Construction Change Order Management: A Complete Guide

Change orders are an inevitable part of construction projects—and often a significant source of profit or loss. How you manage change orders can make the difference between a successful project and a financial disaster. This guide covers everything contractors need to know about change order management, from identification through resolution.

What Is a Change Order?

A change order is a written agreement to modify the original contract. Changes can involve:

• Scope additions: New work not in original contract
• Scope deletions: Removal of work from contract
• Design modifications: Changes to plans or specifications
• Field conditions: Responses to unforeseen conditions
• Schedule impacts: Time extensions or accelerations
• Owner requests: Modifications requested by owner

Types of Changes

Directed Changes

Owner explicitly orders additional or different work:

• Formal written directive
• Clear scope definition
• Pricing negotiated or ordered
• Time impact addressed

Constructive Changes

Actions that effectively change the contract without formal direction:

• Design interpretation differences
• Inspector requirements beyond specs
• Owner interference with work
• Defective specifications

Cardinal Changes

Changes so significant they constitute a new contract:

• Fundamentally alters the work
• Beyond reasonable contemplation at bid time
• May allow contract termination
• Rare but important to recognize

The Change Order Process

Step 1: Identification

Recognize potential changes immediately:

• Design conflicts or errors
• Field conditions different from plans
• Owner requests for modifications
• RFI responses that add scope
• Specification clarifications that increase work

Step 2: Notice

Provide timely written notice:

• Most contracts require notice within 7-14 days
• Describe the potential change
• Reserve rights to adjust cost and time
• Submit to proper parties

Sample Notice Language:

"This letter serves as notice per Contract Section XX.X that the following constitutes a potential change to the contract scope. Contractor reserves the right to submit a change order proposal for the additional cost and time impact of this work. [Describe the change situation.]"

Step 3: Documentation

Build your case with thorough records:

• Photographs and video
• Daily reports referencing the issue
• Labor and equipment logs
• Material receipts
• Correspondence
• RFIs and responses
• Meeting minutes

Step 4: Pricing

Develop a complete change order proposal:

• Labor costs with burden
• Material costs with handling
• Equipment costs
• Subcontractor costs
• Overhead and profit
• Schedule impact
• Supporting documentation

Step 5: Submission

Submit formally per contract requirements:

• Use required forms
• Include all supporting documentation
• Reference contract provisions
• State time impact
• Set response deadline

Step 6: Negotiation

Work toward agreement:

• Respond to owner questions promptly
• Provide additional backup if requested
• Consider reasonable compromises
• Document all discussions
• Escalate if necessary

Step 7: Execution

Finalize the change order:

• Written agreement by all parties
• Clear scope description
• Defined cost adjustment
• Time extension if applicable
• Integration with contract

Change Order Pricing

Cost Components

Include all legitimate costs:

Direct Labor:

• Hours by craft
• Wage rates including burden
• Productivity impacts
• Supervision

Materials:

• Quantities needed
• Unit costs (quotes if available)
• Taxes and delivery
• Waste allowance

Equipment:

• Equipment needed
• Rental rates or ownership costs
• Operating costs
• Mobilization/demobilization

Subcontractor Costs:

• Subcontractor proposals
• Your markup (if allowed)
• Coordination costs

Overhead and Profit:

• Contract-specified percentages
• Or negotiated amounts

Pricing Methods

Different approaches for different situations:

Lump Sum: Fixed price for defined scope

• Best when scope is clear
• Risk on contractor
• Simpler administration

Time and Materials (T&M): Actual costs plus markup

• Use when scope is unclear
• Requires detailed tracking
• Owner has cost risk

Unit Prices: Contract rates applied to quantities

• Uses pre-agreed rates
• Quantities verified in field
• Common for quantity variations

Force Account: Cost of work plus overhead and profit

• Similar to T&M
• Often used for emergency work
• Requires daily documentation

Markup Guidelines

Standard markup ranges:

• Contractor overhead: 10-15%
• Contractor profit: 10-15%
• Subcontractor work: 5-15% (varies by contract)

Many contracts cap total markup at 15-25%. Know your contract terms.

Schedule Impacts

Time Extension Entitlement

Change orders often warrant time extensions:

• Work duration of added scope
• Impact on critical path
• Concurrent delay considerations
• Acceleration costs if not extended

Documenting Schedule Impact

Show the impact clearly:

• Updated CPM schedule
• Fragnet analysis
• Critical path impact
• Resource constraints

Time vs. Money Trade-offs

Consider strategic options:

• Accept time extension without acceleration
• Accept payment to accelerate
• Negotiate combination of both
• Evaluate liquidated damages exposure

Common Change Order Disputes

Scope Disputes

"This was included in your bid"

Defense Strategies:

• Reference specific contract documents
• Show scope not in plans/specs
• Document changed conditions
• Cite industry standards

Pricing Disputes

"Your costs are too high"

Defense Strategies:

• Provide detailed backup
• Show market rate quotes
• Reference similar approved changes
• Compare to bid unit prices

Timing Disputes

"You didn't give timely notice"

Defense Strategies:

• Prove notice was given
• Show owner had knowledge
• Demonstrate no prejudice
• Argue constructive notice

Causation Disputes

"The delay wasn't caused by this change"

Defense Strategies:

• Schedule analysis
• Concurrent delay separation
• Critical path documentation
• Expert support if needed

Best Practices for Change Order Management

Proactive Identification

Don't wait for problems to become obvious:

• Review plans for conflicts before bidding
• Document assumptions in your bid
• Track RFI responses carefully
• Watch for scope creep

Real-Time Documentation

Build your case as work proceeds:

• Daily reports noting changes
• Photos before, during, after
• Labor allocation tracking
• Material usage logs
• Equipment time records

Professional Communication

Maintain positive relationships:

• Be factual, not adversarial
• Respond promptly to requests
• Keep emotions out of negotiations
• Focus on fair resolution

Contract Knowledge

Know your contract provisions:

• Notice requirements
• Pricing terms
• Markup limitations
• Dispute procedures
• Time extension processes

Prompt Submission

Don't let changes pile up:

• Submit proposals promptly
• Follow up on pending items
• Track approval status
• Escalate delays appropriately

Managing Change Orders as a Subcontractor

Unique Challenges

Subcontractors face additional complications:

• Flow-down of prime contract terms
• GC markup on your changes
• Limited direct owner access
• Payment tied to GC collection

Best Practices

Protect yourself:

• Review prime contract change provisions
• Submit notices to GC promptly
• Get GC agreement before performing extra work
• Track changes pending GC approval
• Document GC-caused changes

Pass-Through Claims

When the owner is responsible:

• GC may need to submit your claim
• Cooperate fully with GC
• Maintain your own documentation
• Understand payment timing

Technology for Change Order Management

Document Management

Organized records are essential:

• Cloud-based storage
• Photo and video management
• Email archiving
• Version control

Project Management Software

Track changes systematically:

• Change order log
• Status tracking
• Approval workflows
• Integration with accounting

Schedule Software

Demonstrate time impacts:

• CPM scheduling
• Fragnet analysis
• What-if scenarios
• Delay documentation

Cost Tracking

Capture costs accurately:

• Time card systems
• Material tracking
• Equipment logs
• Cost coding to changes

When Changes Go Wrong

Disputed Changes

If agreement can't be reached:

• Follow contract dispute procedures
• Continue performing directed work
• Maintain detailed records
• Preserve claim rights

Claims vs. Change Orders

When changes escalate to claims:

• Compile comprehensive documentation
• Consider expert assistance
• Follow contract procedures
• Evaluate litigation alternatives

Protecting Your Rights

Don't forfeit your claims:

• Meet all notice requirements
• Document continuously
• Submit required certifications
• Preserve lien rights if applicable

Change Order Ethics

Legitimate vs. Opportunistic

Maintain integrity:

• Only claim genuine extra work
• Price fairly
• Don't inflate hours or costs
• Be transparent about inclusions

Relationship Preservation

Long-term success depends on reputation:

• Fair dealing builds repeat business
• Excessive claiming damages relationships
• Balance assertiveness with reasonableness
• Consider the big picture

Conclusion

Change order management is a critical skill for construction contractors. The most successful contractors:

• Identify changes immediately
• Document thoroughly from day one
• Price completely and fairly
• Submit promptly per contract requirements
• Negotiate professionally
• Maintain positive relationships

Every project will have changes. The contractors who manage them well protect their margins, maintain owner relationships, and build reputations for fairness and professionalism. Those who don't find themselves in disputes, losing money, and damaging relationships.

Invest in systems and training for change order management. The return on that investment will be significant across every project you build.

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ConstructionBids.ai helps you find projects that match your capabilities and risk tolerance. Understanding contract terms—including change order provisions—before you bid is essential for project success.