Change Orders: Different Types, How They Work, and What to Include
Changes to contractual agreements can become necessary at any time during the life of a construction project. Between the signing of the original contract and the completion of work, dozens of changes may be requested regarding the project’s schedule, scope of work and budget. Change orders are the official documents used to make changes happen.
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What Is a Change Order?
A change order is an essential document that is brought into play during the course of the construction process. It is used to propose and get approval for any change that deviates from the original contract.
What to Include in a Change Order
A change order typically includes the common elements listed below. These will help the project owner or architect approve a proposed change. (The original contract may specific a particular change order form to be used, and may instruct how that form should be submitted. Common forms include the AIA G701 Change Order and ConsensusDocs 795.)
- Project and contact information, including:
- Contract number
- Project name and address
- Change order number (each project’s change orders should be numbered in a sequence)
- Owner’s name and contact information
- Prime contractor’s name and contact information
- Name and contact information of contractor submitting the change order
- Description of the requested change compared to the original contract
This is where the proposed work change – and the reasons for that change – should be described in as much detail as possible.
3. Updated schedule
The document should include the new schedule that results from the change. The new schedule should state the number of days needed to complete the change, and the date when the change will be finished.
4. Cost of the change
The document needs to include the resulting cost of the proposed work modification. This includes positive and negative charges, overhead, tax, insurance, profits and any other costs associated with the change.
5. Updated contract value
The document should include:
- The original contract value
- The value of all past approved change orders (if any)
- The cost of the current change order
- The new proposed contract value (including all of the change orders, positive or negative)
Types of Change Orders
Contractors use various types of change orders to collaborate with project owners. Here are the four most common types:
A lump sum change order is used when the change in the work scope can be quantified with a firm price, resulting in an overall increase in the expense of the project. It can occur when the project owner or a hired contractor finds conditions that warrant a change in work scope.
This type of change order does not change the contracted price, but is used to document scope- of-work changes that do not affect the contract value.
Time and Material (T&M)
A T&M change order occurs when the entire cost of the proposed change cannot be estimated. In this case, contractors are to track their time spent working on the change, as well as any costs associated with needed materials or equipment.
A contractor usually will negotiate this type of change upfront, before any change-related work begins. It is based on additional scope of work that can be defined by specific measurement units. The contractor must track completed work based on those specified units.
How Does the Change Order Process Work?
Prior to execution, the typical change order process looks something like this:
Step 1: The contract is signed. This document outlines the project’s scope, schedule and budget that have been agreed upon.
Step 2: An issue is raised. Often, contractual agreements need to be changed due to reasons such as:
- Material procurement issues
- Regulatory changes
- Owner-initiated changes
- Design errors, omissions or alterations
- Less-than-ideal site conditions
Step 3: A change is proposed. Someone proposes a solution to fix or manage the issue that was raised, and relevant parties review the proposal. At this point, subcontractors may also be asked to estimate the change’s impact on the project budget and timeline.
Step 4: The proposed change is reviewed. The owner evaluates the change and may ask for additional information for clarification in the form of an RFI. (Ideally, the original contract will specify how much time the project owner has to accept or reject a proposed change, or request additional documentation.)
Step 5: The change is agreed upon. All appropriate parties agree on the proposed change. Then the party requesting the change prepares the document to amend the original contract.
Step 6: The original contract is amended. All appropriate parties sign the document to amend the contract. Then the contractor and subcontractors are responsible for notifying all workers of the finalized changes.
Be aware that the change order process does not necessarily go this smoothly every time. Whenever a contractor requests a change (Step 3 above), the project owner, general contractor or architect can decide to approve the change, counter the change, deny the change, or make a decision to hire someone else.
The Best Way to Handle Change Orders
When you’re hit with a change, multiple factors affect how you should approach the situation. You can adopt different strategies based on how the change arose, and who on the project is responsible for paying for it. Learn about some common reasons for change orders, and to read strategic advice on how to approach specific scenarios.
Interested in Learning About Other Important Construction Documents?
Then make sure to check out these additional blog posts from Billd:
- Notice of Commencement: What It Is and How to File It
- The Contractor’s Guide to Construction Punch Lists
- Construction RFI Fundamentals