What is Change Order in Construction Contract? 4 Important Points

By December 17, 2020April 12th, 2021Project Management, Civil Engineering, Construction
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Every Construction Project big or small, experiences Change Order at some stage of the project. Do you know what is Change Order in Construction Contract and how to accomplish the Change Management Process?

Please read this blog for details:

What is a Change Order?

Every Project commences with a fixed project programme, activities schedule and fixed budget. Also, every project comes with a set of assumption and exclusions and they are examined and calibrated when the project commences.

So, when those assumptions are verified with specific surveys and investigations, the contractor identifies new constraints and gaps in the project programme. These gaps and associated mitigations are considered as additional tasks of the project.

As a result, the contractor raises the Early Warning to the client to inform that these new tasks may cost additional fund and may need additional time to execute the activities. The contractor then raises Change Order along with task details, fees and task duration details.

Change orders are never considered as a unilateral process. The change order is technically an amendment to the original contract agreement. So, it’s essential for the contractor to clearly set out the reason for the change order along with new tasks details so, the client or the project sponsor understands the nitty-gritty and accepts the change order.

What to be included in Change Order?

As explained Change Order is a very important document to inform the client regarding the additional tasks that are not included in the original scope but necessary to carry out as a part of the project.

Followings are the key information that needs to be included with the Change Order:

  • Dates of the Change Order
  • Details to include in the Change Order
  • Mini Project Programme and Schedule of Deliverables
  • The fee of the Change Order

Dates of the Change Order

When Change Order is prepared, it is very important to provide a specific number to the change order for any future references. When a change order is issued to the client, it should include the date of the issue, along with the names of the originator, verifier and approver.

It is very important for the contractor to maintain a Change Order Register and record all the outgoing Change Order details along with their final outcome (such as accepted or rejected). The register should also record the date of issue and date of client approval.

Details to include in the Change Order

Change Order should cover all the details related to the change such as what is the change, the reason for the change, Task details, resource details, fee details, etc.

It is very important for the contractor to provide all the details related to the change order to make a strong case for approval.  If it is required to include evidence like site pictures, survey reports or finding, etc, it is recommended to include that.

Keep in mind that the Change Order is a legal document as well as a technical document (If the issue is technical in nature) so it will be handed over to the legal team of the client along with their technical and commercial team. So, it’s very important for the contractor to address all three aspects very clearly.

Mini Project Programme and Schedule of Deliverables

The size of the change order may vary from small change to a very big change, but it is important for the contract to treat them equally and develop the project programme to list down all the activities and duration of the change order. Ideally pulling it in a project programme like MS Project or Primavera P6 would be recommended.

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It is also recommended to develop a schedule of deliverable that would represent the ultimate goad of the Change Order. It is important to note that both the project programme and schedule of deliverable must complement each other and there is no discrepancy in the information. Otherwise, it would lead to a delay in getting client approval or end up getting rejected.

If the project programme identifies that the new activity may impact and extend the original programme, it must be notified to the client. A separate Early Warning Notice (EWN) would be ideal to address this information.

The fee of the Change Order

Once the project programme and schedule of the deliverable are complete, it is time to prepare the Change Order Fee. It could be a Lumpsum fee or Time & Material based fee, depending on the original terms and conditions of the contract.

But in either case, it is important for the contractor to calculate the manpower and material cost to execute the change and issue the Change Order Fee to the client for approval.

When Change Orders are Raised?

Before figuring out when to raise change orders, it is very important to know the key reasons for the change orders. Here are some key reasons for the change order:

Inadequate Scope of Work:

This means when the scope of work is not clearly defined with clearly define boundaries and carries various loopholes, it would lead to allowing scope creeps at many stages. Therefore, change orders are raised by contractors.

Design Errors:

When there are errors in design drawings or documents or specification or setting-outs, it means that the contractor may not identify the errors during the tender stage and identify it once the execution process takes place.

As a result, the contractor raised the Change Order to inform the client regarding the design error and subsequent design change takes place by the designers.

Unforeseen Condition:

At the design stage and at construction, there will be many occasions where designers and or contractors make decisions based on some assumption due to the lack of information or lack of surveys/ investigations. In those situations, they record the assumptions and associated risk (in monetary form) and populate a risk pot during the design and tender stage.

During the project execution, if the assumptions do not match with ground realities (once survey & investigation finding are out), then the cost of those activities may go up or down and impact the original project programme. in those cases, change orders are raised by the contractor.

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How to Prepare Change Orders?

Change Order Process should be put in place from day one when you start the project. A change order template, a register and a team should be assigned to maintain the change order. If the initial homework is in place from day one, it would be easier to prepare a change order when needed.

Hope this blog helps you to understand the meaning of Change Order, the reason for the change order and its execution process. please feel free to like, share and comments.

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