In the construction world, the process of building from blueprint to a finished structure is rarely a straight line; change orders are inevitable due to the complex nature of construction, different variables, and the fact of facing unexpected issues. Change orders can cause a significant financial crisis if you don’t know how to handle them; understanding and managing them is crucial to ensure the project's stability and success.
In this text, we will provide strategies to help you minimize change orders in your projects and how to deal with them if you have no other option to prevent cost overruns, maximize project profits, and reduce the risk of jeopardizing your project.
What is a Change Order? Understanding the Core Concept
A change order is a formal and written amendment to modify the scope, timeline, and project cost. These changes can occur at any phase of the project, ranging from unexpected site conditions to regulatory requirements. A change order serves as a legal document that is agreed upon by all parties to the project, acknowledging and authorizing changes from the original and primary agreement. Changes in orders typically arise in these cases:
- Changes made by the Owner: The project owner requests changes to the original design, materials, or scope, such as upgrading finishes or selecting new materials for drywall.
- Change made by the contractor: usually happens when the contractor identifies a more effective method or finds out that the cost of a specific material is rising unexpectedly; changes made by the contractor require the owner’s approval
- Unexpected site issue: problems that happen during the construction that were not anticipated, like soil conditions. These changes are often referred to as "differing site conditions," which require some amount of money to address.
- Design errors: any flaws or missing information in the architectural or engineering plan that must be corrected immediately.
- Regulatory changes: Sometimes new building codes are regulated, or new permits are required for a construction project.
Understanding different types of change orders will help us recognize them as more than a verbal agreement or a simple request; they are a process that requires documentation, justification, and mutual agreement to change any terms of the original contract. Without this understanding, many legal disputes, delays, and financial crises can occur.
Strategies to Prevent Cost Overruns
The most effective way to prevent a constructive change order and, consequently, a cost overrun is to adopt certain strategies during the pre-construction phase. Below are some of these strategies that can help you minimize budget increases as a result of change orders:
- Detailed specifications: A detailed scope in the contract will reduce any room for ambiguity. Detailed architectural design, precise material specifications, and an accurate estimate of the number of workers needed for the project can minimize change orders during construction.
- Pre-construction assessments: Before anything is finalized, conducting a thorough environmental and geotechnical evaluation can help you identify problems like poor soil conditions or environmental hazards that can cause any surprises during the project and lead to costly unforeseen conditions
- Use a Construction Cost Calculator: use online tools to calculate construction cost of house to estimate the cost of your project accurately and find out how much you should spend on every aspect of the project based on projects’ needs and specific characteristics, read the following article to learn how to conduct an accurate estimation, using the cost calculator: The Ultimate Guide to Construction Cost Estimation and Calculations: From Renovation to New Builds.
- Clear and Consistent Communication: Conduct a formal communication system and ensure that any decisions and discussions are documented. Constantly communicate with all parties about the project’s status, potential issues, and the next steps in the project; this will help all parties to identify any potential changes in advance.
- Include a Contingency Budget: always include a contingency fund, which is typically 10-15% of the whole project budget, to cover any unexpected financial issues that might happen during the construction. An important note here is that you should not spend this fund on the ocean; you should meticulously manage this fund and spend it wisely for the approved change order.s
Budget Defense Strategies When Facing Project Changes
Even the most strict proactive measures can face unexpected and inevitable change orders. To minimize the financial impact of changes, consider the following strategies:
- Establish a Formal Change Order Process: as soon as the potential change is identified, both sides of the contractor must issue a written notice to other side and document everything related to the chagem like photos, sketchesm detailed neasurement, extra matrals used and extra labor hours, as well as the impact of the change on the agreed upon timeline.
- Detailed impact analysis: demand a breakdown of costs associated with the changes that can both directly and indirectly add to the project’s cost, such as equipment or insurance.
- Negotiate Early: discuss potential changes with contractors and suppliers in the pre-construction phase to secure better pricing. Sometimes, suppliers can agree to provide materials at a fixed price during the project's duration. Additionally, it is wise to consider alternative approaches or materials that are less expensive but can achieve the same goal with a reduced scheduling impact.
- Review Costs in Real-Time: You can get help from construction project management firms or similar software and online tools to track change orders and make sure they align with your primary budget.
- Limit Scope Creep: another way to stick to the budget is to avoid unnecessary changes and do your best to stick to the original plan; unless the change is crucial and inevitable; of course this can only applied to minor changes like avoid adding decorative elements that migh add up to the final cost without any funcioanl valure
From Surprise to Control: Managing Change Orders for Project Financial Stability
Effectively managing change orders is all about establishing a robust system that allows you to turn unpredictable aspects of construction into a predictable and controllable process; this system will ensure financial stability.
- Implement a standardized template: use a customized template to document any data for a change order request, like:
- Data of request
- Reason for change
- Estimated cost impact
- Estimated schedule impact
- Date of approval
- Approved cost and schedule
- Any document for reference
- Regular budget and schedule reconciliation: regularly assess and update your project budget and schedule to evaluate the impact of changes on your project. Compare your actual spending and progress against your primary budget and schedule. Make sure that you can successfully manage the change.
- Regular Communication: If possible, hold weekly meetings with all parties involved in the contract to review the project's progress, potential changes, and their impact on the budget and schedule.
- Use Technology: There are numerous tools, such as construction project tracking and cost estimators, that can help examine the process and minimize errors as much as possible.
The Art of Negotiation and Change Management: Key to Financial Success
While the technological tools and systematic documentation are crucial in managing any change offer, it is the human element, especially the art of negotiation, that determines the financial outcome of the project. To master negotiation, you need to consider some key factors:
- Constant Communication: The importance of clear, respectful, and proactive communication is evident to everyone. Most disputes arise from miscommunication or a lack of timely information.
- Document Everything, Always: Verbal agreements have no use in legal matters and risk management. You should document every change, discussion, decision, and approval in a written and signed document.
- Get help from professional expertise: although online tools and software can help you manage the changes to a great extent, in complex and large building projects, or when a significant change arises, you should not try to manage it solely; get help from professionals in the field.
- Project management consultants
- Construction legal counsel
- Cost estimators
- Learn dispute resolution methods: if negotiation fails, use the resolution pathways outlined in your contract, such as mediation, arbitration, or litigation. If possible, use Alternative Dispute Resolution (ADR) methods to resolve disputes, which are often faster and less expensive than court battles.
By adopting these strategies, you can equip yourself with the knowledge to manage any change orders that may occur during a construction project and react to them properly to minimize financial loss.
