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How to Keep Change Orders From Derailing Your Construction Project

If you’ve ever hired a contractor before, whether for your house or where you work, then you already know that change orders are one of, if not the most, critical and difficult issues that you will face. They can cause expensive schedule delays, push your costs over your project budget, and create a rift between the owner, architect, and contractor that can damage the decision making process for the rest of the project. The bad news is you can’t fully eliminate the prospect for change orders, but with a little extra time and money spent at the beginning of the project, you can reduce their possibility and limit their impact when they do happen.

 

Limiting Change Orders

Choose the Right Project Organization

The first thing you can do is chose a project organization that is less prone to change orders. Generally, the organization most likely to produce change orders is the design/bid/build structure. To present a competitive bid, the contractor many times will find ‘holes’ in the plans and specifications that they can exclude with the intent to making money back with high margin change orders. The project organization the least prone to change orders is design/build because the same entity does the design as the construction. There are few excuses for leaving things out or using cheaper materials than intended, because the discussion should’ve been had with the owner during the design phase and included in the project proposal. Of course, if you need to choose an organization prone to change orders for other reasons, make sure you have an adequate contingency in place.

Know What’s Hidden Beneath the Surface

Spend extra money up front for geotechnical exploration, especially if the site has history.  This is one area where the extra time and money investment can be a huge insurance policy.  If you have a greenfield site with no prior use, you can probably get away with a couple borings and standard Geotechnical Evaluation. However, more borings create a better picture what’s beneath the surface, and allows your contractor to more accurately project the costs for soil improvements. If your site has been used for industrial purposes in the past, get a Ground Penetrating Radar and/or and environmental study done of the property before purchasing it. If you don’t, that site you got a great deal on could have hundreds of rotted oil barrels that were buried back in the 50s leaking into the soil. Now in addition to paying for the studies that should’ve been done in the first place, there will be a big change order for environmental remediation, which could by itself be enough to kill the project, and you’ll need to pay the contractor extra costs for mobilization and per diem.

Understand the Scope of Work

The devil is always in the details.  If you’ve chosen the design/build construction method, you should expect a lengthy proposal from your contractor, and in it will be a long list of what is included and a (hopefully) shorter list of what isn’t.  You need to take the time to not only read the proposal from top to bottom, but also understand what all of the items mean and how much the items could potentially cost. If they don’t have an exclusions list, work with them to identify what you may be missing. Also sit down with your contractor and have them explain to you in detail anything that might be vague or written in contractor-speak.

If you are going to hold multiple contracts with different contractors, consider holding a meeting with all parties to iron out where one scope ends and the other begins.  Assumptions about where one contractor’s work begins and another’s ends are prime opportunities for adding unaccounted for costs to a project. Taking the extra time to identify and understand where the scope begins and ends can catch many change orders and avoid divisive arguments down the road.

Get References

If you haven’t ever worked with the contractor you intend to use, ask them for a list of the five most recent projects of similar scope. Give the references a call and ask about their experience working with the contractor.  If there is a pattern of numerous expensive change orders, you are likely to have the same experience, and the same is true of the opposite.

Limiting the Impact of Change Orders

Contractor’s Contingency

To help mitigate the effects of change orders, never begin a construction project without budgeting a contingency. A contingency should be above and beyond the anticipated project budget, and should be at least 5% of the project cost to handle any unforeseen items. This allows the owner’s point person to approve small changes without needing to go back to the authorities for approval, or get additional financing from the bank.  This won’t eliminate change orders, but it can prevent them from derailing a project that is already underway.

Pre-Negotiate Margins

One last thing you can do as an owner to mitigate the effect of the change order is to pre-specify the margins that the contractor will receive on change orders.  This will remove at least one point of contention at the beginning of the project when change orders aren’t an issue, instead of tackling it during an already heated discussion.

You probably aren’t going to get away from change orders entirely, but by taking these steps you can decrease the probability that they’ll occur and at the same time reduce their impact on your project when they do.

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