantially impact its price or timeline. They are not needed for minor changes or work that clients would reasonably expect are covered by the original contract. For example, construction contracts typically specify that work be done to “construction industry standards” or “manufacturer’s written instructions.” In that context, a contractor wouldn’t install an unfinished door and then create a change order when the client wants it painted.
Think outside the box. Although uncommon, change orders may be used simply to suggest changes. For example, contractors for some federal projects are invited to suggest a different method or material if those changes cut costs.
What Is Included in a Change Order?
No two construction projects are identical, so it stands to reason that neither are change orders. However, well-constructed change orders typically share some common elements. These include:
- A description of the requested change and a comparison to what the original agreement contains. This section should include enough information for the client and potentially a lender to readily understand why the additional work is beyond the scope of the original agreement.
- An itemized summary of all contractor and, if required, subcontractor costs resulting from the change.
- A tally of the total cost of the change.
- A contractual statement on the change’s impact on the project’s timeline.
- The signatures of the client, the contractor and, if required, the lender and/or subcontractor.
Change orders should also clearly identify the relevant project by including the:
- Original contract number;
- Project owner’s name and contact information;
- Contractor’s name, contact information and license number;
- Lender’s information where applicable;
- Project address; and
- Change order number.
When Do Change Orders Occur?
Change orders generally start when a client has a new idea or wants to modify features already in place. But contractors may initiate a change order — perhaps they anticipate a problem as work progresses or didn’t properly estimate the project’s cost. And sometimes change orders are driven by factors outside either party’s control. These reasons may include job-site conditions, such as obstructions that were unknown before work began, or problems or disruptions in the supply chain that delay the delivery of materials. The pandemic, for example, has had a negative impact on delivery systems. Weather or natural disasters also can slow down or even halt a project. So can design flaws, such as inaccurate specifications, that aren’t apparent until a construction project begins.
How to Prepare for Change Orders
A successful change order process begins with the healthy assumption that all projects will be altered along the way. This is why experts agree the construction contract itself should spell out how the change order process is to be handled. With a solid plan and process in place, change orders can be drafted, amended, agreed on, signed and executed quickly to keep a project moving forward.
Software that automates this process and tracks each step can be helpful. In addition, a construction firm will want to ensure its project managers can clearly communicate changes they deem necessary, why they’re needed, their potential impact on the project and an accurate cost estimate, and be able to explain such changes to their teams and other key players. If a lender is involved and the change will materially raise the cost of the project, make sure the team knows what format is required and what information the bank will need in order to sign off.
5 Steps to the Change Order Process
Any change to a construction project that involves work outside of the contract’s original scope requires a change order. But there’s plenty of groundwork to be laid before drafting an official change order. Here are the steps of an effective change order process:
Start the conversation. Regardless of who initiates a potential change, the first step is for the project owner and contractor to discuss what the change is, why it’s being requested and how it will impact the project’s cost and timeline. Everyone needs to walk away on the same page.
Lay the groundwork. Next, the contractor needs to price out the change. If the change expands the project, added expenses may include revised construction plans, extra labor and new materials and equipment. The project’s timeline will likely need to be adjusted as well.
Review the numbers with the client and lender, if required. If the contractor’s estimate is more than the client wants to spend — or the bank will approve — or extends the estimated timeline too much, the process may stop here. Or it may mean the parties must go back to the beginning of the process to discuss other options.
Draft a change order proposal. After everyone agrees on costs, the contractor will submit a change order proposal — not the final order — for client review. It may take a few back-and-forth revisions to get agreement.
Write and sign the change order. Once the client agrees on the proposal’s terms, the contractor can draft the actual change order. Both parties must sign it — and then work can begin.
Common Causes of Change Orders
A variety of problems can arise during construction. They’re to be expected, and they’re the reason change orders exist in the first place. Common issues that lead to change orders include:
Drawing errors or omissions
Ideally, all errors, such as an incorrect specification or omission in the original construction plan, are spotted and corrected before a project begins. But if they’re caught once construction is underway, they may be substantial enough to require a change order.
Estimates are just that. All it takes is one number — in materials cost, labor hours or project schedule — to be off by more than an acceptable variance to require a change order.
Changes in scope of work
From changes in design to material substitutions, clients often change their minds. When they do, a change order is needed. For example, a switch from quartz countertops to marble will change the price for material and skilled labor. Or, the decision to turn a parking lot into a parking garage will significantly alter a project’s scope, cost and timeline.
Clients and contractors should agree at the outset on a dollar amount past when a change order must be implemented. For example, changing man-made quartz to midrange granite rather than marble might add only a few dollars per running foot; the contractor may have enough cushion built in that it can absorb that, or it may cut back on tile or cabinet hardware.
Extended construction projects are inherently vulnerable to variability in the costs of materials. Sheathing plywood that cost $40 a sheet when work commenced might be up to $55 by the time subcontractors must reorder. An extra closet here, additional plantings there, and soon the project has exceeded its material budget. Change orders help manage cost increases before they get out of hand and impact profitability.
Hidden conditions at the job site
Common problems found along a project’s way can include rotting wood, slow leaks, pest infestations and pockets of asbestos. These issues must be remedied, necessitating a change order. In large projects, contractors may also run into unforeseen underground lines or ledges, or find that a municipality’s planning board imposes unexpected conditions based on zoning or other factors.
Change orders may be needed to correct or compensate for outside events that disrupt a project. Such events may include labor strikes, vandalism, weather, natural disasters and even a customer running into a cash or credit shortfall and needing to cut back dramatically on a project.
Inspectors may find code violations in a construction project. Perhaps attic clearance is insufficient, or additional electrical panels are needed. Inspectors also may find problems unrelated to the core project. During a building renovation, for example, they may discover the air conditioning system was not installed correctly. The work needed in all of these scenarios will require a change order.
Tips for Change Order Disputes
An effective change order process in which all modifications and associated costs are well documented and signatures are gathered from all stakeholders is key to minimizing disagreements over what was agreed to. But arguments can happen nonetheless.
Here are a few ways contractors can minimize or navigate disputes:
Go in order. When the change order is signed is almost as important as having it in the first place. Work should not begin until the change order is completed and signed.
Cover all bases. A project may include more than one contract, so a change order to one may not apply to the others. For example, if the client and contractor sign a change order but neglect to get one for a subcontractor, there may be a gap in the scope of work that can be disputed later.
Make sure the lender is on board. At minimum, contractors should reserve the right to check with the client’s lender to ensure there are sufficient funds available to cover the change order.
Rely on the facts. Disputes may arise over whether the work in question truly constituted a change — which may ultimately be answered by a judge unfamiliar with the job or industry. Contractors need to arm themselves with facts to make the case. That may include everything from pre-bid documents and field-work orders to photographs, employee timecards and project correspondence.
Change Order Examples
There are likely as many examples of change orders as there are construction projects. Take, for example, a small business that has signed a contract with a construction company to build its first office space. Not long after work gets underway, the client decides to change the entryway’s design. It also wants to upgrade the originally specified flooring material from carpet to tile throughout the space. Because these changes are outside of the contract’s original scope of work, they require two separate change orders that factor for added expenses, revised schedules and other considerations. For example, an architect may be needed for the entryway’s redesign. Skilled installers may be needed for the tile. Change orders specify these details and go into effect once all parties, including subcontractors, have signed them.
Improve Change Order Management With Software
In the midst of the current digital business revolution, it should be no surprise that software can be a game-changer in construction, too. Some solutions can help minimize the need for change orders and related expenses in the first place, such as visualization tools that create more accurate construction plans. In addition, a robust enterprise resource planning (ERP) platform and professional services automation (PSA) software with built-in production management capabilities lets contractors connect various elements of project management so that work is done more efficiently and without errors inherent in manual processes. Related integration enables a contractor to access their financial records, enter a change order, send the change order and adjust the schedule in minutes.
Changes are to be expected with any construction project. Whether initiated by the client or by the contractor, anything that alters the original contracted scope of work, costs or project timeline requires a signed change order that captures these modifications. Because changes are so common, experts advise baking a process for handling change orders right into the original project contract. Doing so can help minimize disputes and ill will, nonpayment and possible legal action.
Change Order FAQs
Q: Why is it important to have a change order?
A: A change order is an official, documented modification to an existing construction project contract. It can be initiated by either the project owner or the contractor. The client and contractor must agree on terms and sign the agreement for a change order to be valid. This protects all parties. Without a change order, disputes over alterations can lead to ill will, delayed — or no — payments, adverse actions by lenders and even lawsuits.
Q: How do you write a change order?
A: A change order can be created in a document, spreadsheet or on paper. Because they are addendums to contracts, they should include some standard elements:
- A comparison between the proposed change and the original agreement or bid.
- An itemized summary of all contractor and subcontractor costs resulting from the change.
- A summary of the total cost of the change.
- A contractual statement on the impact the change will have on the project’s timeline.
- The signatures of all parties.
Q: Who prepares a change order?
A: Generally, a lead contractor prepares a change order. However, if subcontractors are involved, it may behoove them to draft their own change orders for their portions of the work. Otherwise, components of their work may get overlooked or responsibility for costs may be disputed.
Q: Can a contractor refuse a change order?
A: A change order is valid when the project owner (client) and contractor sign it. But if the parties can’t agree, the owner may use a construction change directive (CCD) instead. A CCD is a unilateral instruction that doesn’t require consensus. According to the American Bar Association, contractors may not refuse to comply with the CCD — doing so is a breach of contract. However, that doesn’t mean contractors must yield to demands that fundamentally alter the contractor’s initial obligation. The cardinal change doctrine protects contractors from agreeing to build a church and then being forced to build a hotel instead, for example.