Getting Change Orders under Control

Custom residential design is a complex creative process involving the homeowner, designer, and builder. It takes time and it's unreasonable to expect every decision to be made before construction begins. Change orders provide a way to fine-tune the big decisions. For the clients, a change order may be the last chance to get what they really want. For the contractor, change orders mean increased revenues without a lot of trouble. After all, the crew is already on site working. All you have to do is write the changes up and manage them properly. In my company, which has separate sales, management, and production teams, change order management has involved establishing good procedures, then assuring that everyone understands and follows these procedures. Other companies may be smaller and less complex, but the same basic procedures are just as necessary.

Defining Change Orders

What is a change order? Is it any deviation from written specs and drawings or is it only additional work? Regardless of what a company's policy is, there has to be a definition that the whole team understands and agrees on. At my company, change orders include all deviations from the original scope of work, plus all clarifications of job specs. Apart from assuring that clients pay for extra work, this comprehensive definition protects the company from the conflicts that often arise from undocumented verbal agreements. With so many decisions being made during a job and so many chances for decisions to conflict with one another in unanticipated ways, documentation is the only way to manage this information and avoid being wrongly blamed. Clearly defining what constitutes a change order is essential to setting up a system that prevents you from doing unpaid work. One way to better understand how change orders affect a contracting business is to track them as a percentage of sales. Historically, they have represented 10% of the total sales volume in my company. That percentage breaks down into the categories in the chart in Figure 1.

Figure 1. Change orders may stem from a variety of causes. Additional requests, deletions, and clarifications present no problems for clients; hidden conditions and design errors are a tougher sell. From top to bottom, the list goes from the easy-to-handle change orders to the hard-to-handle ones. Clarifications, additional requests, and deletions are all decisions that the client makes voluntarily. They are easy to agree on. Hidden problems, such as unknown code violations or unknown constraints, can be more difficult. Clients often resent local building codes forcing them to perform extra work or subcontractors insisting on higher than expected costs due to some unforeseeable problem. Forewarning clients about these potential situations lessens their shock when one actually happens. The final category, designer or architect errors and omissions, is the most difficult category to handle. Good will between a contractor and a customer can evaporate quickly. Clients may feel betrayed and think that expensive extra work should have been foreseen by the builder before work began. Often, in order to preserve customer relations, companies have to absorb the cost of problems that should have been foreseen. Fortunately, a solid change order procedure helps to eliminate these project planning problems in the future. The key is to use past change orders to learn from mistakes and improve future work.

The Original Contract

The original contract for a job must clearly set out the scope and cost of agreed upon work. It also has to clearly define what change orders are and the procedure for how they are processed. In addition to a change order clause in our standard job contract (Figure 2), our project specifications include clear language stating that work beyond the defined specifications will only be performed after receiving a signed change order.

We have read these Contract Specifications and completely understand the contents.  Any changes or additions will be handled  through a Change Order.

Figure 2. This simple clause makes the change order process a part of the original contract. For example, specifications for a kitchen remodeling job would include a clause stating: We will make every attempt not to damage the drywall of an adjoining room. However, if nail pops occur, we will write a change order for drywall repair and paint. To ensure that clients understand the change order process, we also give them a one-page handout that describes change orders. We read through this with the clients and have them sign it before work begins (see ). While it may be easy for a client to miss the change order clause in the original comprehensive contract, they can't fail to at least look over this explanatory page — after all, they have to sign it. Later, as a job develops, we introduce clients to the process by writing up clarification change orders for items such as paint colors or new locations for light switches. These do not affect the budget but become part of the written history of the job. Clarification change orders get the client used to the process and quell the fear that change orders always mean more money.

Writing the Change Orders

Changes need to be identified and described, then processed into a formal change order signed by all parties before the scope of work is changed. This ensures that clients and subcontractors agree with you concerning any cost adjustments and schedule delays caused by change order work, both of which should be spelled out in the paperwork you use (Figure 3). Figure 3. The completed change order specifies the type of change, the scope and cost of the new work, and the additional time added to the schedule. Include in all change orders a clause stating that any additional work must be done at the same time as the original scope of work for the price to be valid. At my company, our charges to clients for change orders include administration time, material cost, work crew time and subcontractor cost, and a full profit margin. To ensure that clients will meet their end of the bargain, we require a 50% deposit before change order work begins and the balance when it is complete. On deletion change orders, only the actual labor and material costs are deducted from the original contract price. Markup and profit are not deducted because the company has already spent time planning for the work and must recover these overhead costs.