Manage Change Orders More Effectively
Change orders can be disruptive. They can turn a project from one that's on track to earning a profit to one that may end up losing money. They also can cause delays, eat up valuable management time, and create additional work for estimators and other team members.
Contractors can't make change orders disappear, but they can limit their prevalence and minimize their financial impact. The key is to develop a process that identifies the causes of the change order, communicates the change to all involved parties, and factors in the cost of the labor, time, and materials of the required change.
Identify the Causes
Change orders typically fall into three main categories:
Owner Changes. These are fairly clear-cut. They occur when the owner requests a change, an enhancement, or an addition that was not included in the original contract or in the project drawings.
Design/Specification Changes. Change orders also result from designer clarifications or changed specifications. Architects, engineers, or designers will sometimes recommend a change in the materials used in certain parts of the building or want to add an architectural feature that was not included in the original project blueprints.
Unforeseen Conditions. If soil conditions on the site are different than were originally outlined in the specifications and require significant remediation, then a change order would be necessary.
As a contractor, you can minimize the possibility of a change order negatively impacting profits by taking a few steps. First, go over the contract. Make sure terms and conditions for change orders are clearly spelled out. Next, make sure supervisors are aware of what is and what is not included in the contract. If an owner requests changes in the middle of a project, your supervisors will be able to follow a series of prearranged steps to get the changes approved and ensure the changes are billed.
Automate the Process and Communicate the Changes
Once changes have been requested or identified, you need to contact the customer to confirm them. It can help if you automate the process. Doing so allows you to keep track of potential changes, change orders, and contract modifications so you can communicate these changes to supervisors, suppliers, designers, and subcontractors. Communicating with all involved parties as soon as possible is critical in order to halt work in the change area and limit additional costs to that change. In addition, a good system allows you to update project information in real time and quantify and record all work as it is completed.
Ensure Accurate Payment
Do not process change orders until you and the customer have reviewed and approved billing rates for the extra work. If the contract does not offer pricing guidance for change orders, you have to be sure that you include both direct and indirect costs.
Don't let change orders disrupt your business. Take steps now to manage change orders more effectively.
