In an industry known for tight deadlines, cost overruns, and unforeseen circumstances, change orders are inevitable. How a construction company handles change orders will ultimately decide whether they remain profitable or buckle under the pressure. When a change order is passed down from an owner, how will your business handle it?
In this article, a West Palm construction lawyer with Cotney Construction Law discusses the three types of change order costs and how you can better manage changes to a project’s scope of work. What makes this topic so important, especially when it comes to construction law, is the fact that scope of work changes are the leading cause of construction disputes. In order to adapt to change orders and avoid disputes that have bankrupted so many other companies, you’ll need to keep the four tips discussed through this article top of mind.
What Are Change Orders?
In brief, a change order is a request to alter a project’s original scope of work which was agreed upon in the contract. As a project commences, someone — usually an owner — will submit a change order. In order to lessen the cost of change orders, we must first look at how those costs are broken down.
As the name implies, direct costs are costs that directly impact a project. Direct costs usually include labor, equipment, and materials. They are easy to keep track of, especially if your company invests in construction software.
Indirect costs are far more difficult to quantify because they include your business’s overhead. These are the behind-the-scenes costs — supplies, legal fees, licenses, office staff salaries, etc. As a project stretches on and the change orders pile up, these are the costs that will eat away at your business if you’re not careful.
When a change order comes at a bad time, whether it be the result of bad weather or a lack of manpower, the costs incurred from having to adjust are known as consequential costs. Everything on a project site is connected, and when you drastically alter one aspect of a project, it creates a ripple effect that hinders everything down the line. Like indirect costs, consequential costs can only increase with the length of a project.
1. Analyze Your Data
We’ll begin by focusing on one of the most important tools you have at your disposal: data. Your company’s entire MO should revolve around data. If you haven’t already invested in construction management software, why not? Programs like Aconex, Procore, and e-Builder can help you manage resources, assign tasks, and alter strategies at a moment’s notice — a necessity when you receive a change order. In addition, management software allows you to look at the big picture and prevent some of the leading causes of direct and consequential costs: missing materials, budget issues, and scheduling issues. If there’s a problem on your jobsite that could lead to a change order, your software will be the first to tell you.
2. Take Communication and Document Management Online
Data isn’t the only thing that software can keep track of. There are numerous contractors and subcontractors that are attached to a construction project at any given time. Some of them will work directly for you, while others will be independent contractors. In order to mitigate and adapt quickly to change orders, you need a way to communicate with all parties on a project. We recommend taking all communication and document management online. Not only will this alert your team to changes, but it will also reduce indirect costs that add up following a change order. And as a team of attorneys, we’d be remiss if we didn’t mention that this system is essential for maintaining documents that could be valuable in legal proceedings.
3. Don’t Skip the Design Phase
Change orders often come from on high (project owners), but they can also stem from design errors. For this reason, collaboration must be a priority from the very beginning of a project. When you involve all parties from the get-go — contractors, consultants, engineers — you’re less likely to be blindsided by change orders later on. Remember, construction is a collaborative effort. You’d be surprised by the foresight and solutions that your subcontractors bring to the table.
In preventing design errors that lead to change orders, nothing beats building information modeling (BIM) software. BIM is critical for reducing design errors, coordinating subcontractors, and increasing productivity. By creating a virtual model, you can avoid clashes well before breaking ground. Of course, we don’t have to tell you this. BIM is now the standard for virtually all large construction companies. However, only 72 percent of mid-sized construction companies and 28 percent of small construction companies are taking advantage of this software. If you represent a smaller construction company and want to mitigate change orders, it’s in your best interest to invest in BIM software.
4. Review Your Contracts
Don’t mistake a change order for what it really is: a contract amendment. It’s an amendment to change a project’s work, price, or schedule, and it affects everyone who signed the contract. As a West Palm construction attorney can tell you, your construction contract is your most important tool for preventing disputes and deciding how disputes play out. Not only that, your contract should have stipulations dedicated to change orders and how they’re to be delivered and handled. Even after implementing all of the above strategies, your company could still succumb to exorbitant legal fees (a direct cost) if your construction contract is not up to date.
As mentioned above, there are numerous project aspects that are beyond your control. Your best chance for limiting change order costs and avoiding disputes is to partner with a Boca Raton construction lawyer. At Cotney Construction Law, our attorneys can review, draft, and negotiate your contracts to ensure that they contain contract language that limits the impact that change orders have on your business. If you’re tired of being blindsided by owner requests, and want a contract that safeguards profits in the face of demanding change orders, partner with an affordable, on-demand attorney from Cotney Construction Law.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.