Change orders are a necessary part of construction.
It’s a touchy subject when after starting a construction project, things come up that require you to charge additional costs.
Many contractors are afraid to charge for Change Orders for fear that it’ll affect their business relationship. Or worse, they work on an hourly basis and never get paid for their work.
Change Orders can be challenging to get approved and keep a solid relationship.
We’re a construction estimating and consulting company, and we’ve developed a very specific strategy to get change orders approved.
I’m going to show you how to bill change orders professionally, get them approved, and be an asset to your client where they continue to want to use you for projects.
Using these strategies, we’ve seen clients make an additional 10-20% more on their contract through change orders.
What is a Change Order?
A change order is a formal mini-contract that modifies your original contract. Change orders can be additions or deductions to the amount in your contract.
When you have a contract, you have a scope of work of what is included in your list of responsibilities.
Every project has changes, and those come in the form of owner changes, inspector requirements, and conflicts in the drawings, and several others.
Because these changes are outside of your contract, you should be charging something for the work.
The challenge with change orders is that many contractors and subcontractors believe that charging for certain things, or charging too much is going to make your client not want to use you again in the future.
Prevent Change Orders (and establish yourself as a valuable asset)
If you are a very good contractor, you will do your due diligence to identify any issues before even starting the job to prevent change orders. Most change orders result in pre-existing issues on the jobsite, or coordination issues that can be prevented by a detailed scope and plan review, subcontractor meeting, or Owner/Architect meeting.
If you really want to prove your worth to a General Contractor (or Owner if you are the GC), identify issues before they happen. Save the GC (or Owner) a few headaches and budget surprises, and I can guarantee they’ll come back to you in the future.
Common issues I see frequently are:
- Mechanical duct work interferes with ceiling heights
- Structural dimensions don’t match architectural dimensions
- ADA dimensions are not according to code yet pass the plan review
- Overhead Access Panels are not according to Mechanical code (some codes require ability to completely remove overhead components)
- The scope of work misses parts of the projects (this occurs frequently due to rushing to meet deadlines)
But you can’t control if the owner redesigns walls, or if an inspector comes and adds additional requirements that weren’t caught in the plan review, or what about when another trade damages your work and you have to redo some work?
Or… What if a sprinkler pipe burst and damages drywall?
Because of the challenges we’ve seen in our experience, we developed this strategy where you can identify the type of change order so you can approach it a little bit differently.
How to Strategically Issue a Change Order
The standard operating procedure for change orders is typically where you prepare a document with a small scope of work of the additional work to be performed, a total amount, and supporting back up information to prove why you are charging this amount.
It’s kind of like a mini-estimate for the work to be performed. And once it’s signed, it becomes a mini-contract that modifies the original contract.
This is an example of what a change order looks like.
And the backup for it:
You might want to add an additional backup to prove your case. Your backup is your evidence of what the work is that needs to be performed is, and why it’s costing what you’re charging.
You should include photos, purchase orders, invoices, emails, RFIs, addendums, revisions, sketches, snippets of the plan, highlighted picture of the plan, and any other proof you might need to prove your case.
It’s a good idea to use Project Management Software to keep track of Change Orders, Requests for Information (RFIs), Addendums and Revisions, and Sketches. You can use Procore or Corecon to manage this.
I also recommend Dropbox to manage all of your documentation. You can integrate these folders with your team.
I recommend you bill Change Orders aggressively. There are a few good reasons for this.
Reasons to Bill Aggressively for Change Orders
Change orders are often negotiated – By submitting an aggressive price, when you need to discount your client, you’re still profiting on the change order.
Change Orders are often challenged – They can be challenged because they believe the work is part of your contract. By billing aggressively for your other Change Orders, when one comes up that you can’t win, you mitigate your losses by charging more than usual on others.
There is no competition – When bidding, you try to be the low bidder because you have competitors. Once you’re on the job, it’s unlikely a contractor is going to hire another company to perform a change order.
Change orders always involve risk of non-payment – Even though there are legal methods to secure payment, you hardly want to go in the direction of suing or liening unless absolutely necessary. There are change orders that initially get approved, and later the owner is out of money, or the GC realizes he never got it approved and it slipped the cracks. It’s common for GCs to come back later and ask for discounts, or flat out refuse to pay something. Or even “conveniently” forget what it’s for.
Makes up for “Favors” – General Contractors are notorious for asking for free work in the form of favors. In full disclosure – when I was a superintendent, I used to ask for small things all the time. GCs take it as an insult when you need to repatch a small hole and charge them $100 for that work. But what happens when they ask for 20 small favors? They can add up to thousands of dollars. If you can’t bill for them directly, you can make up those costs indirectly through other aggressively billed change orders.
Make T&M (Time and Materials) against your company policy
We recommend making Time and Materials against your company policy. It’s really not a good and safe way to bill for your work.
Instead, we recommend ALWAYS using formal change orders.
What happens on the job is due to the rush on the job sites, General Contractors will want Subcontractors to proceed with the work on an hourly basic and they would pay for reasonable labor and materials with a small markup.
The problem with this is it leaves you open to your client later trying to negotiate your price down. They like to say “I couldn’t get this one approved so we’re not going to be able to cover this”. Or they might say “I’m going to need to bring these costs down if we want the owner to approve it”.
And since you don’t have an approved Change Order, you don’t have any legally binding documentation to get paid for.
Instead, if your client insists on T&M, offer a “Not-to-Exceed” Change Order.
This is like a hybrid T&M and Formal Change order. First, the GC approves your change order based on a guaranteed maximum price. You can use field tickets to keep track of the hours so essentially they are pre-approving your change order.
Bill According to the Reason for the Change
Changes are made for various reasons. Some are because the owner and architect want a change while under construction, and others are outside of the owners or GCs control.
Here are the reasons for changes, and how to handle them.
Owner Directed Changes
Often times once the job is underway and owners start seeing walls being put up, they frequently get inspired to make changes because they can actually visualize the space.
These changes are optional. Because of this, you can charge a premium for these. The logic here is there is no competition since you are already on the job site.
I’m a fan of charging change orders aggressively and letting the Owner or GC try to negotiate your price down.
Architect Directed Changes
Architects also make changes when noticing inconsistencies in their design or last-minute inspirations they might have. This is also true with interior designers.
We treat these similar to Owner changes. We price premium for these as well. Sometimes the architect issues an addendum or sketch to clarify or improve something on the job. If it’s an optional change, we price premium. If it’s a necessary change, we price a little lower.
Conflicts in the Drawings
No drawing is ever perfect. The architecture industry has developed quite sophisticated software to help spot conflicts before they become issues, but there are always issues in the drawings.
Whenever that happens, you try to keep the pricing reasonable to you don’t appear to be price gouging.
Inspector Requires Additional Items
Inspectors are notorious for coming onto the job site and adding additional requirements and making changes based on their building code.
Sometimes things get missed in the plan review, or during renovations of existing buildings, there are hidden surprises behind walls that inspectors notice.
For these, try to be reasonable. This is an unforeseen change.
Damages by other Subcontractors
Damages by other subcontractors on the construction site are very common. They often results in a back charge for the cost of repairing the damage to work.
These always result in a back-charge. If you have good relations with that Subcontractor, you try to work it out with them directly, or you charge low or at cost. This is just to cover your costs.
I once had a mechanical contractor rip off all my acoustical ceilings because he was having trouble installing his mechanical work. They ripped off all our work, so we charged this double the cost.
Emergencies on the Job
And sometimes, things just happen. A plumbing pipe can break, there can be a leak in the roof and damage drywall, or there could be a fire.
These things have to be remediated and repaired before turning the space over to the owner.
These you charge reasonably. You even try to be a team player and do these at cost. It’s not the owner’s fault.
Sometimes the General Liability Insurance covers these sorts of issues. If this is the case, you can charge premium rates.
Lastly, GCs and Owners ask for favors.
If you charge for every single small amount, you’ll look like you’re nickel and diming.
What you do here is you keep track of the work in a change order set as a draft in your software. Once it hits a threshold, you let your client know you start charging.
Negotiating your Change Orders
You’re going to run into many scenarios where your change orders don’t get approved. If you bill according to the reason for the change we recommend above, you’ll likely have less challenges getting change orders approved. These are battle-tested strategies where we observe the underlying reason for the changes.
Essentially, when it’s out of anyone’s control, you try to be a team-player and charge less for your work. When they are optional changes, you can bill for premium rates and you’ll often be asked to negotiate your prices. This ensures you cover your costs, and make a decent profit for your time and effort.
There will be times that you can’t get something approved, so you can use the leverage of the schedule to “push” your GC to approve quickly. You can let them know that they need a signed approval before proceeding. This is a major reason we don’t encourage T&M work or performing the work before you have a signed approval. Once the work is complete, there is a good chance they’ll come back and say “the owner only approved 50% of your costs so that’s all we can pay you”. Its happens all the time.
Luckily with a signed Change Order, it legally modifies the contract and it gives you the ability to lien for non-payment.
Now you know how to properly and effectively bill for change orders.
It doesn’t have to be challenging or an issue to get these approved. Change orders can win you between 10-20% on additional contract value. I’ve shown you how to strategically issue change orders, amount to bill for, and how to negotiate their approval. I also showed you how to include in your AIA billing.
Implement these strategies and you’ll be more profitable on your job.