How Expensive Is A Change Order, Really?
No one in the construction industry likes handling change orders, but they’re a part of doing business. Do you know how to make sure they aren’t too expensive, inaccurate or time-consuming?
We all know how frustrating change orders can be. They crop up at the worst of times, modifying the original scope of the work, the original contract amount and/or completion date of your project.
No matter what you do, it’s impossible to totally avoid change orders. It’s the cost of doing the business you do. Instead of trying (and failing) to avoid them at all costs, the smart move is to learn how to optimize them.
Do you know how?
How Do Change Orders Work?
There are plenty of reasons why change orders occur – unknown field conditions, design changes or owner requests. The causes can be broken down into two areas:
- Owner-initiated changes: Mostly unavoidable
- Design errors and omissions: Often manageable with better oversight, tools, and processes
It’s important for you to pay attention to the root causes of the change orders you deal with. This allows you to identify patterns and troubleshoot issues. For instance, the possible causes of change orders in the construction of large buildings include:
- Change of plans 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 Does A Change Order Actually Cost You?
It can be difficult to get an accurate idea of what a given change order is actually costing you. On average, change orders result in a 30% loss of productivity. Really understanding the specific and layered cost of a change order will help you minimize the negative effects.
- Direct Costs Of Change Orders: 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 Of Change Orders: Indirect costs (including overhead) 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 Of Change Order: 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.
Tips For Optimizing The Change Order Process
At its core, optimization of change order processes comes down to gathering tracking and understand all information involved. Your best practices for change order optimization include:
- 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 Secret To Enhancing Your Change Order Processes
The fact is that project changes are common and inevitable. The best way to deal with that reality is to standardize any process that you can in order to eliminate delays, wasted time and other resources, and other obstacles that cost you money.
The top two best practices to consider are:
- Automation & Project Tracking: Implement or improved automation in project tracking systems. Having the right software/CRM in place will drastically improve your change order process.
- Outsource Management To An IT Company: Larger companies can afford to hire IT managers that bring having experience with the software you use. 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. For smaller crews, this can be financially restrictive. They should instead 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.