How Change Orders Work in Construction

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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When you start a new construction project, you make agreements with the seller about materials, payments, and other factors. This contract serves as a starting point, but new circumstances can lead to significant changes. For example, a customer may lose money during the contract and request cheaper materials. Some clients will want you to speed up production and provide extra compensation if you hit closer deadlines. You may also receive a request for an additional feature. A client’s needs can change during the construction, and charge orders address this scenario. We’ll discuss how change orders work, so you know what to expect if your client has new requests. 

Billd Commercial Construction Financing

Billd is a payment solution that allows construction contractors to offer 120-day terms to pay for materials and suppliers to sell more.

What Is a Change Order in Construction?

A change of order lets clients address new requests and add them to a new contract. This change order contract replaces the preexisting agreement and dictates the new direction for the project. You will have to create a change order draft that reflects the client’s new requests and the contractor’s price change. A change order only takes effect once both parties sign the agreement.

When Do You Need a Change Order?

Contractors need a change order when clients make requests outside of the original contract. A change order helps both parties reach a new agreement concerning additional features, cost-cutting measures, and other initiatives.

The Change Order Process

The change order process consists of several steps. Completing each step when crafting your first draft will minimize issues and help you get back to work sooner. We have outlined how these orders got initiated and resolved.

Signing Of Contract

The customer and contractor must reach an agreement before construction starts. The initial contract jumpstarts the relationship and sets objectives.

An Issue Arises

During the project, a client may make a request. Requests can range from new features to using more affordable material. Clients may not provide additional funds until the issue gets resolved. You can get funding from Billd to continue the project during these circumstances. This approach works best if the problem can get resolved quickly.

A Change Order Is Initiated

The client wants changes, and the contractor must create a first draft of the change order. This draft contains additional details and may set a new price point for the construction.

Evaluation of Change Order

The client will review the contract and address any concerns. You may have to revise the change order several times to meet the client’s requests. 

Change Order Agreement

After going back and forth, both parties reach a new agreement. The contractor and customer sign the change order contract and make it official.

Amendment of Contract

The change order modifies the existing contract and acts as the new guiding compass. The original agreement has been altered to address the client’s changing needs and objectives.

Billd Commercial Construction Financing

Billd is a payment solution that allows construction contractors to offer 120-day terms to pay for materials and suppliers to sell more.

Common Reasons for Change Orders

A party may request changes to the established contract. These are some of the most common reasons change orders occur.

Inaccurate Contract/Design Specifications

Contract inaccuracies can overestimate or underestimate costs. Contractors can make their best estimates, but many forces can influence materials and labor costs.

Ambiguous or Imprecise Drawing  

The construction blueprint helps clients see what their finished property will look like before work begins. Employees look at the drawing when working at the site to make sure they perform effectively. Contractors will check the drawing before signing the contract, but some drawings have flaws. The drawing significantly impacts the direction of a construction project. Any seller who suspects an ambiguous or imprecise drawing will ask for a change order.

Late Arrival of Workers/Items On-Site

Contractors and clients establish project milestones and deadlines. When agreeing to deadlines, contractors assume workers and materials will arrive on time. Any delays can stall production and push back deadlines. Both parties may agree to a change order with new deadlines to reflect the slow start.

Improper Budgeting and Scheduling

A client may question a contractor’s use of funds, especially if the contractor front-loads payments. In addition, improper budgeting and scheduling practices can result in a change order and a disgruntled customer.

Other Unforeseen Conditions

It’s difficult to anticipate everything that can go wrong with a construction project. The construction site may have a hidden problem, an inspector can reject the project, or material costs can substantially rise. Either party can request a change order due to any unforeseen conditions that impact either party’s ability to fulfill their end of the original contract.

What Is Included in a Change Order?

A change order has several components. Including all of them in your first draft will accelerate the process and help you get back to the project sooner.

Project and Contact Information

Every charge order should include the project’s name and address and the change order number. Some contractors and clients agree to several change orders or go through multiple drafts before reaching a conclusion. Numbering your change orders helps both parties keep track. You should also include the names and contact information of the owners and contractors involved in the project.

Description of the Requested Change

Prepare a description that explains the added or eliminated work from the project. The contractor should write a detailed description that explains the additional services. The customer may not be as familiar with the scope of work. Don’t assume your customer knows every small detail about the extra work.

Update Schedule

The change order process puts a halt on construction, making previous deadlines unrealistic. As a result, the contractor and client have to agree on an updated schedule with new deadlines for each milestone. 

Cost of the Change

Adding and removing materials and services will impact the contract’s cost. You will have to pay more for workers and supplies if the client presents more ambitious plans. Detail the cost of the change in your change order. 

Updated Contract Value

You can add or subtract the cost of the change from the original contract value. This updated contract value puts both parties back on the same page. 

How to Improve Your Cash Flow in Case of Change Orders

The construction industry is a low-margin business. Change orders stall projects but can also deplete your cash reserves. You may breeze through a construction project without a single change order, but some clients may make several requests. Change orders can lead to significant stress and project delays if you don’t have a plan. Getting short-term capital can help you navigate project delays and other obstacles.

If you want additional funding for a commercial construction project, Billd can help. Billd provides 120-day term loans to help constructors cover the costs of materials. These funds can help you move forward even if a client doesn’t provide immediate funding. Most contractors avoid buying materials during change orders. However, if you are discussing minor issues that won’t take long to resolve, it can make sense to get financing for additional materials. The client will pay you back after everything gets resolved, and you can continue moving forward with the project.

Billd lets you enroll in their services for free and start buying materials. You can fill out their form to get more information about how you can access working capital for your projects.

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