The Change Order, Construction, and Your Business
How effectively managing change orders can help boost revenue for your construction business.
In the commercial construction industry, change orders are a necessary and vital component for managing project modifications. For trade contractors, mastering change order management can be the key to scaling your business and ensuring long-term success.
Many contractors and subcontractors start off by offering their services to friends. They make verbal contracts and perform great work while trusting that they’ll be paid. Any changes to the original project are discussed and verbally agreed without a fuss, and everyone walks away happy.
Once you’ve started an actual business, however, things may not always go so smoothly. Most customers are fantastic to work with. A few, however, will always want more done than you’ve agreed to. Unfortunately, you’ll also find they may not always be willing to pay extra to make it happen.
In this comprehensive guide, we will explore the business importance of change orders and the challenges they present. 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.
Ultimately the tips in this guide can help you unlock the potential for growth in your trade contracting business.
Scope of Work and Contracts
To understand the role of change orders in construction projects, you need to know how they fit in to the process. A change order cannot exist without an original contract, otherwise, there would be nothing to make changes to. Clearly defining the scope of work and writing detailed contracts with explicit pricing will protect you and your business.
Construction contracts are a key piece 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 sort of people who will try to pressure you into doing extra work without compensation. Never work without 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 what 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. It will also help when calculating the value of changes in the future. Your contract might also include any or all of the following:
• Delivery schedule for the project
• Payment terms
• Default conditions and penalties
Once your contract includes a scope of work and some pricing, you’re ready to implement change orders within your business.
What is a Change Order?
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. Subcontractors who don’t use change orders may forget to bill additional costs, or forget to complete the changes altogether.
Change orders show the customer that getting more work done costs more money. They were made to help you manage the customer who always wants more for less.
When combined with a detailed scope of work, you’ll have an easy time ensuring that both parties are treated fairly.
The Business Importance of Change Orders
Change orders provide flexibility and adaptation to project changes, allowing for necessary adjustments in scope, schedule, or budget. They are crucial for trade contractors in the commercial construction industry for two primary reasons:
Revenue generation and protection: Change orders can lead to additional revenue by documenting and authorizing work outside the original scope. Properly managing change orders ensures that trade contractors are compensated fairly for their work.
Risk mitigation and dispute resolution: Avoid risks and disputes by providing a clear record of agreed-upon changes. A well-documented change order process can help minimize conflicts and legal challenges between stakeholders.
The Challenges of Change Order Management
However, change order management is not without its challenges. Trade contractors must navigate several obstacles, including:
Communication and coordination among stakeholders: Ensuring clear communication and coordination between project owners, general contractors, subcontractors, and suppliers can be challenging.
Time delays and cost overruns: Change orders can lead to delays in project completion and increased costs if not managed properly.
Conflict and negotiation issues: Change order negotiations can become contentious, leading to disputes and strained relationships between stakeholders.
What makes a good change order?
A change order form has the following elements:
1. A revised scope of work: This could mean less work or more. Usually, the customer is asking for something in addition to what has already been agreed.
2. Pricing for new work: Any relevant updates 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.
3. The signatures of both the contractor and the customer.
Tips for Effective Change Order Management
Develop a robust change order process: Establish a well-defined process for handling change orders. This should include clear roles and responsibilities for all stakeholders. Create guidelines for submitting, reviewing, and approving change order requests to streamline communication and decision-making.
Utilize technology and software solutions: Implement construction management software and mobile applications, like eSUB Cloud. This will help improve communication, coordination, and tracking of change orders. Construction change order software can reduce errors and increase overall efficiency.
Create clear contracts and agreements: Ensure contracts include provisions for dealing with changes in scope, schedule, and budget. This should also include dispute resolution processes. Well-defined contracts can provide a solid foundation for managing change orders.
Monitor and track project progress: Doing this regularly will help identify potential issues early on, allowing for proactive change order management. Keep an eye on budget, schedule, and scope, and be prepared to address any deviations promptly and effectively.
Foster strong relationships with stakeholders: Cultivate positive relationships with project owners, architects, and other subcontractors. Strong relationships help minimize conflicts and facilitate smoother change order negotiations. Regular communication and collaboration can promote a shared understanding of project goals.
Implementing a Change Order Process
Requests for changes can be awkward if you fail to manage expectations from the beginning. With that in mind, 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. Be clear with the customer that this scope of work is meant to be highly detailed. This ensures they get everything they want in the project. Being clear and details upfront will allow you to provide the most accurate cost estimate.
2. Manage expectations about your change order process. One you’ve agreed on a scope of work clarify up front that changes will come with additional costs. 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. Remind the customer to expect a change order when they request a change. Always be candid about the fact that additional work costs money. Don’t rely on the customer to remember agreeing to change orders during your conversation about the scope of work.
Never attempt to gloss over it without addressing it directly.
Let the customer know that you will create a change order. Remind them that the change order will document the additional costs. Seek their sign-off to proceed with the change.
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. Lastly, remember to bill the customer once the work is complete.
Making Change Orders Work for You
Scope of work, pricing, and change orders can all be touchy subjects for some customers. As a contractor, contracts and change orders exist to protect you. They protect you from performing work that’s beyond the agreed scope. And they protect your business from doing work outside of your planned 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. Take the time to walk them through 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.
Scale Your Trade Contracting Business
By implementing these tips, trade contractors can improve their change order management, leading to several benefits:
Improved project outcomes: Effective change order management can result in on-time project completion and reduced cost overruns.
Enhanced reputation and credibility: Successfully managing change orders can enhance your reputation in the industry. And doing so will increase the likelihood of securing future projects.
Increased profits and financial stability: With better control over project costs and schedules, you’ll have a more stable financial footing.
Opportunities for business growth and expansion: Managing change orders effectively will let you take on larger, more complex projects. Ultimately, this will fuel business growth and expansion. Learn more about how construction change order software can help you scale your business. eSUB Cloud is easy to use and was designed with the principles of this guide in mind.
Change orders are essential for proper documentation within your business. But they are also an important tool for managing expectations with your customers. Some contractors love the informal nature 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 process will help your customer relationships and add to your bottom line. As you become more process-oriented in billing for changes to scope of work, your business will appear more professional.
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