The Unseen Costs of Mismanaging Construction Change Orders

Construction change orders are part of nearly every construction project. Designs change, material costs fluctuate, regulatory hurdles emerge, and owners change their minds.

It’s one thing to simply accept the inevitability of change orders and delays. But failing to take the next step and create robust processes for managing change orders will cost your business dearly. 

When Are Construction Change Orders Necessary? 

Creating a change order provides everyone with a record of how and why additional work had to be done to complete a project. They show customers exactly why a project will cost a little bit more money than the original contract stated.

“Change orders have earned a bad reputation for the implication that a change means someone made a mistake; however, mistakes are not the primary cause for change orders,” Salvatore Verrastro and Mark I. Baum at AIA Contract Documents write.

“All modifications of contract terms must be memorialized by change order. Most modifications to the contract, including change orders, are due to owner changes to the project, unforeseen conditions, weather delays, contractual issues, and other matters not caused by any of the parties. Owner-directed changes may include desired scope changes, for example, to fit out a tenant space, or to adjust schedule milestones to meet a lease deadline.”

Change orders are necessary when, for example, there are changes to an initial budget or timeline, or when material costs rise, or when the scope of work has to change, the team at ContractsCounsel writes.

Why Do Construction Change Orders Costs Spiral?

No one likes to sign a contract then start making changes to that agreement. This discomfort that GCs and trade contractors feel about making changes to agreed-upon work is the source of many unnecessary costs.

But changes are a fact of life in construction, and so providing a complete, transparent account of the what and the why of any change is the fairest way to do business — and to protect your own company.

Otherwise, you and your clients end up negotiating tweaks and adjustments in a gray area, and this is what creates steep financial downsides. 

The team at advisory services company Thompson Greenspon outline what some of those downsides include:

• Direct costs. This includes the labor and materials that go into executing the work in the change order.
• Indirect costs and overhead. This includes the rent you pay on an office or the salaries and benefits you pay to administrative staff. Any additional general business expenses you incur by doing additional work can fall into this category.
• Consequential costs. This includes costs such as delays in work, the costs incurred when you reassign crews, or overtime you have to pay out to make the necessary changes.

Trade specialists who fail to account for all of these costs can start to hemorrhage money quickly when change orders pile up. 

The Primary Reasons Construction Change Orders Get Expensive

Change order mismanagement typically drives up costs in one or both of the following ways:

Revenue Loss

The three types of costs that Thompson Greenspon outlines above — direct costs, indirect costs, consequential costs — eat into a business’ revenue. 

When you fail to plan for overtime hours or additional materials costs, for example, then those costs reduce your revenue. That’s why it’s important to track each change order, the status of each change order, and the impact each change order will have on your budget.

It’s tempting to cut corners here, especially when the change order is small. When you know your team can complete the work quickly and without charging for it, that relieves the part of your brain that says: “Great! We don’t have to amend the contract now.” But this will inevitably come back to haunt you when you calculate the construction project’s profitability.

That creates a slippery slope, too. When you set a precedent that some amount of work can be done for free, how do you guard that boundary? What’s the threshold for paid work and billable work? You’ll end up wasting a lot of energy negotiating those boundaries with yourself and with your clients.

Legal Disputes 

Change orders are the No. 1 source of legal disputes in construction. 

Trade contractors who fail to create change orders or push through free work just to get it done can expose their businesses to any number of liabilities because the agreements to commence work aren’t recorded. Verbal agreements or tacit agreements that the work will get done don’t guarantee your business any protection against disputes that can emerge later. This is an unnecessary risk to take on.

But even the creation and documentation of a change order won’t provide a guarantee against future disputes. There are so many gray areas that emerge when parties start to amend their contracts. The team at legal firm Stimmel, Stimmel & Roeser outlines some of these:

• Change orders are necessary due to updated information. Imagine some aspect of the work would benefit from a different approach. This means changes to the scope, the timeline and the budget. The change order needs to account for each.
• Change orders are necessary because of latent conditions at the work site. This could include issues such as problems with the soil. Again, recognizing such issues triggers changes across the construction project. Those need to be addressed in the change order.

As changes enter and the project evolves, roles and responsibilities change, and so do people’s expectations. These are tricky legal matters. Make sure all dimensions of change get reflected in your change orders so that you and an owner or a GC don’t conclude a project on different pages. That can lead to costly dispute resolution — whether through direct negotiations or legal remedies — and it can impact the resources you have available to complete other jobs.

Keep the Costs of Your Construction Change Orders From Spiraling

To avoid problems like those outlined above, trade contractors can leverage cloud-based construction project management software to track change orders, keep an eye on costs, and ensure there’s no miscommunication between departments.

Our Change Orders Guide is a resource that further explores the business importance of change orders and the challenges they present. In it, you’ll get practical tips for managing change orders effectively. We’ll also look at when and why to use them, and how to go through the process with your customer. 

With a tool like eSUB Cloud, trade contractors can:

• Prepare their own change orders.
• Estimate additional costs — direct, indirect, and consequential — with accuracy.
• Add field notes and photo documentation to demonstrate how changes were made.
• Set reminders to follow up on pending change orders.

To learn more, schedule a demo today. 

Images used under license from Shutterstock.com.