Change Order Management

Matthew Stevens
July 7, 2008 — 1,202 views  
Changed conditions or changing project demands lead to schedule and financial impacts. Both cost the same thing: money. To an owner, general contractor, subcontractor, supplier or service provider, there is a cost to change. Either increasing or decreasing, both have to be formally managed and documented. Without a process, chaos will consume all project stakeholders.

Changes are an inevitable part of the construction process. However, we might try, the industry has lessened them but will never eliminate them.

In managing change orders, let it first be said that a contractor's right is whenever possible, changes are not performed until they are approved by either the architect or owner. This is a tall order and a sometimes unrealistic one. His project manager must thoroughly understand the owner’s contract provisions with regard to change orders and claims. If a change of conditions occurs in the field and a change to the scope of work is required, the project manager must notify all appropriate parties within the provisions of the client's contract. (See "Timely Notice Requirement" in your contract) In general, a contractor should not proceed with the work unless they have received written authorization. Only by establishing and following a policy of refusing to make a change without the proper authorized paperwork, will you reduce the risk of having a claim situation later in the project.

Change Orders should be based upon the costs submitted by the involved subcontractors and/or vendors, such as:

1) Direct costs incurred by your company
2) General conditions costs
3) Insurance
4) Taxes
5) Cost of bond premium
6) Office overhead
7) Profit

The project manager must be familiar with the owner contract to know the allowable amounts for overhead, profit, and similar items. Make sure you review the subcontractor’s change order request for fairness. Do not simply pass along the Change Order without confirming the costs.

Your change order log should show the status of all change orders on a project including the history of their issuance, review and approval. They should be coded differently and their costs should be kept separate from the baseline budget figures for the project.

GUIDELINES

Nobody likes to have change orders on their project. Owners and design professionals will resist approving them. Be prepared and do your homework up front before sending them.

• Document the impact of the change on the project schedule (duration, impact on substantial completion, change in critical path) when you submit the Change Order

• Reflect this in the schedule updates

• If the owner refuses to acknowledge a certain effect of the Change Order, reserve in writing your right to continue to assert your position

• Bill the owner for all Change Order’s incurred during the month in which that Change Order was approved

Copyright Stevens Construction Institute, Inc. 2005

Matt Stevens is a management consultant who works only with construction contractors. He can be reached at [email protected] His firm, Stevens Construction Institute assists contractors in working smarter, is located at stevensci.com

Matthew Stevens

Stevens Construction Institute Inc