What is a Change Order? - Managing Your Construction Business
Change orders are a vitally important tool for contractors, and if you’re not sure why then it’s important that you read to the very end of this resource article today. Many contractors and subcontractors start off by offering their services to friends, making verbal contracts, and performing great work while trusting that they’ll be paid. Any modifications to the original project are discussed and verbally agreed without a fuss, and everyone walks away happy.
Once you’re really in business, however, things may not always go so smoothly. Most customers are fantastic to work with, but you’ll find a few that always want more done than you’ve agreed to and may not always be willing to fork over the extra cash to make it happen. You’ll have to start clearly defining the scope of work and writing detailed contracts with explicit pricing to protect yourself and your business.
This resource article explains what change orders are, how they fit into your overall business processes, when and why to use them, and how to go through the process with your customer.
Scope of Work and Contracts
Before we can start a conversation about change orders, it’s important to establish a contract and a scope of work. A change order cannot exist without an original contract – otherwise, there would be nothing to make changes to! Construction contracts are an important mechanism for holding both you and your customer accountable to the terms that you agree on. Any client that wishes not to be bound by contract should not be trusted – these are the same types that will try to pressure you into doing extra work and claim that you’ve promised things that you never mentioned – always work with a contract!
A construction contract can be full of clauses, but it has two key components: the scope of work, and the price. A detailed scope of work is crucial for project costing and for managing expectations with the customer – sit down and work it out together, ensuring that it includes everything the customer wants and which you intend to provide. Pricing can be given as a total but is best given as an itemized list. This offers the customer more transparency into what they’re paying for and can help when calculating the value of changes in the future.
Your contract might also include a delivery schedule for the project, payment terms, default conditions and penalties, and other clauses, but if you’ve got a scope of work and some pricing, you’re ready to implement change orders within your business.
What is a Change Order? - Implementing a Change Order Process
A change order is a document used to record an amendment to your original construction contract. Change orders in construction create a record of additional services being provided to the customer, along with costing for those services. A subcontractor that neglects to use change orders may forget to bill additional costs related to the changes requested, or forget to complete the changes altogether.
A change order form has the following features:
- A revised scope of work – this could mean less work or more, but usually, the customer is asking for something in addition to what has already been agreed.
- Pricing for the new work.
- Any relevant modifications to the original contract that result from the new scope of work, for example, extending the delivery schedule for the project because the scope of work is now greater.
- The signatures of both the contractor and the customer.
Making Change Orders Work for You
The most important function of construction change orders is that they show the customer that getting more work done costs more money. Change orders were made to help you manage the customer that always wants more for less, and when combined with a detailed scope of work, you’ll have an easy time ensuring that both parties are treated fairly. Requests for changes can be awkward if you fail to manage expectations from the beginning, so here’s a step-by-step guide on how to do it right the first time:
1. Establish a construction contract with a clearly defined scope of work. Tell the customer: “This scope of work is meant to be detailed so that you get everything that you want in the project, and so I can provide the most accurate cost estimate. Let’s flesh this out together to ensure you’re getting exactly what you want”.
2. Manage expectations about your change order process. Say: “Now that we’ve agreed on a scope of work, it’s important that you understand that you can make changes in the future. If you decide there’s something else you want, we can add it to the scope of work along with any additional costs associated. I use a document called a change order for that, and we would both have to sign it.” Some contractors even include this in their contract – the customer has to tick a box indicating their understanding that additional work will incur additional charges.
3. When the customer requests a change, say: “That sounds like a great idea and I would love to get that done for you. I’ll create a change order and determine what additional costs there would be, and then we can move forward.” Always be candid about the fact that additional work costs money. Never attempt to gloss over it without addressing it directly.
4. Write the requested changes down on a change order, price it out for them, and sign it together. Append the change order(s) to the original contract in your records and don’t forget to bill the customer appropriately once the work is complete.
A Final Word on Your Construction Change Order Process
Scope of work, pricing, and change orders can all be touchy subjects for some consumers. As a contractor, contracts and change orders protect you from feeling pressured into performing work that’s beyond the agreed scope and outside of your anticipated budget for the project. Managing expectations is the most critical aspect of your change order process – you should always discuss the process with your customers in advance so they are aware that additional work will cost extra, and of the process for requesting those changes. This will prevent them from feeling “ripped off” when they request a change and you ask them for more money.
Aside from being necessary for proper documentation within your business, change orders are an important tool for managing expectations with your customers. Some contractors love the informality of working without contracts and negotiating changes as needed, but contracts are important for both the customer and the contractor and we would encourage all contractors to work with them.
An effective change order process will help your customer relationships, make your business seem more professional, and add to your bottom line as you become more procedure-oriented when it comes to billing for changes to scope of work. Templates for change orders are available online, so look around for one that suits your business and start using them today!