Change orders are the primary mechanism through which construction budgets erode on projects that were otherwise reasonably well-structured at the outset. On projects without disciplined change order management, the pattern is consistent: the initial contract is competitive, the budget appears adequate, and then the change orders come, one reasonable-looking request at a time, each approved with limited scrutiny, until the project reaches substantial completion with a change order total that has consumed most of the contingency and pushed the total project cost well above the original budget.
Active, rigorous change order management does not prevent every change order. It prevents the change orders that are not legitimate, reduces the cost of those that are, and keeps the owner informed of their cumulative budget exposure throughout the project.
What Makes a Change Order Legitimate
A legitimate change order satisfies three criteria. First, the scope claimed in the change order is outside the original construction contract. Second, the pricing for the additional scope is reasonable and supportable by current market rates. Third, the schedule impact, if the change order includes a time extension request, reflects the actual effect of the additional work on the project schedule.
Change orders that fail any of these criteria should be challenged before they are approved. The challenges do not need to be confrontational, a professional request for documentation supporting the scope claim, a comparison of the pricing to market benchmarks, and a detailed review of the claimed schedule impact are the normal tools of change order management.
Scope legitimacy. The most common source of scope disputes is ambiguity in the original construction documents. When the drawings show a condition without specifying how it should be detailed, or when the specifications describe a performance requirement without specifying the means to achieve it, the GC will often interpret the ambiguity in their favor when submitting a change order. An owner’s representative who reviews the original contract documents before evaluating the change order, confirming what was and was not within the original scope, is in a position to distinguish legitimate additions from scope that was always the GC’s responsibility.
Pricing reasonableness. Change order pricing should reflect the actual cost of the additional work, the subcontractor cost for performing the additional scope, plus the GC’s overhead and profit at the rate specified in the construction contract. Common change order pricing problems: subcontractor costs that include overhead and profit already included separately in the GC’s markup; markup on markup (the GC’s overhead and profit applied to a subcontractor cost that already includes the subcontractor’s overhead and profit); and unit pricing that does not reflect the scale efficiency of the work being done in the context of an ongoing project.
A construction manager who knows current market rates for the relevant scopes, MEP additions, structural modifications, finish scope changes, can benchmark the change order pricing against current competitive rates and identify pricing that does not reflect the actual market cost of the work.
Schedule impact. Change orders frequently include requests for time extensions alongside the cost request. Schedule impact claims should be evaluated against the project’s current schedule, the work sequence, and the actual effect of the additional scope on the critical path. A change order for additional landscaping scope does not justify a time extension if landscaping is not on the project’s critical path. A change order for a structural modification that affects work on the critical path may justify a time extension, but only for the actual delay the modification creates, not for the maximum defensible extension the GC can claim.
The Change Order Log: Non-Negotiable
The single most important change order management tool is a current, complete change order log, a running record of every approved change order, every pending change order, and every potential change order in discussion, with the dollar amount and schedule impact of each. The change order log is updated after every approved change and every new submission, and the owner reviews it at every project meeting.
The change order log serves two functions. It provides the owner with a current view of their budget position, the original contract amount plus all approved changes minus completed work funded through draws equals the owner’s current committed cost. And it provides early warning of budget pressure, when the log shows that approved changes have consumed 60% of the contingency at 40% project completion, the owner knows they need to manage the remaining 60% of the project more carefully than the first 40% to stay within the overall budget.
Construction managers who maintain the change order log as a live document and who review it with the owner at every project meeting are providing the budget transparency that owners need to make informed decisions throughout the project. Construction managers who produce the change order log on request but do not maintain it proactively are providing information management rather than project management.
Establishing the Right Project Culture Around Change Orders
The change order culture on a project is established in the first month of construction. A GC who submits a change order in week two and has it approved without challenge will submit the next one with similar pricing and documentation. A GC who submits a change order in week two and has it returned with a request for subcontractor cost backup, a pricing comparison to market rates, and a request to document the scope exclusion in the original contract will approach subsequent change orders with more care.
Establishing that change orders will be reviewed rigorously from the first submission is not adversarial, it is professional. GCs who understand that the owner’s representative will consistently apply the same standards to every change order respect the process and adjust their submissions accordingly. The relationship does not suffer from consistent professional oversight; it suffers from inconsistent oversight that creates uncertainty about what the standard is.
Innergy Integral’s construction management and owner’s representative practice includes active change order management as a core function, reviewing every change order for scope legitimacy, pricing reasonableness, and schedule impact accuracy before recommending approval to the owner.
Innergy Integral provides these services in Dallas, TX and across our six-state footprint.
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