Change Order in Construction: Adapt, Evolve, and Build Better

“Change is the only constant”, this popular quote stays highly relevant to construction projects. A “change order” is an industry term for a document that records alterations throughout the project, keeping contractors accountable to finish a revised scope of work and owners liable to pay for that work. 

According to a study of over 12,000 projects conducted by the Independent Project Analysis group, on average, over 35 percent of all construction projects experience a major change throughout their lifetime. 

In this blog, we will discuss the meaning of a construction change order, the reasons behind its issuance, and how it is requested and agreed upon. 

What is a Change Order in Construction?

A construction change order is a document that specifies an amendment to the original contract between the owner and contractor (or a contractor and a subcontractor) and other project stakeholders (architect, engineer, etc.). 

It outlines changes in the contractor’s scope of work, project design, materials, cost, schedule, and other specifications not included in the initial construction contract. A construction change order must be written and approved by both the party issuing the change and the one subject to change before it is implemented into the project. 

Construction change orders generally involve:

• Introducing additional work, known as additive change orders 
• Removing portions of scheduled work, known as deductive change orders, and 
• Substituting work to create the best possible result 

For example, if an owner decides to upgrade from standard cubicle partitions to glass partitions or when a contractor wants to substitute specified materials with alternatives due to availability issues, the contractor drafts a construction change order to formalize these adjustments. Depending on the size of the change, there may be alterations to the contract amount or terms. 

Change Order Clause in a Contract 

The construction contract has provisions on how to proceed and manage the change order, if not, it can cause liabilities and put payments at risk. A sample “changes in the work” clause may be written in the following language: 

“The Owner reserves the authority to modify the Scope of Work (additions and deductions of any kind) and material or product selections. No changes are permitted without a written change order signed by both the Contractor and the Owner’s Representative. Verbal change orders will not be compensated.”

Types of Construction Change Orders 

Contractors use various types of change orders to document alterations in project scope and their repercussions on overall cost. There are four different types of construction change orders: 

• Lump Sum

A fixed sum or lump sum change order is requested when the alteration in the work scope can be quantified with a firm price. Lump sum change orders can define adjustments in the cost including direct and indirect costs, markup, and contractor’s profit. This results in an overall increase in the project expenses or adds credit to the contract value.

• Zero Cost

This type of change order does not affect the contracted price. It is used to document scope-of-work changes that may not affect the contract value but impact project schedule. For example, the contractor suggests installing energy-efficient LED lighting instead of fluorescent fixtures (price remains the same) which can delay the project but help increase client satisfaction. 

• Time and Material (T&M)

A time and materials (T&M) change order occurs when the entire cost of the proposed change is unknown. Here, contractors track their time spent working on the alteration and costs associated with labor, materials, or equipment. The client can ask for a breakdown of these expenses to justify the construction change order costs. 

• Unitary Cost

A contractor negotiates this type of change order upfront before any change-related work starts. The contractor tracks an additional scope of work based on specific measurement units. Meaning, they are already familiar with these scopes of work. For example, painters will have a unitary cost change order for applying a type of paint finish selected by the client. 

A hybrid approach combining time and materials (T&M) with a lump sum change order entails initially handling modifications on a T&M basis and then negotiating a fixed sum based on finished work. 

Thus, identifying the type of construction change order allows parties to determine a process for making changes to the project’s scope. 

When Do Construction Projects Need Change Orders? 

Commercial construction is a dynamic business where change is the only constant. project. No amount of planning, design, budgeting, or scheduling can eliminate the risk of unexpected changes with cost impacts. 

There are various reasons for a general contractor or an owner to request change orders during a construction project. Some of the major causes include: 

• Difference in site conditions: Sometimes the job site conditions are different from those identified in the contract documents. For example, a slope that requires leveling, uncleared vegetation, etc. To accommodate these changes, changes to the original plans are necessary.
• Owner-requested changes: The owner or client may request design modifications to the original plans or specifications, such as incorporating or removing a fixture. They may also direct the contractor to make changes to the project’s budget or schedule. 
• Design errors or omissions: Construction change orders for design errors or omissions address defective or missing items or specifications mentioned in the original contract. 
• Material or equipment availability: If a construction material or equipment is unavailable due to supply chain issues or increased market prices, it may force the contractor to alter the originally planned resources. 
• Change in design standards: There may be an upgrade in design standards or an inspector may require additional work before approving building permits. 
• Delays in schedule: Due to unforeseen events like labor shortages, internal disputes, or extreme weather conditions, the project schedule may need significant modifications.
• Task sequencing: The owner may request the construction team to prepone or postpone a specific task, for example, finishing the interior of the meeting room before the reception area. Such an improvement in the planned schedule may require issuing a change order. 
• Inaccurate cost estimates: If the contractor has underestimated the cost of materials, for example, the cost of a standard plywood sheet of 8 feet hikes from $50 to $70, the budget may require changes to accommodate extra costs. 
• Misleading Contractor Bids: Often, construction contractors submit lowest possible bids to secure the contract. But addition of work items to the original scope during the project may result in expensive construction change orders. 
• Subcontractor issues: Problems with subcontractors or their unavailability can lead to unexpected issues, which need contractors to request change orders.
• Inadequate Funding: Large commercial construction projects often experience cash flow problems due to a lack of loan lenders, necessitating alterations to the scope. 

Regardless of the reasons behind issuing a change order, open dialogue between the owner and the construction company greatly helps to lessen negative impacts of the adjustments on the project. 

What Should You Specify in a Change Order Form? 

A change order form is a document used to officially request changes to a project’s scope, specifications, or other contractual elements. 

Change orders vary depending on the project, stakeholders involved, and changes requested by one or both parties. At a minimum, all construction change order forms should specify the following: 

• The name, location, and original contract number of the project
• The name, address, and contact information of the project’s owner, contractor, and architect 
• The licence number of the contractor submitting the change order 
• Change order number 
• Description of the requested change in comparison to the original contract or contractor bid 
• Justifying documentation such as construction drawings 
• The price of the requested change (breakdown of the costs as well as the total)
• Itemized subcontractor costs 
• A contractual statement specifying how the requested change impacts the project completion date, price, and payment terms 
• The signatures of the client, contractor or subcontractor, and all necessary representatives like architects or engineers 
• The date for initial change order request, the creation of the official document, when it was signed by all necessary representatives (and other relevant third parties), and when the initial request was received by the counterparty 
• The revised contract amount upon approval and project completion date 

Since a change order form represents an amendment to the original construction contract, all specific details and signatures in the document must be legally sound. 

The American Institute of Architects (AIA) provides the AIA G701 Change Order form, a standardized form that helps construction contractors ensure legal compliance. 

Examples of Change Order Scenarios During a Construction Project 

Following are some examples where a construction change order was requested during the ongoing project. 

Example 1 – A business owner decides to integrate green roof technology to reduce the commercial building’s insulation bills and showcase the company as eco-conscious. This change order was also initiated to increase their property’s resale value.  

Example 2 – The previously quoted cost for materials and labor fluctuated with the COVID-19 pandemic, leading to the general contractor increasing the cost by 20%. 

Example 3 – Crews at the Knoch School Board faced difficulties compacting the ground for the building pad and foundation due to excessive moisture. This issue prompted the Board to approve construction change order worth $82,000 for quick dry lime treatment. (Source) 

Example 4 – Post building inspection, the contractor decided to initiate a change order to alter the exterior facade design to meet updated zoning regulations. Besides ensuring full regulatory compliance, this move will also improve the aesthetics and market value of the property. 

Example 5 – Installing a backup generator for providing an emergency power supply to a life science research center added $40,000 to the project budget. This construction change order ensured uninterrupted facility operations for performing critical research. 

Example 6 – Ashland City Council approved a $1.25 million change order that will address issues such as replacing a water line under Claremont Avenue, foundational repairs, curb replacements, drainage work, sidewalk installation, and other important modifications. (Source)

Example 7 – Lengthy approval processes from local authorities for building permits and environmental clearances may result in delays in construction phases. Due to this, the contractor extended the project’s timeline from 12 months to 14 months, adding two extra months to the original construction contract. 

Samples of a Change Order Template 

Change Order Template in Word legaltemplates.net/

 

Change Order PDF Template Smartsheet PDF 

 

Time and Materials Change Order Excel Template Levelset 

Steps to a Smooth Change Order Process 

From initiation to approval, a typical construction change order process follows a step-by-step progression that looks like: 

Step 1 – Review the Contract and Project Specifications 

The first and foremost step you should take before proceeding with the change order process is to thoroughly examine your contract and project plan. 

Make sure the contract mentions a change order clause instructing procedures for issuing any alterations to the original scope of work. The construction contract must state how the change order costs (including materials, equipment, and overhead) will be calculated how it will impact the project schedule, and who will approve the proposed modification. 

Next, have a clear understanding of your construction plans and specifications. Identify any vague information or errors in the scope of the project that should be rectified. This will help avoid expensive, surprise construction change orders later. If needed, clarify your doubts from clients, architects, engineers, or subcontractors regarding the work details. 

Step 2 – Discuss the Change with Stakeholders 

Contractual agreements require modifications due to various reasons including owner-initiated changes, material supply issues, design errors, unsuitable site conditions, and others. 

Whether the owner or contractor requests the change, all stakeholders involved in the project must discuss the adjustments before they are documented in the change order form. Transparently reach an agreement on how the alteration will affect the budget and schedule. This step in the construction change order process will ensure all stakeholders are on the same page. 

Step 3 – Create a Change Order Request 

Now it’s time to make the change official. Once there’s an agreement on the scope, schedule, and budget, the contractor drafts a formal “change order request” to be signed by all parties. The general contractor submits this request typically using a special change order form template, mentioning:

• Business information
• Detailed description of the proposed change
• Construction drawings
• Impact on timelines
• Price quotation for extra work
• Revised payment terms and other vital elements 

Ensure your construction change order request clearly outlines price and timeline revisions, and if there are no alterations in either of these, mention that as well. Submit the prepared change order request to all project stakeholders for review. 

Step 4 – Negotiate an Agreement on Change Order Proposal 

It is possible that some stakeholders may have disagreements over adjustments like extension of schedule or design updates requested by the initiating party. This is the stage when all parties engage in negotiations to reach mutually acceptable terms for a smooth change order process. 

Negotiate the price and schedule of change orders using unit prices, lump sums, cost-plus, or time-and-material (T&M) techniques. Consider the value and quality of the work, market conditions, and your relationship with the other party. 

Assess the technical, operational, and legal feasibility of construction change orders, identifying any potential issues for the future. Aim to make a unanimous decision that satisfies both parties’ interests. 

Step 5 – Get the Change Order Signed 

The recipient finally reviews the change order proposal. A Request for Information (RFI) can be issued to ask for additional information. Once everyone agrees on the proposed change including the owner, all parties sign the formal construction change order document to amend the original contract. 

Many contractors, fearing delays and subsequent increased costs, start the revised work without waiting for the owner’s approval. This move can backfire if the owner decides to alter or reject the change order request. 

After the official sign-off, the general contractor and subcontractors notify all construction workers of the approved changes. 

Step 6 – Record in Your Change Order Log 

Though the last step of the construction change order process, documentation is an integral part that general contractors should not neglect. They should register all approved change orders in a change order log for invoices/payments, dispute management, or audits. Tax laws depending on your location may require you to keep these records for a few years to more than a decade. 

When all communication between the owner, contractor, subcontractors, and other participants is documented throughout the construction change order process, it helps to avoid unnecessary disputes. You can find free change order log templates online for effective document management.  

Using Change Order Software for Streamlining Workflows 

While the manual process is standardized, submitting and approving change order requests on paper, via email, or by phone can be time-consuming. Instead, construction change order software and automation streamline change order form creation, management, and approval processes. 

Construction companies can establish tailored construction workflows, for example, an owner or contractor issues a request for improvements, fill out the form, and sign off the document. The recipient immediately gets notified about the pending request awaiting their signatures. Once signed off, the document is safely stored in the platform for future reference. 

Here are ten construction management software with change order management features:  

• Contractor Foreman
• QuickBooks 
• Desktop Enterprise
• Autodesk Construction Cloud
• Smartsheet
• Procore
• CoConstruct
• Wrike 
• InEight 
• Fieldwire 

Resolving Change Order Disputes: Legal Provisions 

When a dispute over a construction change order arises, most of the time both parties sort out their differences to reach an agreement. However, if reconciliation is not possible, then each party has alternate options for pursuing legal action. 

Construction Change Directive (CCD)

A construction change directive (CCD) is a legal provision favoring the client. Let’s say, the client desires to use “Calacatta marble” instead of hardwood for the flooring of their building’s lobby, renowned for its luxurious appearance with light grey veins, tiny amber, and golden hues. However, the contractor rejected the change order not only due to the limited local availability of Calacatta marble but also delays and costs of importing the material. 

If the client is adamant about their demand, they can force the general contractor to accept the change order by issuing a legally binding mechanism known as a “construction change directive” or CCD. That means the building contractor will have to import marble flooring without any choice. 

The difference between a change order and a construction change directive is that the former is a request or an agreement approved by involved parties to make some amendments, while the latter is a direction given by the owner which the contractor must abide by. 

According to the American Bar Association, the value of a construction change directive from the owner’s perspective is that it reduces delays and allows the work to proceed even if the parties can’t agree about the scope changes.

Cardinal Change Directive 

From the contractor’s perspective, the last-minute shift from hardwood to marble, which took the form of a construction change directive, is a loss-making deal. 

Partly because importing the Calacatta marble would incur additional expenses, deducting the contractor’s profit margin, and partly because it will lead to project delays, increasing overhead costs for the contractor. Moreover, the project’s budget and deadline haven’t been modified in the construction contract.

If a contractor feels there has been a drastic change order or series of change orders that fall outside the general scope of the original agreement, they may claim it as a breach of contract from the owner’s side and seek to terminate it through “cardinal change doctrine.” 

In this case, the owner and a contractor signed an agreement for installing hardwood flooring but the owner later switched to imported marble flooring. Hence, the cardinal change doctrine may relieve the contractor from the work despite the valid construction change directive. 

To Summarize 

In commercial building projects, changes arise because of owner requests, lack of regulatory compliance, design errors, supply chain disruptions, and so on. A construction change order is a legal document that represents amendments to a construction project’s scope, timeline, budget, or other key aspects. 

This formal document must be in writing and approved by all involved parties prior to implementation. If handled correctly, change orders are an excellent way to make necessary adjustments in the original construction contract, helping the owner get desired outcome. 

Constructive Solutions, Inc. is a leading commercial general contractor with decades of experience in San Francisco, San Jose, and San Mateo commercial construction projects. We believe in maintaining transparency, managing expectations, and facilitating efficient project execution through written construction change orders. 

Get in touch with our team today to discuss your next project. 

FAQs 

Who’s responsible for managing construction change orders?

As a project manager is usually on-site and in contact with the general contractor, they are responsible for coordinating and managing the construction change order process. 

What is an acceptable construction change order percentage? 

This is the formula for calculating markup on a construction change order: 

Overhead % / Direct Cost % = Markup % 

Many construction contracts provide a 10% or 15% markup percentage for change orders, to fund overhead, indirect costs and profit. 

Is a Request for Information (RFI) a change order? 

No, RFI is not considered a construction change order. However, sending an RFI or Request for Information asking for clarity on specific aspects of the scope or contract can reveal new information, ending up in the issuance of a change order. 

Relevant Resources:

• A Guide to Construction Risk Management: How to Mitigate Different Types of Risks
• 10 Green Flags To Look For in a Reliable Commercial Contractor