When you’ve signed a contract with a general contractor and receive a change order, you might wonder if they are entitled to charge you extra.

The answer is yes. Let’s be realistic. Rarely, if ever, do construction projects escape change orders.

Change Orders (CO’s), also known as Construction Change Requests, can arise during a project due to various factors such as design modifications, additional work requirements, or unforeseen conditions at the site. Change orders can increase costs and cause project delays and disputes between parties.

Here are some key points to understand about contractors and change orders:

• Change orders are inevitable and costly: Ensure you have a healthy set aside of at least a 10% contingency in your budget on Hard Costs, Soft Costs, FF&E (Furniture, Fixtures, and Equipment), and other Expenses for anticipated change orders.

• Acceptable Instances: In most construction contracts, there is a provision for change orders, allowing the Owner to request changes to the scope of work while requiring the contractor to perform the additional work. If the change orders result from modifications to the original scope of work agreed upon in the contract, the contractor is entitled to charge for the additional costs and time required to perform the work.

• Unforeseen Conditions: While it’s crucial for contractors to carefully assess the site before construction begins to identify potential hazards or obstacles, unforeseen conditions can still arise during the construction process.
  
  

  Contractors may be entitled to charge for change orders related to unforeseen conditions that they couldn’t reasonably anticipate and that were not caused by their actions or errors. These conditions could include unexpected subsurface issues, such as the presence of underground utilities, the discovery of contaminated soil, or obstructions may be hidden behind existing walls that could not be uncovered during due diligence.

  If contractors encounter unforeseen conditions during construction, they may request a change order to cover the additional costs and time required to address the condition. This includes expenses for additional materials, labor, equipment, and any impact on the project’s schedule.

• Changes in Design: Design changes can also lead to change orders. For example, if the Owner decides to modify the design after construction starts, it can incur additional costs and delays.
• Poor Construction Document Coordination: As much as you would like to have 100% correct drawings, poor coordination between the design team consultants can lead to conflicting Architectural, MEP, etc. construction documents in the field that lead to change orders. Unfortunately, this could be a separate article topic about who should be responsible to pay or absorb the change order, you or the design team. We’ll save that for a future article.

The cost of a change order can vary greatly depending on the nature and extent of the change, as well as the stage of the construction project. Minor changes like substituting materials may only result in small incremental costs. However, major changes like adding a new room or relocating a structural element can significantly increase time and cost.

Change orders can also have a cascading effect on the overall construction project resulting in an extended construction schedule. If change orders are not approved promptly, the contractor may incur additional expenses, such as material delivery and storage costs, personnel availability due to demobilization and remobilization costs, and idle personnel and equipment.

Therefore, it’s crucial to take proactive measures and implement effective communication and project management practices:

• Thorough Planning: Detailed design, a clear scope of work, and a realistic budget and schedule can help limit change orders. Involving all stakeholders, including the Owner, contractor, and architect, during the planning phase ensures that everyone is on the same page and potential risks are identified and addressed.

• Use a Contract: A well-drafted construction contract that specifies the scope of work, payment terms, and change procedures can help minimize change orders. The American Institute of Architects (AIA) provides legally binding contracts suitable for most construction projects. The contract should outline the consequences of change orders, including cost increases, percentages, and project delays.

Anatomy of the Change Order

Change Order Cost = Trade Cost + Insurance % + Project Fee % + Overhead % + Profit %:

Your construction contract should specify the percentages for both change orders and deduct change orders and typically factored as follows:

• Trade Cost: This includes labor, materials, equipment, and subcontractor costs specific to the trade affected by the change.

• Insurance: Most construction change orders may require insurance coverage or adjustments to the GC’s premium which is a percentage added to the trade cost.

• Project Fee: If a project fee or management fee is specified in the contract, the agreed-upon percentage covers the project management and administrative expenses.

• Overhead: Overhead or General Conditions (aka GC’s) include general project expenses, including site supervision, equipment rentals, utilities, office expenses, and other similar costs.

• Profit: This margin represents the anticipated profit for the contractor or subcontractor. The profit margin percentage is added to the previous total (trade cost + insurance + project fee + overhead).

How to Deconstruct Your Change Order

To understand how the change order was calculated, follow these steps by summing up the Trade Cost, Insurance, Project Fee, Overhead, and Profit:

1. Start with the Trade Cost.
2. Add the Insurance, which is calculated by multiplying the Trade Cost by the Insurance percentage. This is Subtotal 1.
3. Next, calculate the Project Fee by multiplying Subtotal 1 by the Project Fee percentage. This result is added to the running subtotal and is Subtotal 2.
4. Determine the Overhead by multiplying Subtotal 2 by the Overhead percentage. Add this amount to the running Subtotal and is Subtotal 3.
5. Finally, calculate the Profit Margin by multiplying Subtotal 3 by the Profit Margin percentage.
6. The resulting value represents the total cost of the change order.

The chart below is an example of $1,000 contractor trade costs and successive percentage fees resulting in a final $1,593.90 change order:

Category	Percentage (%)	Calculation	Amount
Subcontractor Trade Cost to General Contractor	100%	–	$1,000
+ Insurance	5%	Trade Cost * 5% Insurance	$50
		Subtotal 1	$1,050
+ Project Fee	10%	Subtotal 1 * 10% Project Fee	$105
		Subtotal 2	$1,155
+ Overhead	15%	Subtotal 2 * 15% Overhead	$173.25
		Subtotal 3	$1,328.25
+ Profit	20%	Subtotal 3 * 20% Profit	$265.65
		TOTAL CHANGE ORDER	$1,593.90

Remember, the specific percentages or amounts for insurance, fee, overhead, and profit will depend on the project, contractual agreements, and negotiations between the parties involved.

Validating Change Orders: When faced with a change order, it’s crucial not to simply accept it without question. Take the time to have your design team thoroughly review the proposed changes. This step is essential as they may be able to offer cost-effective alternative solutions or even determine that the changes are unnecessary.

Design Change Orders Caused by Construction Change Orders: While Owner directed design changes may lead to construction change orders, unforeseen and field conditions may require your design team to issue modified construction drawings, too.

Consider the domino effect of how one change, however, minor or major, can affect Architectural, Mechanical, Electrical, Plumbing, Fire Alarm, etc., construction documents. Updated drawings may be needed to provide direction to the trades or are required to be resubmitted to the local permitting authority.

And what does this lead to? You guessed it, a design Change Order. As with construction contracts, design team contracts should also clearly identify the costs for design change orders.

Flexibility: While having a clear scope of work and contract is essential, it’s also important to be flexible and open to necessary changes. If unexpected conditions arise at the site, the contractor and Owner may need to collaborate to find solutions that meet the project’s requirements while minimizing additional costs or delays.