What is a Change Order in Construction Project Management?

Construction projects rarely go exactly as planned, and even the most detailed contracts cannot prevent changes from happening. Change orders help formalize these adjustments, but without proper management, they can cause financial strain and project setbacks.

A common issue with change orders in construction is the lack of a standardized process for approval and implementation. When project teams fail to track changes properly, errors in change order requests can lead to budget overruns, scheduling conflicts, and contractual disputes.

Research from the Philippine Constructors Association (PCA) reveals that construction delays caused by change orders account for nearly 30% of project overruns in large-scale developments. Their findings emphasize the need for better change order management to ensure timely project completion.

Understanding the impact of change orders is the first step to managing them effectively. In this article, we will discuss key challenges, best practices, and software solutions that can help construction professionals handle change orders efficiently.

What is a Change Order?

A change order in construction is a legal agreement that modifies an existing construction contract by altering its terms, conditions, or scope of work. These adjustments occur when unexpected situations, like design changes or unforeseen site circumstances, require alterations to the original project plan.

When the owner requests changes to the design or when site conditions change, change orders document these amendments by officially modifying the contract. These orders can either be additive, increasing costs or time, or deductive, reducing the materials, time, or expenses involved.

Not every design change is considered a change order, as only those modifications that affect the original scope of the project or require adjustments in time or cost are documented as change orders. A change order request ensures that both the contractor and client agree on the revised terms, helping avoid confusion and maintaining a clear understanding of the project’s progress and expectations.

The Importance of Change Orders

Before discussing the key reasons why change orders are crucial in construction project management, it’s essential to understand how they play a central role in ensuring smooth project execution with the help of project management software for construction.

In the following sections, we’ll explore the key reasons why change orders are essential for protecting both parties, maintaining control over budgets, and ensuring that timelines stay on track:

• Clarifies contract adjustments: A change order ensures that any modifications to the original construction contract are clearly documented and agreed upon by both parties. This helps maintain transparency and avoids disputes about the scope of work or costs later in the project.
• Protects both parties legally: In construction, a change order form serves as a legal document that protects both the client and the contractor. It ensures that both parties are aware of the changes and agree to any adjustments in cost, time, or scope, preventing misunderstandings.
• Ensures proper budget management: Change order management is essential for keeping the project budget in check. By officially recording additional costs or savings, change orders help manage financial resources effectively throughout the construction process.
• Facilitates project timeline adjustments: When unexpected issues arise, a construction change order adjusts the project schedule to reflect new requirements. This ensures that both the owner and contractor are aligned on timelines and expectations, preventing delays.
• Maintains scope control: A change order request formalizes any modifications to the original project scope. This helps keep the construction project on track by ensuring that all changes are correctly reviewed and incorporated into the project plan.
• Helps resolve disputes efficiently: In the case of disagreements, having a change order template provides a clear record of agreed-upon changes. This documentation can be used to resolve conflicts quickly and avoid costly delays or legal issues.

What Industries Should Implement Change Orders?

Any construction project that involves multiple changes or adjustments to the original scope of work should utilize a change order. This ensures that all parties are on the same page regarding the modifications, helping prevent misunderstandings or disputes later in the project.

Both contractors and clients need a change order form to document any amendments, such as adding or removing tasks, materials, or costs. This form helps keep a clear record of the agreed-upon changes, protecting both parties legally and financially throughout the project.

In situations where a change order request is made, it’s crucial to follow proper change order management practices to ensure the request is reviewed and approved by both parties. Properly managed change orders help maintain a smooth workflow, aligning expectations and ensuring the project stays on track and within budget.

Types of Change Orders

Before diving into the different types of change orders, it’s essential to understand their significance in construction project management. Change orders serve as formal agreements that modify the original contract terms, addressing new or altered requirements that arise during the project.

Let’s explore the common types of change orders and how they impact both the project cost and schedule:

1. Additive change order

The most common type is an additive change order, in which the client requests additional work beyond the original contract. This type increases the total cost and scope of the project, typically for new tasks or services that were not initially anticipated.

To avoid confusion, the expectations for the added work should be clearly outlined in the change order form to ensure both the contractor and client agree on the new scope. Proper documentation helps protect both parties and keeps the project on track.

2. Deductive change order

A deductive change order involves removing specific tasks or components from the project, which reduces the overall project cost. This typically occurs when the scope of work needs to be scaled back due to budget constraints or a change in client priorities.

While the contractor and client must negotiate the value based on the removed work, this type of change order can be complex depending on the contract’s structure. Clear agreements and proper change order management are essential to ensure both parties are satisfied with the adjusted terms.

3. Partial termination

Partial termination refers to the deletion of significant portions of the work outlined in the contract, often triggered by the client’s need to scale down the project. This type of change order is used when the scope needs to be reduced significantly, and it is governed by the terms specified in the construction contract.

However, too many reductions made via change orders could potentially void the contract, so it’s essential to manage these changes carefully. Using tools like the change order template can help contractors track and manage these terminations efficiently, ensuring that both the client and contractor are aligned.

Change Order Process

Change orders are inevitable in many projects due to unexpected issues or client-requested modifications. Properly managing these changes ensures that both the contractor and client are aligned.

Below, we’ll break down the key stages in the change order process, from the initial contract signing to the final amendments.

• Contract is signed: The process begins once both parties sign the construction contract, which outlines the budget, schedule, and scope of work. This contract serves as the foundation for the project, detailing all aspects of the work to be completed before any changes are made.
• Issues are raised: During the project, problems may arise that require changes to the original contract. These issues could stem from new regulations, changes requested by the owner, procurement challenges, or design errors that necessitate adjustments to the scope.
• The change is proposed: Once the issues are identified, the change is proposed, and subcontractors estimate how the modifications will impact the project’s timeline, scope, and budget. This proposal helps outline the expected adjustments and prepares the project team for any necessary alterations.
• The change is reviewed: The proposed changes are then reviewed by the project owner within a specified time frame. The owner may request additional information to make an informed decision about accepting or rejecting them.
• The change is agreed upon: Once the owner is satisfied with the proposal, the owner and contractor agree to the changes. At this stage, an amendment document is prepared to formalize the revised terms.
• Amending the original contract: The final step involves both parties signing the amended contract to reflect the agreed-upon changes. The contractor then communicates the updated scope of work and timelines to the workers, ensuring that all parties are aligned and the project continues smoothly.

6 Things Every Change Order Should Include

Before proceeding with the details of a change order, it’s essential to understand the critical components that should be included in the document. A well-detailed change order helps ensure that both the contractor and client are aligned and that any modifications to the project are correctly documented.

Below are the six key elements every change order should include to guarantee clarity and avoid complications:

• Project and contact information: A change order form must contain essential details such as the contract number, project name, and contact information for the owner, contractor, and architect. This ensures the change is correctly tied to the specific contract, particularly for large or government projects where tracking is crucial.
• Dates of the change: The form should include the date the change order is completed, along with any relevant dates, such as when the change was first noticed or submitted for approval. This ensures compliance with contract timelines and helps avoid issues such as payment delays due to missed notifications.
• Details of the work: This section details the nature of the changes, whether additional work or task removals. Providing specific explanations, such as attaching photos or drawings, ensures clarity and supports the case for approval, especially when the changes are due to factors like weather or regulatory changes.
• Updated schedule: The change order should include the revised project schedule, highlighting any delays caused by the change. If applicable, contractors may need to analyze how the change impacts the overall project timeline, especially concerning critical path activities.
• Cost of the change: It’s essential to clearly outline the costs involved with the change, including material, labor, overhead, taxes, and any additional charges. A detailed breakdown ensures transparency and proper budgeting, allowing both parties to understand the financial impact of the change.
• Updated contract value: The change order form must reflect the revised contract value, taking into account all previous changes and the current one. This ensures that both the contractor and client are aligned on the financial scope and that adjustments to the contract are accurately documented.

These components will help ensure the change order process is clear, efficient, and legally binding, reducing the chances of misunderstandings or disputes later in the project.

Who Creates Change Orders?

In construction project management, the contractor or subcontractor is primarily responsible for creating a change order. These parties prepare the change order form based on changes to the original scope of work that arise during the project.

Once the proposed changes are identified, various team members estimate the cost of the additional work before the details are passed on to the project manager. The project manager then reviews and approves the change order request, ensuring that the changes align with the client’s needs and that the project continues smoothly.

Collaboration is essential in the change order management process, as prime contractors and subcontractors must work together to communicate any modifications effectively. This coordination ensures that all phases of construction are updated accordingly and that any potential disruptions are minimized for a successful project outcome.

A Common Mistake in Change Orders

When dealing with change orders in construction projects, it’s important to be aware of the common mistakes that can occur throughout the process. These errors can lead to delays, cost overruns, and disputes between the parties involved.

The following points highlight the most frequent mistakes contractors and project managers should avoid to maintain smooth project execution and prevent complications down the line:

• Lack of clear documentation: It is a common mistake to fail to include clear and detailed information in the change order form. Without specifics on the scope of work, cost, and schedule, the change order can lead to confusion and disputes later on.
• Not following the change order process: Not adhering to the correct change order management process can lead to delays or rejected changes. It’s crucial to ensure that every change order is formally submitted, reviewed, and approved by all relevant parties.
• Not accounting for impact on schedule and budget: Another common mistake is omitting the updated schedule and budget adjustments in the change order construction document. It’s crucial to outline how the change will affect the project timeline and costs to avoid misunderstandings with the client.
• Failure to address variations early: Ignoring minor variations or failing to address them as early as possible can result in more significant problems later. Catching these issues early ensures that the change order request can be resolved smoothly without significant delays.
• Not updating the contract properly: After agreeing on a change, failing to amend the contract appropriately is a key mistake. Ensure the change order template includes the updated contract value, reflecting all changes to the scope of work, time, and cost.

By avoiding these common errors, you can ensure a smoother construction change order process, which will lead to better project outcomes and client satisfaction.

How HashMicro’s Construction Software Enhances Change Order Management for Your Business

HashMicro offers a comprehensive construction software solution designed to help businesses manage change orders more efficiently and accurately. One key feature is the automation of change order requests, ensuring that any alterations to the project scope are promptly recorded and processed with minimal errors.

Experience the power of HashMicro’s Construction Software through a free demo. Discover how automation simplifies the change order management process, enhances accuracy, and ensures timely approvals, reducing project delays and cost overruns.

Why choose HashMicro? Our construction software automates critical change order management tasks, such as tracking changes in project scope, adjusting budgets, and updating schedules, improving overall operational efficiency. Its seamless integration with other business modules provides a comprehensive solution for businesses aiming to optimize construction project management.

Below are some of the key features of HashMicro’s construction software for change order management:

• Variation Order on Subcontractor Contracts: This feature helps manage any changes in subcontractor agreements by updating contract details and tracking their impact. It ensures that changes are properly recorded and aligned with the overall project schedule and budget.
• Variation Order Customer Contract Management: This allows businesses to manage client-requested changes by updating the customer contract and adjusting the project’s scope. It ensures that all client changes are documented and reflected in the project’s financials and timelines.
• In-Depth Job Estimates (RAB), Contract, Cost Sheet (RAP), Progressive Claims (Risalah) Management: This feature provides a detailed breakdown of project costs, estimates, and claims. It ensures that all aspects of the project, including change orders, are thoroughly tracked and managed, maintaining accurate financial records.
• In-Depth Budgeting Type (Material, Asset, Petty Cash, Overhead, Subcontractor): By categorizing project costs into specific types, such as materials and overhead, businesses can better allocate resources for change orders. It also helps keep track of each cost type to prevent overspending and optimize resource management.
• Budget Carry Over: This feature allows unused budgets from previous periods to carry over to future periods, including during change orders. It ensures that any remaining budget is effectively utilized to accommodate additional costs from unforeseen changes.
• Reserved/Purchased/Used Budget Actualization: This tool updates the budget in real-time as reserved, purchased, or used items are recorded, including those resulting from change orders. It helps businesses maintain up-to-date financial information and ensures that funds are allocated appropriately.
• Integrated with Accounting to Track P&L and Balance Sheet Per Project: This integration links project financials directly to the accounting system, providing visibility into profits and losses. It ensures that change orders are accurately reflected in the project’s financial reports, facilitating better decision-making.
• Automated Project Invoice Based on Progress or Month: This feature generates invoices based on project progress or monthly milestones, including those impacted by change orders. It streamlines billing, ensuring timely and accurate invoicing for work completed, even when changes occur.
• Progressive Invoice and Bill for Project (Monthly/Progress Based): It allows businesses to generate invoices based on the ongoing progress of the project, adjusting for change orders. This ensures that payments are collected as the project advances, reflecting any additional work or costs from changes.
• Project Issue Management: This feature tracks issues arising from change orders, ensuring they are addressed promptly and efficiently. It helps prevent delays by managing conflicts or discrepancies, ensuring the project stays on track despite changes.

These capabilities improve project accuracy, reduce the risk of disputes, and streamline the change order process. With HashMicro’s construction software, businesses can enhance their construction operations, improve cost management, and drive long-term project success.

Conclusion

A change order is a critical component in construction project management, ensuring that any modifications to the original contract are documented and agreed upon. Managing change orders efficiently is essential to maintaining the project’s scope, timeline, and budget, and construction software can streamline this process by automating key tasks.

HashMicro’s Construction Software provides powerful tools to manage change orders seamlessly, helping businesses track modifications, update budgets, and ensure compliance. Its integrated features ensure smooth communication between all stakeholders and enhance decision-making for better project outcomes.

Ready to improve your project management efficiency? Sign up for a free demo of HashMicro’s construction software today and discover how it can optimize your change order management and drive success for your business.

FAQ About Change Order

• What is the difference between a PO and a change order?

  A purchase order (PO) serves as the payment method for a supplier. Any modifications to the PO, such as adjustments to the amount, added services, date extensions, or updated chartstrings, require a change order.

  This ensures that all changes are documented and aligned with the original agreement. Proper management of these changes is essential to maintain accuracy and clarity in the transaction.

• Who submits a change order?

  The contractor drafts a “change order proposal” providing a cost estimate for the additional work. After the owner and contractor agree on the scope, price, and timeline, a formal written change order is created and signed by both parties. Following this, the contractor begins the revised work as outlined in the order.

• What is a change order used for?

  A change order is a formal written modification to an existing contract, made after the effective date, that adjusts the work, contract value, or timeline. Although contracts are meant to be final, changes may be necessary as projects evolve.