Effective Strategies for Managing Change Orders in Construction
Mastering the Change Order Process in Construction
The Critical Role of Change Orders
Change orders are an inevitable aspect of construction projects, both big and small. As explained by Jerry Aliberti, the owner of Pro-Accel, a change order is essentially a formal adjustment to the original contract scope necessitated by unforeseen site conditions, client requests, or design alterations. These changes are not just paperwork but can have significant financial implications for contractors if not handled correctly.
Identification and Communication of a Change Order
The first step in effectively handling a change order is its prompt identification. This means recognizing when external factors or new demands alter the scope of the original project. Whether it’s an unforseen utility line during an excavation or a client's decision to switch materials, immediate recognition is crucial.
Following identification, communication becomes key. It’s essential for contractors to discuss the change with the project owner or representative to classify it formally as a change order. This must also be in writing!!! This early dialogue sets the stage for proper documentation and agreement on the variation before progressing.
To learn our Six Strategies for Improved Communication in Construction Projects watch this video: WATCH.
Documentation: The Backbone of the Change Order Process
Documenting every aspect of the change order cannot be overstated and happens in several ways:
1. Daily Logs: Keeping detailed daily logs of labor, materials, and equipment used in executing the change. These logs should be verified and signed daily by the owner or their representative to ensure transparency. I'm going to repeat again, the work must be documented and agreed to DAILY!
2. Advanced Estimates: For changes that will take place over weeks or months, generating thorough upfront estimates is critical. This is where professional estimators should step in to assess the situation and project future costs accurately.
Mishaps in this area often lead to the financial pitfalls that many contractors experience. Ensuring every day of work and every material used is accounted for in real time prevents discrepancies during billing.
Costing and Pricing of a Change Order
Once documentation is done, assigning cost is the subsequent phase. Contractors need to collect all data (previous step) including man-hours, material costs, equipment usage, and subcontractor fees. It’s imperative to refer to purchase orders and valid labor rates to ensure that all charges are current and justifiable.
You must also consider off site costs. Example: trucking, shop prep work, etc.
Pricing the change order correctly is also crucial. This includes an accurate addition of overheads and profits which often vary based on the project’s specifications, especially when dealing with public agencies that might have strict guidelines on allowable markups.
Submission and Finalization
With all the data compiled, the next move is submitting the finalized and detailed invoice for the change order. Timing plays a key role here; presenting the invoice should align with both organizational cash flow needs and the client’s billing cycle, enhancing the likelihood of timely payments.
Special Considerations for Successful Change Order Management
- Off-Site Costs: Jerry stressed the importance of including costs incurred off-site, such as prefabricated components or specialized trucking services. These are often overlooked but can significantly impact the overall cost of a change order.
- Photographic Evidence: In today’s digital age, taking photos to document progress and changes should be a routine practice. These images provide compelling evidence of the work done and are invaluable during disputes or clarifications.
- Schedule Updates: Continuous updates to the project’s schedule to reflect the impact of the change order are essential, particularly for high-profile projects where delays might incur penalties.
- Prompt Documentation Submissions Delaying the submission of change order documentation can lead to disputes and financial losses as project details may be forgotten over time. Immediate processing helps in maintaining clarity and facilitates smoother financial negotiations.
In the dynamic field of construction, managing change orders with precision is non-negotiable for the financial stability of contractors. As illustrated by Jerry Aliberti, through proactive identification, meticulous documentation, accurate costing, and timely submission, contractors can turn potentially problematic change orders into opportunities for demonstrating professionalism and reliability. Engaging with these processes thoroughly ensures profitability and promotes trust with clients, paving the way for future project successes.
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