What is Construction Change Order Management

Construction projects are complex undertakings that often require adjustments as work progresses.

Whether due to unforeseen site conditions, evolving project requirements, or design modifications, changes to the original construction plan are almost inevitable.

According to Digital Builder, 35% of projects experience at least one major change throughout the life of the project.

In the construction industry, these adjustments are formalized through documents known as change orders.

A change order is a critical tool that outlines and authorizes modifications to the initial construction contract, ensuring that all parties involved — owners, contractors, and subcontractors — are aligned on the scope of work, cost, and timeline of the changes.

Understanding the components, process, and impact of change orders is essential for anyone involved in construction project management.

And if you’re looking for a place to begin delving into the various aspects of proper change order management, we’re here to help.

Key Takeaways for Construction Change Orders:

Change orders are formal documents that modify construction contracts, impacting scope, cost, and project schedule, and often include a description of changes, cost adjustments, schedule impacts, signatures, and supporting documentation.
Common reasons for change orders include unforeseen conditions, project owner requests, scope creep, and contractual omissions.
Change orders are typically initiated and processed during the construction execution phase and can provide legal protection, financial control, schedule management, risk mitigation, and transparency.
Effective change order management involves timely processing, detailed documentation, clear communication, collaboration, and dispute prevention.
Estimating software can streamline change order management through accurate cost estimation, efficient documentation, improved communication, enhanced project visibility, and reduced errors.

What Are Construction Change Orders?

A change order is the industry term for a formal document that modifies the original construction contract.

It acts essentially as an agreement between the owner and contractor to alter the scope of work, cost, or timeline of the project. For the change order to be valid, the owner and contractor must agree on all terms.

What Are the Components of a Change Order?

A change order typically includes several key components:

A clear and detailed description of the modifications being made to the original project scope.
An outline of the financial implications of the changes, specifying adjustments to the contract price.
An in-depth explanation of the impact on the project timeline, indicating any necessary changes to the original schedule.
Formal signatures of both the owner and contractor to signify their mutual agreement to the modifications.
Supporting documentation, such as sketches, photographs, or supplemental plans, to clarify the proposed changes further.

Why Do Change Orders Occur?

Change orders are a common occurrence in construction projects and can arise from a variety of factors.

For example, unforeseen jobsite or field conditions, such as encountering soil instability or hidden utilities during excavation, often require modifications to the original project plan.

One of the most common causes for change orders is scope creep, where the project’s scope expands beyond the initial construction contract and can lead to owners requesting changes to the project’s design or material selections.

How Do Construction Change Orders Work?

Change orders can be initiated at any point during a project, from design to closeout. However, they primarily occur during the construction project execution phase.

The process of submitting and processing a construction change order can be complex and involves several steps.

Step #1: Initiation

Either the owner or contractor can initiate a change order. However, the party requesting the change must provide detailed documentation outlining the proposed changes, including:

Complete description of the changes
Impact on the project scope
Estimated cost adjustments
Potential schedule impacts

Step #2: Evaluation and Negotiation

Once a change order is initiated, a thorough evaluation process begins. The party receiving the change request assesses its potential impact on the project, considering factors such as cost, schedule, and scope.

The owner and contractor negotiate to determine the terms of the change order, including adjustments to the contract price and project timeline.

To support these negotiations, the contractor typically provides a detailed breakdown of the costs associated with the proposed changes.

When evaluating costs, the original construction estimate will serve as a foundation for evaluating the financial impact of proposed changes.

The cost of change can add up if owners want to make constant project changes. Commonly, contractors will include a change order markup in the construction contract up front.

On average, this markup percentage is about 10-15% for overhead and profit, as stated by Digital Builder.

Step #3: Formalization

After negotiations are complete, a formal change order document is drafted.

This document outlines the agreed-upon changes to the project scope, including detailed descriptions, material cost adjustments, and revised project timelines.

Step #4: Implementation

Once the change order is finalized and signed, it is communicated to all relevant construction project stakeholders.

This ensures that everyone involved is aware of the modifications, their implications, and the revised project plan. With the change order in place, the contractor receives authorization to proceed with the specified changes.

Upon completion of the modified work, the owner fulfills their financial obligation by paying the contractor the adjusted contract price as detailed in the change order.

Key Points to Remember About Construction Change Orders

Effective change order management is essential for minimizing negative consequences and ensuring the project remains on track.

Processing change orders promptly is essential to minimize project delays. Accurate and comprehensive documentation is vital for supporting cost and schedule adjustments, providing a clear record of the changes made.

Effective change order management relies on clear communication amongst team members, collaboration among project stakeholders and strict adherence to contract terms.

While change orders are a common occurrence in construction, disagreements can arise. Implementing a well-defined change order process is essential to ensure a smooth project progression.

Tracking all change orders in a central location also helps to ensure all teams members are working off the correct plans. This ensures the project status is accurate while automatically updating budgets once change orders are accepted.

Why Are Change Orders Important in the Construction Industry?

Change orders are essential for the successful management and completion of construction projects. They aren’t just used to alter a project but can also be used as a way to offer helpful suggestions to keep the project on track.

1. Legal Protection

Change orders serve as a formal record of the agreed-upon modifications to a construction project, helping to prevent disputes and misunderstandings between the construction owner and contractor.

By clearly outlining the financial and schedule implications of the changes, change orders provide a transparent reference point for all parties involved.

2. Financial Control

Change orders accurately reflect the increased or decreased costs associated with project modifications.

By tracking additional expenses related to the changes, change orders contribute to effective budget control and help maintain financial oversight throughout the entire project.

3. Schedule Management

Change orders play a crucial role in project scheduling. They allow for adjustments to the project timeline to accommodate new work or delays.

From a project management perspective, change orders assist in maintaining the project’s schedule and budget by formally documenting and managing alterations to the original plan.

4. Risk Mitigation

Change orders serve as a proactive tool for managing project risks. By formally identifying and addressing potential issues early in the project lifecycle, they help mitigate unforeseen challenges.

Furthermore, change orders provide an organized structure for monitoring adjustments to the project’s original scope, budget, and schedule.

5. Transparency

Change orders enhance project communication and collaboration. By ensuring all project stakeholders are informed about changes and their potential impacts, change orders promote transparency.

This open communication fosters trust and a collaborative environment between the project owner and contractor, leading to a more successful project outcome.

How Do Change Orders Impact Construction Projects?

While change orders can introduce challenges to an ongoing construction project, they also present opportunities for improvement and adaptation.

By allowing for flexibility and addressing unforeseen circumstances, change orders can contribute to a higher-quality final product.

Effective change order management, including clear procedures, thorough impact assessments, and open communication, is essential to maximizing the benefits and minimizing potential drawbacks.

Change Orders Impact on the Estimating Process

Change orders, while not formally part of initial estimating, are deeply intertwined with the process. The original estimate serves as a foundational benchmark for assessing the financial implications of proposed changes.

When a change order is issued, the estimating process is essentially replicated on a smaller scale to determine the adjusted costs. This underscores the critical role of estimating in managing and evaluating change orders.

Construction estimating software is an invaluable tool in this process. It can efficiently calculate the impact of changes on overall project budgets and schedules.

By providing accurate cost estimates, identifying potential cost savings, and analyzing the financial viability of proposed alterations, estimating and takeoff software empowers project stakeholders to make informed decisions.

How Can Construction Estimating and Takeoff Software Streamline Change Order Management?

By leveraging construction estimating and takeoff software, construction professionals can streamline the change order process, improve accuracy, reduce costs and enhance overall project management.

1. Accurate and Rapid Cost Estimation:

Quick takeoff: Software allows for rapid re-measurement of affected areas to accurately determine additional materials and labor required.
Material and labor cost databases: Built-in cost databases provide up-to-date pricing information for accurate cost estimates.
What-if scenarios: Explore different adjustment options and their financial implications.

2. Efficient Change Order Documentation:

Digital change order forms: Pre-built templates for change orders can be easily filled out and electronically signed.
Automatic calculations: The software can automatically calculate cost and time impacts based on the change order details.
Version control: Track changes to the change order and maintain a clear audit trail of project documents.

3. Improved Communication and Collaboration:

Centralized platform: All project stakeholders can access the same information and collaborate on change orders.
Real-time updates: Changes to the change order are reflected immediately across the platform.
Digital signatures: Securely capture approvals from all parties involved.

4. Enhanced Project Visibility:

Impact analysis: Assess the overall impact of the change order on the project budget and schedule.
Reporting capabilities: Generate reports on change order history, costs, and delays.
Integration with project management software: Connect change order data with other project information for a comprehensive view.

5. Reduced Errors and Disputes:

Data accuracy: Minimize errors in calculations and measurements.
Clear documentation: Detailed records of the change order process reduce disputes.
Version control: Track changes and prevent misunderstandings. Create change orders as separate line items to reflect modified costs in real time.

See How McCormick Can Streamline Change Order Management

The careful implementation and management of change orders contribute significantly to the successful completion of construction projects.

Construction change orders are vital tools for managing and adapting to the dynamic nature of construction projects. By formalizing modifications to the project scope, budget, and timeline, change orders provide a structured approach to handling unforeseen challenges and project owner requests.

Change orders also offer essential legal protection, financial control, and risk mitigation, all while promoting transparency and collaboration among project stakeholders.

While change orders can introduce complexities, such as additional costs and potential delays, effective change order management, supported by modern estimating and takeoff software, ensures that these challenges are addressed efficiently.

There’s no one-size-fits-all way to manage change orders. But using McCormick takeoff and estimating software can significantly streamline your processes.

McCormick’s change order management allows you to build change orders directly in the software, know the status of all your jobs at a glance with change order tracking, customize change orders to fit your construction company’s needs, and so much more.

If you’re in the mechanical, electrical, or plumbing trade, consider using McCormick to manage your change orders on projects.

Chat with a specialist today to learn more!