Change Order 101

change-order

Change Order 101

 

Have you seen the classic image of the contractor’s giant yacht called “Change Order” and the tiny dinghy called “Original Contract?” (In case you haven’t, we included it below). This is most people’s perception of Change Orders, that they are a vehicle for contractors to make extra money. But in reality, they are a tool to track costs and formally make decisions on a construction project. In a perfect world, a project would have ZERO changes and thus ZERO Change Orders, but this never happens. Because Change Orders are a part of every project, it’s important to know exactly what they are, why they exist, and what they mean for different parties, in terms we can all understand.

 

What are Change Orders?

 

A “Change Order” is a document used in the commercial construction industry to formally adjust a contract value between contractor and customer. A Change Order Request (COR) is a document the contractor sends to the customer formally requesting the contract value be adjusted by a certain amount. The COR includes a description of the work and either a lump sum or cost breakdown of the added labor, material, and equipment used to perform the added work. In response to a Change Order Request, the customer will issue a Change Order, formally updating the contract value. In commercial construction, billing is typically done on a percent complete basis, so a Change Order must be formally issued before a contractor can bill for the change. Once approved, the contractor can bill for the entire amount or the portion that has been completed.

 

Why do Change Orders exist?

 

As mentioned before, the only thing consistent in a construction project is change. Managing that change is a challenge for all parties. Every stipulated sum contract in construction is based on a specific scope of work outlined by a set of drawings, specs, and/or specific contract language. When the owner changes his mind, regardless of the change, it will result in a change to the contract scope of work. To formally document and communicate the change in scope and cost, a contractor would send a Change Order Request to be reviewed by the customer.

 

There are hundreds of ways a scope of work can change that result in a Change Order Request. Sticking with the owner-directed change, let’s walk through a real world example.

 

Let’s say the owner wants to add a restroom to an office remodel project.

  1. The architect comes up with a design for an added restroom and gives it to the owner.
  2. The owner then asks the General Contractor for a price to add the restroom.
  3. The General Contractor sends the architect’s updated drawings out to the plumber, electrician, ceramic tile installer, HVAC, drywall, toilet partitions and accessories, painter, and any other subcontractor affected by the change in scope. Each of these subcontractors has a certain period of time to respond with a COR noting their cost impact to add the restroom.
  4. The General Contractor packages these Subcontractor CORs up into an owner COR and sends it all to the owner for review and approval.
  5. Once the owner approves the COR, they issue a Prime Contract Change Order to the General Contractor who then issues Subcontract Change Orders to each of the Subcontractors.

 

Easy!

The Challenge With Change Orders

The above example sounds simple enough, right? This process happens dozens or hundreds of times on commercial projects of all sizes. Here are some of the basic challenges:

 

  • When Subcontractors email these CORs to their General Contractor, it introduces the risk of the email getting bounced, lost in the shuffle, or hard to find weeks or months later.
  • To ensure the GC has everything needed, the GC will request a log from each Subcontractor. Each Subcontractor uses a different format, which must be manually updated by the Subcontractor after every new Change Order. Because it’s a manual process, these Change Orders are prone to errors, which can result in huge financial consequences if not caught.
  • The GC has to manually download each COR document from every sub from email and manually enter the costs into their accounting/ERP system, which is a huge administrative burden.
  • If the Subcontractor COR contains issues, the correspondence is hard to track via email and even harder over the phone.
  • It is easy for the GC to fall behind in reviewing these documents which can result in real financial consequences for all parties involved.

What Do Change Orders Mean For All Stakeholders?

For Subcontractors

 

For Subcontractors, Change Order Requests fall into two basic categories:

 

  • Estimated Change Order Requests
  • Time and Material basis

 

Both have their challenges, but T&M is significantly more risky.. For both types of CORs, the additional costs cannot be billed until the COR is officially approved and the General Contractor issues a Change Order to update the contract value. Then, depending on when the work was performed, they can actually bill for the work.

 

Estimated CORs are typically requested by the owner or General Contractor, reviewed and approved before the work begins. (Not always, of course, but most of the time). Often, these are verbal or email approvals and the COR will sit without being formally approved for months, thus not allowing the Subcontractor to bill for the work.

 

Time & Material CORs follow the industry standard practice of tracking the labor, material, and equipment spent on a Time & Material Tag (T&M Tag) document. Then the T&M Tag travels back to the office where it is scanned and attached to a formal Change Order Request. This COR goes under review for weeks or months before it is decided whether or not it will be approved. All the while, the Subcontractor has spent real money performing the work months earlier and thus temporarily financing this part of the project on their own. If Subcontractors are not organized tracking these two types of documents, they can not only wash out their profits on a project, but can potentially lose money or go out of business.

 

For General Contractors

 

For General Contractors, Change Order Requests only represent risk. Depending on the project’s size and scope, a GC’s fee may fall somewhere between 2-8% (Or less! Remember 2009?). If a subcontractor sends a $10,000 COR to their GC, the GC’s upside is a meer $200-$800. The downside of missing that COR is a $10,000 surprise that leads to an argument with the owner or Subcontractor. General Contractors stay up at night worrying they have missed or not accounted for a COR from a Subcontractor. This is why they constantly request COR logs from each of their Subcontractors.

 

For Owners

 

The ability to make decisions with all the information is paramount for owners on construction projects. If an owner has no real-time insight to project costs as they occur, this will limit their ability to make decisions on a project. Projects slow down when owners cannot make decisions. But often the reason for slow decisions are that cost impacts on changes or issues are not clear or not presented in a timely manner. These delays in presenting costs are all results of the downstream inefficient process prevalent in the industry. If an owner requests a cost impact, it should take no more than two weeks to get them the cost, but often it takes significantly longer because the GC is busy tracking down individual sub CORs that are scattered throughout their email and spreadsheets.

 

What Extracker can do for you

 

Extracker was born out of first-hand industry experience with the frustrations of getting Change Order Requests and T&M Tags done in a professional, efficient, timely manner.

 

You know the headache of keeping all the information together and keeping it organized. With Extracker, your T&M Tags are neat, easy to read, and can be shared instantly, complete with photos, for everyone involved in the project.

 

You know the delays caused by miscommunication between the General Contractor and the Subs. Papers and emails get filed away without being logged and the project goes on hold while both parties are waiting for the other to get back with them. Extracker removes these delays by logging estimated and final Change Order Requests in a shareable cloud-based log that keeps the General Contractor up to date in real time. Our streamlined system helps you review and assemble all these documents in a way that’s simple to share with the owner. All this can happen within minutes of work occurring in the field, saving you both time and money, not to mention alleviating the hassle of doing all this manually.

 

Best of all, a basic account of Extracker is completely free. What do you have to lose? Download it now and say goodbye to the frustrations of Change Order Request Forms forever.

 

Schedule a Demo to learn more!