Change orders are used in construction whenever there is a change to the scope of work that will cost more (or less) to the contractor.
The most common cause of change orders are items/tasks that were not shown on the contract documents and are later required or items that have changed. Another cause for a change order is delays incurred by the contractor performing the work that were not the fault of the contractor. They can also go the other way however, and lead to a deductive change order, in which case the contract amount will be reduced instead of increased. This can be due to materials or services that are no longer required and were part of the contract, or through value engineering which finds more affordable materials to replace what was specified.
Change orders are dreaded by owners, as they do not want to pay more than they had originally expected, but are very common in larger projects. In order to maintain a good relationship with the owner and show good faith, it is important to be fair when pricing a change order. Some contractors are notorious for tacking on very high amounts of costs on change orders to make extra profit on a project, but doing so can seriously hurt their relationships with owners and leave a bad reputation. If the owner does not agree with the price quoted, they do have the choice to find another contractor to do that work or negotiate the price down.
With this in mind, we are outlining below the process on how to properly process a change order:
Step-by-Step Directions:
1. Notify the Owner or General Contractor that you will be issuing a Change Order
2. Fill out the Change Order Form on Excel, Word, or a similar program
a. You will need to fill out a letterhead summary sheet and a cost breakdown sheet
b. List both the monetary cost and the time extension requested (if applicable)
3. Save Change Order Form as a PDF File and combine it with any applicable invoices/documents
4. If you are a General Contractor, Send Change Order Form PDF to the following (as applicable):
a. Owner/Owner’s Representative(s)
b. CC The Following:
i. Project Manager (Your Company) any other relevant parties
5. If you are a Subcontractor, Send Change Order Form PDF to the following (as applicable):
a. General Contractor
b. CC The Following:
i. Project Manager (Your Company) any other relevant parties
6. Document the Change Order in your Change Order Log with the following information:
a. Change Order Number
b. Description
c. Date Sent
d. Total Cost and Time Extension Requested
7. Upon receiving the Approved and Executed Change Order do the following:
a. Notify any affected parties, such as the following:
i. Superintendent/Field Lead
ii. Project Manager
iii. Subcontractor (Schedule activities if applicable)
b. Document the Change Order in your Change Order Log
c. Save Approved Change Order in your Change Order Folder
d. Order materials and schedule activities
e. Add time extension and activities to your schedule
f. Add the Change Order costs to your Schedule of Values (in your Pay Application)
Download our Change Order Form template for excel here.
Tips:
Make sure you include costs for Taxes, Overhead, Profit, Bond and Labor Burden in your Change Order. You could be missing out on valid compensation!
Some commonly forgotten costs are General Conditions, Equipment and Miscellaneous Rentals.
If you are forced to negotiate, provide as many invoices and receipts as you can to back up your charges. It is hard to argue against factual costs.
If negotiations go against your favor on costs, consider negotiating a larger time extension, beneficial use of the other party’s equipment, or using money from the project allowance, as some examples. Get creative!