Change orders often involve adding new features or more work to a construction project, but they can also be used to reduce a project’s scope. In this case, it’s known as a deductive change order.
What Is a Deductive Change Order?
Deductive change orders, simply put, address a lowering of the scope of a contract. Negative change orders are used to replace one portion of a contract with lesser valued materials and/or lowered labor costs. On the other hand, the complete removal of some aspects of a contract may instead be considered a partial contract termination.
Which one to use varies on a case-by-case basis, but is important in maintaining the integrity of a contract as well as ensuring the proper calculation of additional expenses put on the contractor due to the change.
When Do You Need a Deductive Change Order?
So, what exactly is a deductive change order? The first question to ask is: Was the change major or minor?
Minor changes happen all the time and are the ideal place to use a deductive change order. A customer may wish to swap out real hardwood floors for easier lock-in slats. Or perhaps during the construction of a wall, the customer decides to reduce the size of a large window.
The job is still there, but the price of materials and labor will likely be reduced causing a descope from the original agreed upon contract. This constitutes a negative change order. It’s particularly common in a T&M contract, or when the customer is frequently near the job site.
These small variations are commonplace, however, when a customer begins to entirely remove agreed-upon work orders, causing major changes, a partial contract termination may be needed instead.
Deductive Change Orders vs Partial Contract Termination
Construction contracts will many times have clauses that allow for a “partial termination for convenience”, or T for C. These are best used with major changes in the scope of a contract, such as the full removal of an agreed-upon line item.
Let’s say a customer wants a guest house with a wooden deck installed in their backyard. Upon quoting, measuring, and getting the material list together the customer agrees to the price and timeline, signs the contract and construction begins.
Then, once construction of the guest house is underway, they decide against the deck.
This should be ordered as a T for C, as the entire scope of the work has changed and cannot reasonably be considered part of the same contract. Remember that contractors are entitled to compensation for the overhead that went into the plans, adding up to the costs they’ve incurred along the way while allowing room for a reasonable profit.
However, if the customer wishes to change the size of the deck or its materials, then a deductive change order may be the best option. For substitutions like this, the work must be deducted from the contract, and then the new work added back in. Importantly, this avoids breaking any part of the contract and work should be able to continue quickly.
The difference between a deductive change order and a partial contract termination can be a bit tricky. In many cases, it might not even make a large difference in the final total. But there is an importance in determining which one to use in case of a disagreement between the customer and contractor and to avoid muddying line items in the increasingly complicated contract.
Deductive change order example
Let’s look at a full deductive change order example:
The customer wishes to install an additional room with a bay window at the back of their house. Material costs, timeline, and price are assessed and a contract is signed with standard clauses for deductive change orders and T for C.
During construction the owner has second thoughts on the bay window, perhaps a bay window facing their backyard felt like an odd aesthetic choice, and would like to instead install a standard window in its place.
Partial termination makes no sense here, as both parties still want the work finished. So in this case a deductive change order would be issued by the owner to remove the bay window from the contract and replace it with the standard window.
Minor changes and work substitutions should be handled in this way to keep the contract intact and to help properly calculate the overhead and profit in the deductive change order.
Overhead and Profit in Deductive Change Orders
The best way to deal with a deductive change order is really to just delete the line items on the contract. After this, the new items are added in as a different change order. This works if ALL the costs of each item, including overhead and profit, are tracked and included in each item’s total.
Obviously, this is much easier said than done considering the potential of other sub-contractors being less meticulous in tracking their overhead. However, it is a guaranteed way of avoiding any obvious contention.
Using Software Can Simplify Managing Deductive Change Orders
It is important to have an easily accessible record of changes in a contract. Streamlining the change order process can help keep the details clear and consistent. This way there’s no misunderstanding by any parties involved and everyone can move on to the next leg of the job without any problems. If everyone’s on the same page, working within the same software, communication errors become less likely. Simple as that.
We created Trak Changes to make change order management easier and more centralized. Just write in the changes, email the customer of the updated pricing, and have them digitally sign.
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