The Purpose of a Construction Change Order
A construction contract defines a specific scope of work for a specific price. When reality deviates from those original plans, a change order acts as the bridge. It documents the deviation and provides a mechanism to legally adjust the compensation and time allotted to the contractor.
Without formalized change orders, contractors risk doing 'free work.' Performing additional tasks based on verbal agreements often leads to payment disputes at the end of the project. A written change order secures the contractor's right to be paid for extra effort.
When is a Change Order Required?
Applicability covers any scenario that impacts the project's baseline. The most common trigger is an owner-directed change, where the client decides to add features or upgrade materials after the contract is signed.
Other standard triggers include unforeseen conditions (like finding hazardous materials during excavation), design errors or omissions in the architect's blueprints, or force majeure events that cause significant, unavoidable delays requiring schedule extensions.
- Owner-requested additions or subtractions to the scope.
- Unforeseen site conditions (e.g., hidden structural damage).
- Errors or omissions in the original contract documents.
- Regulatory or code changes enforced by inspectors.
Key Elements of a Standard Change Order
To be legally enforceable, a change order must be precise. It requires standard project identifiers, a sequential change order number, and a highly detailed description of the new work to be performed, referencing specific blueprints or RFIs.
Critically, it must clearly state the financial impact—showing the original contract amount, the value of previous change orders, the cost of the current change, and the new total contract value. It must also explicitly detail any additional days added to the project timeline.
Calculating Direct Costs and Markups
A change order is essentially a mini-estimate. The contractor must calculate the direct costs of the change, including the exact quantities of new materials, the hours of additional labor, and any necessary equipment rentals.
Once direct costs are tallied, the contractor applies a markup for Overhead and Profit (O&P). The allowable markup percentage is typically predetermined in the original contract, standardizing around 10% to 15%. This ensures the contractor covers the administrative burden of executing the change.
The Approval Process and Contract Integration
A change order is not valid until it is fully executed. This standard process requires signatures from the General Contractor, the Architect (verifying the change aligns with design intent), and the Project Owner (authorizing the funds).
Once signed, the change order becomes part of the prime contract. The contractor is legally bound to perform the work, and the approved amount can be immediately added to the Schedule of Values, allowing the contractor to bill for it on their next progress payment application.
Frequently asked questions
Can a contractor start work before a change order is signed?
It is highly risky. While common in the field under pressure, proceeding without a signed change order means the contractor operates at their own financial risk and may not be legally entitled to payment.
What is a deductive change order?
A deductive change order reduces the contract price. This happens when the owner decides to remove a portion of the scope or downgrade materials, giving them a credit back from the contractor.
What is a Construction Change Directive (CCD)?
A CCD is an order from the owner directing a change in work prior to an agreement on cost or time. It forces the contractor to proceed to avoid delays, with the final pricing negotiated later based on actual costs.
Can an owner reject a change order?
Yes. If the owner believes the proposed costs are too high or the work should have been included in the original scope, they can reject or negotiate the change order.