The question everyone is afraid to ask, thinks they understand, has a totally negative connotation, dominates the cocktail conversation, and is the neighborhood’s constant boogey man, hiding within every new house, every addition and renovation. Everyone has a story, everyone has a solution and no one has a clue!
What is THE Change Order???
A Change Order is anything that changes the scope, or the value of the contract for construction, whether it is commercial or residential. A Change Order can change any of the following / or can be a combination of these issues;
- Price / a Change Order can add or subtract to the contract due to a circumstance that occurs during the construction of the project.
- Time / a Change Order can add or subtract time to a contract, this is especially important if there are penalty or award clauses within the contract.
- Scope of work / a Change Order can add or subtract from the scope of the work, which will usually, but not always, add or subtract both financially as well as the scheduled timing of the project.
- Change of name, legal changes / if the contractor, architect, owner, etc., basically any party identified within the contract changes their formal legal name, change order will be issued to formally authenticate legally the change.
Basically, the change order is a vehicle that identifies a change within the project that needs to legally be identified and documented, for all parties to sign and agree upon.
The formal paperwork for a Change Order will have signature lines that identify all the legal parties as well as their agreement with the change. In addition, the change order will list the original value of the contract, the previous changes, as well as the particular revision this Change Order is being issued, together with the date of the change. In this fashion, the current value and time allowed for the project is updated as the change orders accumulate, theoretically identifying the current cost and time to complete.
Some contractors and subcontractors use a detailed accounting system for their Change Orders. The procedures are normally as follows. ( All software construction management programs are designed to manage change orders in a similar fashion.)
- A Change Order Request is issued by the architect / engineer to the contractor for pricing. This identifies the change that is being priced, and includes documents to clearly describe the changes, materials and equipment required, as added or a deleted scope.
- The Change Order Request is numbered in sequence on the project, and the contractor solicits values from the appropriate subcontractors and vendors.
- Once all the pricing has been completed for the change order, the contractor will present the final value and time influence to the architect or engineer / or both / for review and approval. If the change order value and timing is approved, a formal Change Order is created by the architect and issued to the owner for approval and signature.
If this procedure is strictly followed, then the infamous reputation for Change Orders would certainly not be as entertaining as what actually occurs in reality. What occurrences cause this very simple procedure to become tainted with either assumed dishonesty or grey areas of believability?
- Something occurs on the project that requires immediate action. This action cost more money and will add time to the project. This could entail such things as:
- Rock is encountered during the excavation requiring additional excavation time and expense.
- Water is encountered during the excavation requiring pumping and de-mucking of the foundation.
- Unsuitable soil is encountered during the excavation requiring shoring, stabilization or other means of allowing the excavation to continue.
- Hazardous materials such as chemicals, PCB’s, asbestos, chloradan, is encountered which requires remediation.
- Mold or rot is encountered in areas that had not been identified, causing specialized removal and repair.
- Extreme weather conditions, hurricanes, tornados, blizzards, etc. cause substantial delay and expense.
- Snow removal is extensive and not part of the original contract.
- Labor strikes and or issues reduce the amount of labor on the project causing delays, etc.
- The contractor and or subs realize that their bid is incorrect, and that they need to make up money and or time, through the use of the change order system. There are many alleged extra work that can be entertained to accommodate this issue;
- Rock is encountered and the excavation contractor claims they excluded rock. The contract is not specific regarding this fact and the argument starts.
- Water is encountered and there were no borings on the project. Borings are actual drilled excavations that are analyzed for water and rock levels.
- Silt and or clay is encountered and again, if the contract specifications are not clear, this will be presented as a change order to the owner.
- Hazardous waste is encountered without notification within the bid documents.
- Extreme hot, dry weather occurs and the contractor claims inability to landscape, etc due to the extreme conditions.
- Heavy thunderstorm causes damage to the underground piping, the sitework or other negative issues due to the extent of water. Contractor will claim that the weather could not have been anticipated.
- Any weather that is not normally encountered that causes delays, costs, etc. will be claimed as change orders.
- Mold and deterioration is discovered within a part of the structure that was scheduled to remain. Without proper identification on the documents, contractors can claim the delays and repairs as change orders.
- Out of sequence work caused by other subcontractors on the project. An organized and observant contractor will use the out of sequence work of others that may not be within the scheduling responsibility to claim delay and additional work.
- Long lead items that the owner insists must be used. The contractor will claim delay and additional cost if material and or equipment specifically required by the architect and or owner is delayed and the contractor can claim this was not their responsibility.
Unfortunately the Change Order is a necessity within the contracting business. However, as my son informed me, it also becomes the only means a contractor has of trying to recoup lost revenue, from a project that was bid incorrectly, mismanaged, delayed due to inexperience, etc.
My son is a subcontractor on most of the major projects here in Connecticut, and provides a refreshing, young and aggressive point of view, on the contractor’s side. I certainly could have used his very concise and precise analysis of many of our construction dilemmas during my years within this business.
Based upon the 10 issues presented as well as my son’s point of view, THE CHANGE ORDER has gained the reputation of both dishonesty and negativity, causing it to be one of the primary issues of contention and negative opinions on a project, especially a residential project where lay people are involved and yes, get together at the weekend cocktail parties!
I personally had a project for a municipality several years ago, where I had over 1500 approved Change Orders, and the company I worked for ended up performing 5 additional major projects for this municipality. Change Orders are not by their definition, bad; they are simply vehicles to manage the constant changes on a project, in terms of time, scope, money, etc. Unfortunately they have morphed into this negative alien boogey man that hides behind the original contract value, and causes sleepless nights for individuals who are renovating, building new, or adding a residential project to their experiences.
As I have repeatedly suggested, the hiring of a professional construction consultant to monitor your Change Orders, and to identify the good with the bad, is necessary for proper management of THE CHANGE ORDER. It becomes impossible to educate anyone enough in the process to fully understand the difference between legitimate change orders, fabricated ones and simply illegal ones that are fabricated as a means of adding money to the contract.
What should we expect in terms of added percentage for Change Orders on our project?
Although this is a separate question to, What is THE Change Order, what is the percentage of value that should be expected on change orders for each type of project, is handy to have, as a scalable estimate of the amount of money that should be added to a contract value in anticipation of the Change Orders.
Logically thinking, the Change Order is a means of adding cost, or time that is unknown at the time of the initial contract creation. Therefore, the following items should be accurately and thoroughly identified, prior to creating the original contract value.
- Scope of the work should be clearly noted within the contract documents (drawings, sketches, specification, product information, etc.)
- All products should be identified and clearly indicated, especially if there is a “ priority “ vendor that is required. For example if GE Profile appliances are required by the owner, they must be identified as such in the bid documents.
- A clear and concise schedule must be identified and clearly noted within the documents.
- All common items of contention such as rock, water, hazardous materials, etc. must be managed and identified prior to the establishment of the contract.
- Allowances should be provided for items that are not clearly identified, and remain in the design phase. Allowances will be explained under a separate discussion within this website; however, it is simply a value, for a line item, that is established by the architect, for all bidders to use. A common example is an allowance for hardware. All bidders will use the same allowance value in their bid. This eliminates that need to precisely design all elements of the project prior to the award of the project to a contractor.
- Elements such as temporary housing, winter protection, hot weather protection, fire protection and liability, builders risk, etc. must all be specifically detailed, to allow all contractors the opportunity to include any costs, or time issues, to their initial bid for the project.
Once again the use of a professional construction consultant to identify the common issues within the original scope of work and schedule that could provide change order potential is encouraged. Every project is different, and it is impossible to educate the lay person to be aware of all the potential “ pitfalls “ for the potential creation of THE CHANGE ORDER.
What should the percentages be for anticipated Change Orders on various types of project? To provide a line item in the budget for change orders, I would approximate the following percentages to be added to the initial contract value.
Once again, this is totally influenced by the accuracy of the bid documents, the use of a professional consultant and an architect / engineer that has experience and history with the type of construction being contracted for.
- New home on a new piece of property 8-12%
- Renovated home on existing piece of property 12 – 18%
- Addition to an existing home 18 – 22%
For example, the final value after competitive evaluation or as a GMP (Guaranteed Maximum Price) is $475,000.00 / I would recommend that the budget carry 12% on top of this value for Change order acknowledgement. Therefore I would recommend a budget totaling $532,000.00 for the new home. In this manner, you have realistically evaluated, what the industry realizes will occur on the project. Even a new home will have change orders involving unknown conditions, site issues, owner changes, etc.
It is extremely important that acknowledgment of all the costs to be incurred, is realistically evaluated prior to decision making.
I will present a recommended spreadsheet, for discussion and evaluation, of total project cost within another discussion topic on this website. For this particular discussion, the use of the noted percentages will allow the lay person to more accurately identify cost and hopefully will take the fear out of the CHANGE ORDER PROCESS.
As my son so astutely noted, a CHANGE ORDER opportunity for a contractor is like your girlfriend giving you a second chance, after you did some boneheaded thing the night before. Like I said, his insight is extremely accurate and definitely explains the reasoning for the fear and anxiety regarding change orders. However, the proper managing and understanding of what they are, and how they are meant to fit into the total scheme of the construction process, is beneficial.