If you’re in construction, you’re undoubtedly familiar with change orders. They’re part of the risk with construction projects. Change orders are not all the same. They will differ in changes or types. They might also have a “not to exceed” change order clause which requires specific attention.
Construction change orders are often implemented when a project is not going as planned, or when unforeseen circumstances arise.
These orders may be issued by the owner, general contractor, architect, or engineer. Change orders can be major or minor. They often require additional design work, engineering analysis, and construction plans.
It can be issued by either the owner or contractor, and both parties must sign it. The change order should include a description of what has changed, the date of the change, and any other relevant information.
It’s crucial to understand the ins and outs of change order clauses to prevent issues that could lead to disputes or legal actions. There’s a clause that is important to look for within a change order.
Here’s what a “not to exceed” clause means in a change order contract, and how to handle the situation.
What is the “Not To Exceed” Change Order Clause?
You might not be familiar with the “not to exceed” clause. It’s an agreement of a preset budget for a project or an allowance for a particular portion of the project.
A not to exceed change order clause codifies the maximum amount payable to a contractor for the performance of the work under a time and materials contract. Basically, it’s a cap on price, time spent, and material costs, to prevent a project from spiraling out of control too far beyond its initial scope.
If you have a time and materials project, it could have a “not to exceed” clause, since it’s subject to change. A fixed-price model is a lump sum amount without changing variables.
For example, there might be a “not to exceed” clause when minor pricing modifications during a kitchen remodel.
It’s essential to verify any changes with the owner. You cannot exceed until you have a change order to agree with new changes. Once you have a change, you cannot proceed until you have approval from the client.
You might think it’s just a small modification; however, depending on what type of payment method you’re doing, you cannot have any wiggle room within the contract.
To make this minor modification, if there’s a not-to-exceed clause, there is absolutely no opportunity to go beyond the clause – not without a written change order.
As a contractor, you need to create an estimate for the new changes. You cannot exceed an NTE unless approved by a formal change order.
The NTE is usually there since there’s a scope and price range that the owner is trying to stick with. You want to ensure you can make the changes without impeding a contract or change order, and that everything is fully approved by the client.
Since the clause is an estimate, it could be more or less. If it’s less than the NTE, they get credit. If it ends up being more, it’s ok because they have already signed the change order.
What Happens If You Bypass a Not to Exceed Clause?
Don’t forget that when you’re working with change orders, they are amendments to a contract. A contract is legally binding, and therefore, you want to take caution with verifying the perimeters of your agreement.
To ensure that you abide by change orders, it is essential to have a contract in place.
This contract should include all necessary details to ensure that both parties understand what they are getting into.
Change orders are a legal requirement for any construction project. The contract between the contractor and the property owner is not complete until both parties sign a change order.
It is always better to abide by change orders and make sure that you comply with your contract. Bypassing an NTE clause without client approval can put you at risk from a legal standpoint.
Even if it’s a minor change, there could be specific reasons for a “not to exceed” clause. The owner could have a strict budget and need to allocate the project if things change. Or, they may need to evaluate the contract and eliminate part of the agreement to fit their budget.
A not to exceed clause could indicate the client only has a certain amount to spend on the project. The client may simply not have the funds to cover the cost of extensive changes.
Navigating Change Orders When There’s an NTE Clause
Think of the not to exceed clause as a pause. It would be best if you figured out the possible cost for that part of the project, and addressed the issue to the client.
Once they understand the new scope of work, a change order can be made, and the new work can be reconfigured into the cost.
It is crucial to stay within the agreement set with a client. As much as you don’t want to issue a change order, you must respect the contract, even if it’s a minor change.
An NTE clause indicates that the client is on a budget and needs to evaluate any modifications. What seems like a bit of change could alter the entirety of a project. Always discuss before proceeding.
Always err on the side of caution when you run into a NTE clause in a construction contract.
How Change Order Software Can Help
It can be stressful to manage change orders. You don’t want to impede on a “not to exceed” clause. The best way to avoid this is to organize and track your change orders – and change order management software is a great way to do that.
Software for change orders can help manage these changes by providing a system that allows for easy access and tracking of all the changes made during a project
It can also make sure that all stakeholders are aware of them and know how to handle them.
Trak Changes keeps a running log of a contract’s initial value, plus all of its change orders and their impact on the cost and pricing, all in one centralized place. This running total of the overall expense of the project makes it easy to keep an eye on how change orders are affecting the original estimate, helping you stay on top of these changes and avoid violating a do not exceed clause.
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