Change orders can become a problem in a hurry – especially on large, complex projects. Documenting every change and staying organized can feel like a full-time job, itself. Having an efficient, streamlined process for handling change orders can save time, money, and help reduce the likelihood of disputes.
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What is a Change Order?
A change order is an agreement between two parties on a construction project to change or amend the contract terms. They provide the means to add or remove work from the original scope of work or to tweak how a task will be performed. Usually, change orders will include a description of the requested change, supporting documents, an overview of the proposed change’s costs and the potential impact on the construction schedule.
Importance of Getting Changes in Writing
So, what happens if the customer wants more work than you had initially agreed to? What if the customer wants to change some significant project details? Anyone who’s dealt with needy customers knows that they aren’t always willing to cough up the extra dough for changes.
The Customer’s Perspective: They’ve paid for the work and want it done to their liking. The customer may not realize that even small changes result in more labor, materials, and costs. The tendency may be just to informally ask the contractor to make the change. Such as, “Hey, while you’re doing that, can you also do this?”
The Contractor’s Perspective. Every contractor and subcontractor knows one thing for certain – changes cost money. What may seem like a minor, easily solvable issue to the customer might actually be a complicated, expensive issue to solve at the job site.
The simplest solution is to get all change orders in writing. At the end of the day, contractors aren’t paid for the work they performed, but for the work they documented.
Change Order Management Tips
A proper change order procedure can help alleviate a lot of these issues. Change orders create a record of any additional services requested by the customer, along with the relevant cost increases. It’s always best practice to get everything in writing, and in some jurisdictions, it may be legally required! Also, if there is any confusion concerning the work or pricing, a properly executed written change order becomes part of the contract.
Let’s take a look at some best practices to streamline the change order procedure.
Performing some pre-construction due diligence can go a long way in streamlining the change order process. Think about it: one major source of change orders are any design or specification errors or omissions. Therefore, reviewing all the plans and specs beforehand can reduce the need and amount of change orders required to complete the project successfully. Also, identify any tasks or areas of uncertainty and any risks associated with these areas. This will allow contractors to anticipate any required changes later down the road.
Change Order Templates
Paperwork is a serious problem in the construction industry. Every project comes with different contractors, subs and, suppliers. All of whom use their own versions of forms and terms. It stands to reason that having a standardized template can save both time and money during the evaluation process and speed up approvals. Some project managers opt to use two different forms – a tracking form to account for time and materials costs, and a proposal form to submit requests.
Detailed Information & Photos
The requests should be quick and easy to evaluate, but still, contain enough detail to explain the situation adequately. A change order request should lay out the proposed costs and any impacts the change will have on the schedule. Of course, the best way to accomplish this is to provide supporting evidence. This evidence can be updated specifications, marked-up plans, daily reports, or (ideally) photos. Photos are a quick and easy way to show where and why changes need to be implemented. The more details and evidence included in the request, the more likely it will be approved.
According to Marc Hendrikson, CPA, CCIFP, a Denver-based commercial banker who specializes in lending to the construction industry, unapproved change orders are one of the top 3 causes of contractor financial losses. Due to this fact, it’s crucial that every approval is done in writing. Prudent contractors and subs should direct their crew not to do anything until the change order is approved in writing. This includes ordering materials or even scheduling the work.
This tip relates to the construction industry as a whole. Open channels of communication promote transparency and keep everyone on the same page. Thus, once a change order is approved, contractors should reach out to their subs and suppliers to discuss adjustments that need to be made to sequencing and scheduling and the allocation of materials. Changes can cause a ripple effect over the entire project. Everyone will need to adjust accordingly.
Change Orders and Mechanics Lien Rights
If a change order has been validly made and performed, it will become a part of the original contract and it will qualify for mechanics lien rights. If its agreed upon verbally but is then immediately documented for both party’s records it might still constitute a valid change order as well. However, why take this chance? Insist on a written change order and explain to your customer that verbal change orders are not allowed. Bottom line? Get the change orders done correctly and your lien rights should remain intact. What’s more, the change order could even “extend” or revive lien rights, in some cases. More on that here: Change Order Format Can Make or Break Mechanics Lien Claims.
On the other hand, while an approved change order likely always qualifies for lien rights, an unauthorized one may not qualify. If extra work is requested informally, it will likely not constitute an actual change order. Meaning those amounts might not qualify for lien rights. When they’re supposed to be made according to a specific process as demonstrated by the contract, the non-paying party could dispute any work done pursuant to a change order as unauthorized work.
It’s easy to see why it’s very important to make sure you are following the methods laid out in the original contract. So next time a GC or homeowner says “Can you do this extra work?” make sure you get it in writing before completing that work.