What is a Change Order?

The Change Order System

Whether the project is a complicated commercial project, or a simple residential addition, the cost control on the project, centers on a properly managed change order system.

A change order, is a directive issued by the party controlling the money, to change something on the project with a formal document. The controlling party can delegate the management of a change order system to an architect, a professional construction consultant, or another entity, that the party with the money trusts.

There are several different types of change orders;

1.) Scope of work revision: This type of change order is provided to formally change the scope of work on the project. This change could entail added scope, deleted scope, or a specific change to the scope of work summary. This change order is probably the most frequently required change order on a construction project. Depending upon the degree of accuracy in the construction documents, these change orders can be encountered frequently, especially on a project that does not have a fully developed set of documents, specifying the contracted work. If the owner has not obligated the architect, engineer or designer, with the task of producing an accurate set of documents, there will be numerous scope of work revisions required to complete the project. An experienced contractor is trained to identify all items that could provide additional scope of work. In many instances, a contractor will purposely bid a project that has a very limited amount of identification in terms of drawings, specifications, etc. in the hope of extending the scope of the project through change orders. A contractor understands that the pricing of a change order, is not a competitive system, and therefore the pricing can be more liberal in terms of overhead and profit.

2.) Change of specification: This type of change order is provided, if the product specifications change. For example, if window X is originally specified and after further investigation, the owner or architect, decides they prefer window Y, a change order indicating this change in specification is issued. A change in specification can involve a change of price structure, depending upon the specification revision. The value of the product specified could be more or less, again depending upon the change. In many instances the change in a specification is due to a long lead delivery of the originally specified product. The specification is modified to provide a product that can be delivered to the project sooner than the original.

3.) Change of project schedule: This type of change order is provided if there is a reason to accelerate or decelerate the project. In some cases, the owner’s schedule changes, as the project advances, and there becomes less or more time to perform the work. If this occurs, a change order can be used to formally notify all parties of the change in schedule. If the project has a large number of scope revisions then the entire schedule concept must be revised. A contractor understands that to increase the scope of work and maintain the original schedule, will require acceleration on the project. Acceleration on the project will cost additional money due to overtime hours, additional manpower, etc.

4.) Change in formal information: This type of change order is used to change a formal name of a party on the contract, to change the insurance requirements, to change the sales tax status. Any formal information that could change during a construction project is made public by a formal change order. If the owner is bought out by another entity, if the contractor should change their name, if the insurance coverage is modified, are types of issues that could be associated with this type of change order.

5.) Change the type of contract: If, for some reason, the owner decides to shift from a time and material contract to a lump sum contract, this would formally be done by the use of a change order directive. Sometimes during a project that was initially identified as a time and material contract, the scope of work clarifies, as the project moves along. The owner may decide to convert the contract to a lump sum once the scope of work is clarified, this would be formally addressed with a change order.

In general a formal change order is used to revise any legal aspect of the contract between the owner and the contractor.

The actual Change Order System has several variables, and is managed in many different ways by owners and contractors. A good change order management system will assist both the owner and the contractor to financially manage the construction project.

I will summarize the most common method of managing the Change Order System.

1.) The change, or revision to the project information, is formally presented in the form of drawings, specifications, sketches, narrative descriptions, or any other means of communication by the owner, architect, designer or engineers to the contractor.

2.) Upon receipt of this change information, the builder reviews the changes and identifies them to subcontractors and suppliers effected by the change or revision. This change is formally sent out to all affected parties by the builder for a response regarding pricing and scheduling.

3.) After issuing the information to all appropriate parties, the builder manages the responses. The preferred method of managing the return information, is for the contractor to issue a request for proposal to the various parties affected such as material suppliers, subcontractors, etc. The builder identifies a period of time allotted for the development of the pricing for the change. Eventually the builder accumulates all the costs and charges related to the revision.

4.) Once the builder has accumulated all the appropriate charges, added their costs, as well as overhead and markup, the proposal is formalized into a change order. This change order is then submitted to the appropriate party such as the owner or the architect for approval. It will be up to the owner to determine, who on the construction team, will be assigned to manage the change order system.

5.) The owner or designated appropriate party, reviews the submitted change order by the contractor. This review entails the evaluation of cost and time. If the costs and time are consistent with the evaluation performed by the owner or designated party, a formal change order is issued to the contractor. If the change order is inconsistent with the evaluation of the owner or designated party, a formal response is issued to the contractor indicating the issues that are not in agreement. Upon review, the contractor will offer an explanation, or will adjust their change order presentation by changing the price, as well as time required to perform the change order work.

6.) It is recommended that NO work be performed on any change order work, by the contractor, until such time as the change order is signed and approved. The owner will consistently attempt to convince the contractor that the work is approved, and that field work should commence prior to formally signing the document. To circumvent the normal constant indecision regarding change order issues, the contractor should simply not perform any work on the change order until formally approved.

7.) Once the change order is formally approved, the value of the change order is added to the contract sum, changing the total contract value. In addition, the time element designated on the change order is also added or deducted from the formal project schedule.

8.) If the number of change orders becomes excessive, the total scope of the project has basically been revised. This could constitute another secondary change order that would address the amount of acceleration required to perform the additional scope. Theoretically, unless the contractor accelerates the project by the introduction of additional manpower or overtime work, the additional scope cannot be accomplished within the original schedule. Of course, the contractor needs to understand this concept to actually submit the change order to the owner, sadly, many do not.

Theoretically, this is how it works, and this is the formal method of change order control via a professional change order system.

OK , in reality, what really occurs.

1.) The owner is insistent that the project move ahead, and is constantly complaining that the construction schedule is delayed and falling behind. This constant complaining creates a general panic on the jobsite to complete and finish as soon as possible. Additional work is performed without the signed documents. The owner wins, the contractor loses! This is typical, of course I come from the contractors side!

2.) All normal construction projects are built upon problems, inconsistencies and conflicts. Each step of the way, contractors are discovering issues that they did not anticipate and are holding up the project. This constant and reoccurring theme is standard and is what contributes to the negative attitude of all parties regarding change orders.

3.) The change order system, although appearing simple and easy to follow, becomes a major stumbling block in the project schedule, because in many cases, the additional work must be performed prior to moving on. If the additional work is required to move the scope of work forward and the owner is hesitant in approving the work, what happens? The work is delayed, everyone is upset and the situation becomes typical of the overall aspect of change order issues on every construction project.

4.) Immediately on the project, the contractor is placed in the typical dilemma of not having a formal notice to proceed with the work, pressure that the schedule is slipping, and the need to perform the additional work to move the construction schedule along. What should occur, the contractor should stop the work! This is what should occur, it is not what normally occurs. The contractor in good faith attempts to keep the project moving, the owner, knowing full well that this is additional work, attempts to delay the formal approval. It becomes a never ending game that always ends up in a negative situation.

5.) The owner, especially if they are educated in the construction industry, realizes the dilemma of the contractor and procrastinates with the signing of the change order. The owner may actually verbally indicate that the work is approved and they will sign the change order within the next few days. In many cases this is a tactic to keep the pressure on the contractor and force the contractor to perform the work without the change order. Unfortunately this is a common practice for the educated owner and the desperate contractor.

6.) The contractor becomes immediately caught in the middle of legitimate change order work that must be performed to keep the construction schedule moving. However, the owner is placed in a position of forced change order signing. Many owners that are cognizant of this dilemma do not allow the pressure of change order signing, to interfere with the pressure they place on the contractors to perform via the schedule. The situation becomes extremely stressful, contractors need the change orders signed to get paid, however, they need to the work performed to move ahead on the project.

What should occur;

1.) The contractor should immediately upon identification of a change order or additional work have a management system that communicates this additional work to the owner and or architect.

2.) This formal document of notification should include a message regarding timing of a response. If the work can be held off without interfering with the schedule, the notification should indicate this, if the time is critical, this should be noted.

3.) This formal document should identify the following / this is the contractor to the owner or architect.

a.) Date the work was discovered

b.) Simple and brief description of the work

c.) Identification of the time the additional work will add to the schedule

d.) A date that the contractor will provide the owner a cost proposal for the additional work.

e.) Owner options / 1.) the owner can agree to perform the work on a time and material basis 2.) the owner can present, a not to exceed value, to the contractor, and discuss the feasibility of this value with the contractor 3.) the owner can prefer to wait to perform any work until a lump sum value is presented and approved.

If the contractor takes the incentive to push the communication regarding change orders this will enable them to shift the responsibility for a decision to the owner. This is where the proper management of the change orders on the job must be the contractors responsibility, to eliminate the owner’s pressure to perform without the proper signed and approved paperwork. It is essential that the contractor assume the responsibility to communicate all additional work issues, and to provide the proper information immediately to the owner for an immediate decision.

The change order system should not be as complicated and difficult as it actually is. Unfortunately greed and the so called, business end of the construction industry, justfies the ability of owners as well as contractors to use the system to their advantage. The change order issues on projects are the most contentious issues that can occur. This happens on residential as well as commercial projects and unfortunately becomes the basis of failure on many construction projects.

Honestly, I have made my living on the change order system. The discrepancies of what the owner whishes they had purchased against what the contractor thinks they have priced is the essence of conflict on all construction projects. The owner wants more than they paid for and the contractor wants to provide less than their price reflects.

I doubt this will ever change!! Good luck, owners and contractors, it is always additional work, no matter what it is!!

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