Change orders are not an uncommon occurrence. In fact, they are one of the most common causes of construction and schedule delays. Some reports estimate that 35% of all projects will experience at least one major change throughout the lifetime of the project. Yet, a large number of contractors and subcontractors fail to plan for change orders, paving the way for cost overruns on the job.
Some of the most common reasons change orders are requested include:
— Inaccurate specs in the original designs or contract
— Ambiguous or inaccurate drawings
— Conditions and occurrences on the jobsite that weren’t foreseen and planned for
— Late arrival of labor or materials to the jobsite
— Inaccurate budgets and schedules
There are many reasons why a general contractor might dread change orders. For one, it takes time to source materials and factor in labor and other expenses to develop an estimate and seal the deal initially. No one enjoys repeating the process for the same job, even when it’s just one small piece of the job. Plus, a change order request often causes schedule delays.
But, competition in the construction industry is greater than ever, while margins are often low. Even a minor change to a construction project can have a negative impact on your bottom line. If you want your job to stay profitable you need to consider the total impact any change, no matter how seemingly small, will have on your original agreement.
Like it or not, change orders are a necessary, and critical, part of the job as a general contractor.
How Subcontractors Lose Money on Change Orders
Depending on the change order request, your part of the job may come to a complete standstill until the change order is estimated, written and approved. During that time, you may have to either pay your construction workers and eat the downtime or send them home. Neither option is good. Meanwhile, your carefully calculated job schedule is sliding south.
Another way you can lose money on a change order is to simply not create one. If the change order is a small one, you may be tempted to just complete the work without a change order or charging extra for it. At the time, it may seem easier and more productive to focus on the job and keep on working. But this strategy can come back to haunt you later on down the road when you’re calculating the job’s profitability.
It’s a problem for several reasons. For one, it sets a precedent that isn’t in your favor. Make one small change for free and you set the expectation that any future project changes, no matter the size, will be free as well. If you attempt to add up the additional cost of several changes after the fact to justify additional payment, you likely won’t have an adequate documentation trail to fall back on.
The single largest area of litigation or arbitration in the construction industry comes from disputes concerning change orders. Your best defense against litigation is to ensure the contract is clear on the original bid price and specs. Often contracts skip over this area, or don’t do it justice. For instance, you may want to include contract verbiage that specifies a fee for each change order proposal requested. You’ll also want to ensure the contract addresses how change order requests will be handled. Are you, as a subcontractor, obligated to make project changes before a new price has been agreed upon? What methodology will be used to determine how the change order will affect the contract price? Having those questions answered before an issue arises can make everyone’s lives easier.
Some contractors prefer to rely on verbal change orders rather than putting a change order in writing. The reasoning is that a verbal change order is binding, plus, a verbal change order is a lot simpler than having to complete all the research, paperwork, and additional work a written change order proposal requires. Unfortunately, while verbal change orders can be enforced, there’s no guarantee that will be the case. They are often difficult to prove. Plus, there’s the time delay for litigation or arbitration and the added expense of attorney’s fees. It’s really not worth the risk.
An inadequate change order is almost as useless. Often inadequate change orders happen when change orders are written on the fly or with inadequate data. The change order may give you some protection against construction costs, but if it isn’t based on comprehensive analytics, you’re missing a lot of different items that factor into making a change order effective.
Simplifying Change Orders
So how can you get the odds in your favor when it comes to getting paid for change orders?
Smart subcontractors create written change orders, whether the change order is for an addition to the scope of the job (additive change orders) or a reduction to the scope of the job (deductive change orders). Both additive and deductive changes can have a significant impact on whether a job ultimately shows a profit or a loss.
An effective change order must be accurate and specific. That can be a daunting task. Here are some factors you’ll need to consider when creating a change order:
— Cost of labor
— Cost of material(s)
— Cost and allocation of equipment
— Time needed to assemble all the documentation and complete the paperwork
— Delay to the schedule and how that impacts labor, profit, etc.
Having a streamlined, formalized process or system in place to manage change orders can help ensure that associated costs remain low and the additional work continues as quickly as possible.
That’s where using software such as eSUB project management software can be a life-saver. Designed especially for subcontractors, eSUB provides real-time access to all the documentation for the project, including drawings, specs, cost estimates, material costs, workforce information and labor activities. eSUB breaks down change order costs by labor, equipment, materials, subcontractor, overhead and additional categories. All that information is right there, at your fingertips.
Change orders will vary depending on the project, the complexity or severity of the change, the stakeholders and other factors. However, most change orders contain the following information:
— A detailed description of the requested change compared to the job description on the original contract
— A summary of the total costs of the proposed change
— A statement of contractual basis for the requested change and how it will impact the project completion date
Once the change order is created, and any supporting documentation attached, eSUB continues to simplify the process by tracking the status of change orders throughout the approval process. Everyone involved will be on the same page, receiving information and updates regarding the change order status at the same time.
Creating a change order doesn’t have to be difficult if you have a system and software to help. Accurate and thorough documentation and estimates will help ensure you won’t unintentionally cheat yourself and improves your chances of receiving payment for all facets of the change order.