Contract Change Order: Everything You Need to Know
A contract change order is a document written by a project manager to change an aspect of an existing contract such as requirements, amount, or time.3 min read
2. Common Reasons for Change Orders
3. Issues Caused by Change Orders
Updated November 18, 2020:
A contract change order is a document written by a project manager to change an aspect of an existing contract such as requirements, amount, or time. This can also include changes to drawings and specifications. These changes must be within the contract scope and adhere to the contract's changes clause.
Also called a modification order, this document is commonly used in the construction industry because of the frequency of modifications, additions, deletions, and other changes based on local ordinances and requirements. The change order allows any authorized person to make these changes without consent of the contractor. As with other contract amendments, change orders must satisfy the original contract's offer, acceptance, consideration exchange, and reasonable identification of changes.
Elements of a Change Order
Before submitting a change order, the contractor may need to provide a formal notice of an anticipated change. This allows the owner to reduce the impact of the change to the project cost and schedule. The change request usually includes:
- A thorough description of the change
- Itemized subcontractor costs if applicable
- Total cost summary of the proposed change
- Reason for the change
- Projected impact on project completion date
Cost should always be associated with a change order even if the change will not cost the contractor money. This is especially important when contracting with an owner who makes frequent changes. The original contract can set out a fee for change orders or limit the number of change orders that can be submitted before extra charges are incurred. Contractors may also want to note in the contract that they are not responsible for project delays caused by change orders. Change orders are only used in construction with lump-sum contracts, not with cost-plus or time and materials contracts unless a provision is included in the original contract.
Change orders can be created either in an Excel spreadsheet or by using project management software. The change order must be signed by the property owner, the main contractor, and a third party such as the bond or lending company funding the project.
Common Reasons for Change Orders
Change orders are commonly required when:
- Design changes are made after the project has started.
- Plan modifications or deletions are made.
- Extra work is required above the stated scope.
- New instructions are provided by the owner, an architect, or the site superintendent.
- Drawings need more detail.
- Parts do not fit as expected.
- Materials or workers are delayed.
- Job site conditions are not as expected.
In many cases, making a minor change early in the project can prevent the need for a larger, more expensive change down the line. To avoid the need for change orders, make sure that specs, materials, drawings, installation requirements, and a detailed plan are included in the original contract. Change orders must honor building codes, which supersede construction industry practices.
Issues Caused by Change Orders
Change orders are often a source of dispute since they are modifying the terms of an already complicated project. The most prominent issues caused by change orders include the need for new permits and impact to the budget and/or timeline. The most serious issues occur when a dispute results from the change, often over additional payment. Contractors who fear they will not get paid for the extra work caused by a change may slow down or stop work altogether, while property owners may feel that the contractors should have factored the need for changes into their original project bid.
Owners may be prudent to offer potential contractors a pre-site inspection so they can better understand the scope of the project before bidding. The more accuracy and detail provided in the initial contract, the less likely that a change order will be needed. Requiring change orders in writing allows owners to approve changes that affect the scope of work. Providing a time limit for change orders after the need for the change was submitted is also beneficial.
The original contract should deter work slow-downs and stoppages with a liquidated damage clause that creates a penalty for breach of contract caused by a work stoppage. This is not an estimate of damage but a fine to prevent the breach from happening.
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