Change orders are a common pain point for construction firms. They’re expensive, inaccurate and time-consuming. Do you know how to eliminate these change order obstacles?
Change orders can occur and are often unavoidable during the construction process. A change order is work that is added or deleted from the original scope of work and as a result, the original contract amount and/or completion date of your project is modified. Despite the project team’s best effort to avoid change orders during construction, they are still very common.
If you know you’re going to have to put up with change orders, do you least know how to make the process as pain free as possible?
Why Are Change Orders Necessary?
There are many reasons changes can occur. Most of the time they result from unknown field conditions, design changes or owner requests.
The primary causes of change orders include:
- Owner-initiated changes: Mostly unavoidable
- Design errors and omissions: Often manageable with better oversight, tools, and processes
Tracking the root causes of change orders enables construction companies to identify patterns and troubleshoot issues. The possible causes of change orders in the construction of large buildings include:
- Change of planes by owner
- Owner financial difficulties
- Owner change of schedule
- Ill-defined project objective
- Substitution of material or procedures
- Conflict between contract and document
- Change in design
- The scope of work for the contractor is ill-defined
- Error and omissions in design
- Lack of coordination
- Value engineering
- Technology change
- Differing site conditions
- Contractor desire to improve his financial conditions
- Contractor financial difficulties
- Unavailability of skills
- Unavailability of equipment
- Defective workmanship
- Safety consideration
- Weather condition
- New government regulations
What Is The True Cost Of A Change Order?
First, it’s important to grasp the full cost impact of change orders.
While change orders are sometimes unavoidable, it’s difficult for teams to accurately estimate their impact. On average, change orders result in a 30% loss of productivity. Understanding the true cost –direct, indirect and consequential – can help construction teams to minimize the effects.
- Direct Costs: Direct Costs are costs that are directly affected by the change order. Typical direct costs include materials, labor, equipment, and other expenses relating to the change. These costs also include some less obvious expenses like the cost to redesign the structure, cost of communication with crew and engineers, cost of extra set up and clean up, etc.
- Indirect Costs: Indirect costs include overhead. Indirect costs can be a fixed or variable part of the construction project, depending on a business’ accounting practices. In cases when the indirect costs are a percentage of the overall job, the more expensive the job becomes, the higher the indirect costs are as well.
- Consequential Costs: Consequential costs are costs that are incurred because of the timing of the change order. By diluting labor power, reassigning supervision and causing interference from seasonal weather, change orders can slow down efficiency and cost companies in ways that are very difficult to measure.
It’s important to note that cost can quickly change as the scope of the project does. The cost of a change order is directly correlated to the project phase when the change order is initiated. For instance, changes that come up in the design phase are much less expensive changes that surface in the construction phase.
With a better proactive approach to change order management starting in the earliest planning phases, projects are less likely to experience significant cost and schedule overruns.
Furthermore, it’s important to understand that many problems with the cost of change orders come from a lack of information. When a change order is requested, the project manager must estimate the impact on the project’s overall time and budget.
Overestimates and underestimates are common in traditional change order management because there is a lack of real data to support their analysis. For project managers, without the right access to data and information, they are only further eating into a project’s profits.
How Can You Improve Your Change Order Processes?
As an industry, we must expand our level of understanding and general acceptance of what is reasonable and fair for handling change orders. This requires a sweeping cultural change enabled by broad participation and support by everyone involved in the construction process — from owners, architects, general contractors, electrical contractors, and other MEP partners.
To help establish a common ground of understanding, consider implementing the following best practices:
- Detail and substantiate all material and equipment.
- Develop company standard change order forms that are consistent, easy to read, and clear.
- Use nationally recognized and accepted material and equipment pricing services.
- Use industry-recognized labor units from NECA Manual of Labor Units when appropriate.
- Submit a sample/template change order before any work commences to establish credibility, and familiarize GCs and owners with your standard format.
- Remember that Overhead % ÷ direct cost % = markup %
- Leverage guiding principles to educate your clients, peers, and community at large on the benefits of change order standards.
Automation Is The Key To Improving Your Change Order Processes
Project changes are common and nearly inevitable. By standardizing your process and workflows for managing issues, and communicating change orders to your staff, you can save money and time.
Project tracking software can help streamline this process in many ways, including:
- Defining workflows and each person’s role in the change order process
- Setting due dates and reminders to keep everybody accountable
- Provide an audit trail- documents and files are stored in a centralized hub
- Improve collaboration
Two practices you need to implement or improve now to be more profitable and efficient during the change order process:
- Implement or improved automation in project tracking systems. Having the right software/CRM in place will drastically improve your change order process.
- Have a technology partner to manage the software system you implement.
- For larger companies, IT managers should be hired with having experience in the software you choose or at least with a similar software solution. The management of your construction CRM could be time-consuming, so having a second person on the IT staff to handle hardware support while your IT manager is responsible for your CRM is one option. Sometimes this is financially restrictive, as having two internal employees can be costly. In that case, outsource to a managed IT service provider that has experience in the construction industry AND can help co-manage your network systems. This option means all parties must work together.
- For small construction companies that cannot financially justify an internal IT employee, outsourcing to a managed IT services provider that understands the construction industry can manage your CRM and day to day IT issues within your company, and can make technology easy to use for your employees is the right choice.
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