Published July 22, 2024 . 8 mins read

A change order in construction is a crucial document used to formally alter the original agreement of a construction project. This document meticulously details the necessary changes in the scope of work, cost, and schedule. Whether due to unforeseen site conditions, design modifications, or client requests, change orders ensure that all parties know and agree to the adjustments.
Typically, the construction contract outlines the change order process, providing specific guidelines on managing and processing these alterations. Following these contractual stipulations is essential to maintaining order and clarity throughout the project.

Change orders do more than modify the project scope and timeline—they can significantly impact a contractor’s liability and financial standing. Mismanagement of change orders can put a contractor’s payment at risk and potentially lead to disputes. Therefore, understanding and effectively handling change orders is vital for maintaining project integrity and ensuring successful project completion.

What’s included in a Change Order

A well-structured change order form ensures clarity and proper documentation of any alterations in a construction project. Here’s a detailed outline of what should be included:

Submitting a Change Order

After completing a change order should be signed and submitted to the owner or the owner’s representative. The owner will review the proposed changes and may request additional information to support the request. Typically, the contract will specify the time frame the owner must respond, whether by accepting, rejecting, or asking for further documentation.

Once the owner signs and returns the change order, the approval is confirmed, allowing the contractor to proceed with the revised scope of work. Understanding this process is crucial for ensuring timely and smooth adjustments to the project.

Importance of Documented Approval

Contractors often face the temptation to commence work without obtaining formal approval for change orders. However, contractors must only start work once they have documented approval. When changes to the contract arise, it is essential to document them thoroughly and obtain the property owner’s signature. Proceeding without approval increases liability and the risk of non-payment.

Once approval is obtained, it should be diligently saved along with all project documents. Contractors are advised to keep copies of every document provided to the property owner, including change orders, to preemptively address any potential disputes that may arise in the future.

Analyzing Change Orders

Analyzing change orders is essential for contractors, as these can either enhance profits or lead to losses depending on the nature of the work. By thoroughly analyzing change order impacts, contractors can pinpoint trends and root causes, empowering their teams to capitalize on opportunities or mitigate negative effects on project profit margins and schedules. Having robust analysis tools enables proactive risk management, helping anticipate and address future challenges.

Furthermore, implementing lessons learned from change order analysis promotes continuous improvement across future projects, fostering efficiency and profitability. This structured approach enhances project management capabilities and strengthens overall business performance in the construction industry.

Mitigating Profit Fade from Change Orders

Change orders, often overlooked, can subtly erode project profits if not managed with precision. ProNovos offers a targeted approach to scrutinizing the financial implications of change orders, ensuring they don’t lead to unintended profit declines.
Consider the scenario with one of our clients on a project valued at $3 million.

Our analysis pinpointed that their approach to pricing change orders was causing a profit fade of 0.88%. Though this percentage might appear negligible at first glance, it equates to a substantial $27,923 in earnings that failed to be captured and billed to the client.

This case highlights ProNovos’ critical role in fine-tuning financial strategies around change orders. By applying our insights, businesses can recalibrate their pricing models to prevent profit leakage and ensure that every change order contributes positively to the bottom line.

In conclusion, mastering the management of change orders in Construction is essential for contractors to successfully navigate project complexities. From documenting and obtaining approval for change orders to analyzing their impacts on budgets, schedules, and project quality, every step is critical for mitigating risks and optimizing profitability. Leveraging advanced tools and insights, such as those offered by ProNovos, can streamline the change orders in the construction process, providing a competitive edge in the industry.

Ready to enhance your change orders in construction analysis? Schedule a demo with a solutions advisor at ProNovos today and see how our innovative solutions can elevate your project financial management strategies.