Managing Change Order Costs in Construction Projects: How Owners can Stay on Top

Ramani Sundaram
A change can occur at any stage of a construction project. Although there can be many reasons, changes in construction projects are primarily due to three causes: design errors and omissions, change in field conditions or owner initiated changes.

A change may be initiated from any source: a contractor’s Request for Information (RFI), owner’s meeting notes or an architect’s finding of an error or omission in the issued documents.

First and foremost, the owner should ensure that contract clauses define how the change orders will be processed.

First and foremost, the owner should ensure that contract clauses define how the change orders will be processed.

It follows that adequate documentation and record keeping is fundamental to the entire change order process. Change orders should include original contract documents, revised plans and specifications, correspondence, meeting minutes, daily reports, etc. The change order administration involves creating, issuing or receiving various type of documents by the parties involved – the owner, the contractor and the architect. Timeliness is vital to avoid delay.

The following three types of change orders are common in most construction projects:

  • A fixed sum change order
  • Time and Materials (T&M) change order
  • A third type in which the contractor proceeds with the work initially as T&M, then negotiates a unit price later based on data developed during the T&M stage.

The owner should be able to establish the cost of potential change orders or validate the contractor’s price through front end estimating or review the contractor’s proposal by engaging an outside cost consultant or through in-house estimators.

Establishing the cost of change orders is essential to the owner for:

  • Cost budgeting and forecasting the final cost of the project
  • Managing contingency funds
  • Planning a negotiation strategy with the contractor.

 Change order pricing – points to ponder:

  • Not all changes have an impact on the cost. Some of the drawing changes may be for dimensional clarifications or just added notes for more information.
  • Some change orders result from underbidding or misunderstanding the bid requirements by the contractor. On one large project on which Faithful+Gould provided services, the contractor submitted a change proposal for $2 million, claiming additional quantity of re-bar. The contractor had not followed bid documents and drawings for re-bar detailing and had estimated a lower quantity of re-bar in his original bid. At a later stage, delivery tickets indicated that the overall quantity had exceeded the quantity in the bid. The owner had a suspicion that the contractor would have under bid the job and so arranged for an independent estimate to be prepared. It was found that the original bid was under by $500,000. The owner had to terminate the contractor after settling on a partial amount.
  • For repetitive items of work, learning curve theory may be applied and the productivity adjusted accordingly.
  • Material quotes and invoices should be checked for quantities applicable only to the change order being processed. For some items, the contractor may include change order items with the base scope quantities in his purchase order in order to get volume discount, reducing delivery cost, etc. While checking the contractor’s purchase orders, the estimator should check that the material cost included in the contractor’s proposal shows only the pro- rated quantity and cost specific to the change order.
  • The owners should make sure that their contractors submit the change proposal in a timely and complete manner. The owner must also realize that timely review of change order proposals is important to the project and especially to the contractors who must complete the work. It would be difficult for the contractors if they have unpaid expenses for an unreasonable period of time. Timely submission, review and approval of the change orders are very essential. The owner may even consider an interest penalty if the processing is unreasonably delayed.
  • If required, the owner should arrange for training of their estimators for change order estimating.
  • Change orders should be approved and executed with a negotiation record that fully reconciles the negotiated price with an independent estimate or owner’s estimate. This record should describe the basis of the negotiated price and how the price was reviewed, negotiated and accepted.

Digital technology and Building Information Modeling – BIM

Digital technology can speed up and streamline the change order process. It is worthwhile for owners to invest in a digital takeoff and estimating software that supports drawing comparison (overlay). Investing in Building Information Modeling (BIM) technology is even more beneficial to owners. Though BIM technology is still emerging, the value addition brought to the owner through BIM may be much more than just management of change orders.

BIM is already changing the way buildings are designed and constructed and the technology is rapidly maturing. It is being implemented in many major projects and already owners have started realizing immense benefits.

BIM is already changing the way buildings are designed and constructed and the technology is rapidly maturing. It is being implemented in many major projects and already owners have started realizing immense benefits.

The changes that occur in each project are unique, but by establishing standard procedures for documentation and pricing and taking advantage of digital technology or using BIM, owners will be able to efficiently manage the change order process. Effective communication and collaboration between all the project participants is necessary for successful management of the process. The spirit of cooperation between all the entities is also essential. If owners can stay on top in managing change orders, most litigation and contractual disputes can be avoided or minimized.