Understanding Change Orders
Master the change order process to protect your profits and maintain client relationships when project scope changes. Learn how to document, price, and communicate changes effectively.
What You'll Learn
- ✓Understand what triggers a change order and how to identify scope changes early
- ✓Document and price change orders accurately and fairly
- ✓Communicate changes to clients in a way that maintains trust
- ✓Use change order language in your contracts to protect your business
1. What Triggers a Change Order
A change order is any modification to the original agreed-upon scope, price, or timeline of a project. Common triggers include client-requested design changes, unforeseen site conditions like hidden rot or outdated wiring, errors or omissions in the plans, and code requirements discovered during inspections. Recognizing a change early prevents scope creep that erodes your profit.
Key Points
- •Any work not explicitly included in the original scope is a change order, no matter how small
- •Unforeseen conditions like mold, structural damage, or outdated plumbing are legitimate change orders
- •Train your crew to flag potential changes before performing extra work
2. Documenting and Pricing Changes
Every change order must be documented in writing before the additional work begins. Include a description of the change, the reason for it, the cost impact, and the schedule impact. Price change orders using the same method as your original estimate: material costs plus labor plus overhead and profit. Never do extra work on a verbal agreement.
Key Points
- •Use a standard change order form with sequential numbering for every project
- •Include both cost and schedule impacts in every change order document
- •Get the client's written signature approving the change before starting the work
3. Communicating Changes to Clients
How you present a change order affects whether the client sees it as fair or feels taken advantage of. Explain the reason for the change, show how you calculated the price, and present options when possible. Clients appreciate transparency and choices. Frame changes as protecting the quality and longevity of their project rather than as added costs.
Key Points
- •Present the change in person or by phone first, then follow up with the written document
- •Offer options at different price points when possible so the client feels in control
- •Never spring a change order after the work is already done unless it was an emergency
Key Takeaways
- ★The average remodeling project experiences 3-5 change orders, adding 10-15% to the original contract price.
- ★Contractors who document change orders in writing collect payment 90% of the time, compared to only 40% for verbal agreements.
- ★Disputes over change orders are the number one cause of construction litigation for residential contractors.
- ★Including a clear change order clause in your contract reduces disputes by more than 50%.
Knowledge Check
1. During a bathroom remodel, you discover that the subfloor under the tile is rotted and needs replacement. The original scope did not include subfloor work. How do you handle this?
2. A client verbally asks your carpenter to add a built-in shelf while he is already on site. What should happen?
3. How should you price a change order for a task that was excluded from the original scope?
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Common questions about this topic
If you have a signed change order document, the client is contractually obligated to pay. Without written documentation, it becomes a he-said-she-said dispute that is difficult to collect on. This is why written approval before starting work is essential.
Some contractors apply a slightly higher markup on change orders (5-10% above their standard rate) to account for the disruption and re-planning involved. This is common in commercial work and should be stated in your original contract terms.
Credit change orders that reduce scope should also be documented formally. Calculate the credit fairly but remember that you may have already purchased materials or committed subcontractor time. The credit amount may be less than the original line item cost.