What is change order and why it is needed in construction contract?
A change order in construction contract is modification of a contract in writing. It is a change to the original contract that has been previously established and previously written.
Many times, a construction project requires some changes such as addition, deletion or modification of works, or can be changes in local laws related to construction works. These changes can be done by owners, contractors, architects, designers etc. at a later date after signing of the construction contract. These changes are incorporated in construction contracts through a written change orders.
A construction contract includes drawings, specifications, bill of quantities, clarifications and this is for any type of construction or of a building project. Any changes in these are notified to contractor with a change order.
Common Types of Change Order in Construction Contracts
Following are the common types of change orders and their reasons:
Common types of change order
Common reasons and sources of change order
Change in scope of project
Tenant agency has requested a design change
Site conditions differ from the expected. Changes required by professionals or contractor
Professional errors and omissions
Requested by contractor or professionals
Errors in construction design plans and specifications
Omission of an item or element from the plan
Features of a Change Order in Construction Contracts
It should have a cost to it
A change order should always have cost associated with it even if it does not cost the contractor for any changes.
For example, if changes in color of a product is required, and related work has not started, then there can be two scenarios, such as, the product has been purchased by contractor and the product has not been purchased yet.
In first case, the purchased product can be returned to supplier for a replacement with required color of same product. This may cost or not cost the contractor. In second case, the contractor may not have to pay additional amount for change of colour. But contractor need to show the cost associated with this change order as zero or the actual cost.
It should be paid upfront
If you are not getting that done, then you are not following the standards. Get that change order amount upfront. If client wants some change, contractor will accept the change and do that work and ask for extra payment.
If the client changes the mind frequently as it happens in many projects and finally client came to a point where he doesn’t want any further change but by that time large amount of changes have been done in the project, the change order got some hefty amount.
It sometimes happens in contract that contractor makes more the money than the original contract value through this.
This order could be generated by contractor in some unforeseen conditions, may be something wasn’t anticipated initially and was excluded from the contract and now it has come into the picture, like If there is rain possibly it will delay the project.
You also have change order if any change to the completion date. If change in the product, the product once you have selected those and have been priced, you are going to make a change order incorporating that price or specifications in your contract that would affect your contract value.
Notification of the change
A change order once signed becomes part of your construction contract, it’s very important that any change you had, must be informed to owner in written order, so that it gets covered in your contract agreement.
Change order can be created in an excel spreadsheet which most builders will be going to use unless they have some project management software.
Some items to be changed may not be the part of plan or specifications or the construction contract, so scope of work mentioned in the contract is the key part of these orders.
Total price change of construction contract
Another key part is the total price change. Every line in the change order shows the items wherever the price change in material or labor, then there is subtotal and additions to overheads and profits, insurance tax and the builder fee and these all should be negotiated during the contract.
Contractor needs to make it sure during contract phase to discuss change order with the builder, so you have all these items prepared and negotiated so no questions arises later.
Sometimes contractor charges more fees for a change order because it does disrupt the normal construction process, so all that things needs to be discussed in contract upfront.
Contractor should mention the number of change orders mentioning the original contract amount and the current contract amount due to these orders.
5 key components of change order in construction contracts
There are 5 key components to change order, it needs to be checked whether your change order should include all these as mentioned here.
1. Change in the original scope of the work:
If client is changing the product, or there is change in design, whatever the case may be, should be made as a change order.
2. Change in contract value:
If there is an addition or deletion to the project, it’s possible we are getting increased or reduced amount of the contract value, you are amending the contract, so the change order is must.
3. Change in time:
Commencement and completion dates or construction project is mentioned in the construction contracts. In case of project delays due to change orders, contactors can negotiate it with client that delays are due to change orders and they are not liable for it. The client may consider it and an extra time is allotted to the contractor for incorporating the changes.
4. Signatures of both parties
Client and contractor both signs on the change order. Contractor should have a representative of his company and should have been trained on these procedures.
5. Date of change:
Signatures should be along with dates of changing the item or design or any sort of amendment.
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