If you’re reading this, you most likely are already familiar with construction change orders. Officially speaking, a construction change order is an amendment to an original contract drafted and approved by two parties.
Contracts are crucial for construction companies, given the uncertainty of job sites and proposals. If something needs to be changed within the original agreement, either party can submit a change order request, and once approved, the changes will be made to the original contract.
Let’s explore the four types of change orders and an example of when you would use them.
A lump-sum contract in construction is sometimes known as a “stipulated sum contract.” This is a construction agreement where the contractor agrees to complete the project for a predetermined, set price.
However, this doesn’t necessarily mean that the entire sum is paid in a single payment at the end of the contract.
The contractor must carry out all the work necessary for a specified sum of money or a fixed rate per unit of work done and typically used in large-scale projects.
Lump-sum construction agreements are the most efficient way to lower the construction cost since it’s all determined at once and at a fixed rate from the start.
Maximizing profitability with Lump-Sum change orders can be tricky for even the most experienced estimators. Additional unforeseen delays for parts or increased labor costs can erode profitability.
Example of Lump-Sum Contract
An example of a lump-sum contract would be a large construction project such as when the client decides to remove the sink from the side countertops and wants it moved to the center island. The cost would be predetermined with a fixed rate, and the client signs the change order approving the increased costs.
Zero Cost Change Order
Zero cost is almost identical to a lump sum contract. But the zero-cost change order does not alter the contracted price for the project.
The zero-cost change order is a contract term that allows the buyer to change the project without adding extra costs.
This is beneficial for both parties because it ensures that the buyer will not have to pay more for changes, and it also ensures that the seller will not have to spend time on those changes if they do not want to.
This means that if you are requesting a change in scope, time, or price, then you will need to pay for it.
Example of Zero Cost Change Order
Zero-cost is much easier to create as a change order since there is no difference in the price. For example, a homeowner may initially specify a lighter color for cabinets in a kitchen. Maybe they want a darker shade since they’ve changed the paint option. The stain will only require a few extra coats but no cost difference. Therefore, the stain color changes but with no cost change to the project total.
Time and Materials
Time and materials, also referred to as T&M, is when a change order occurs, and the entire cost cannot be estimated at the time of submitting the change order. This can be due to several reasons, such as lack of information, or because the work has not been done yet.
Instead of a lump sum for the project, a time and materials contract outlines the scope of the project along with the hourly rate and material costs. For contractors, this type of contract can be profitable as they are sure to recuperate the costs associated with the job. However, homeowners may be wary of time and material contracts because of the unclear costs of the job.
Contractors could include a “not to exceed” clause to help ease the concern of homeowners undertaking renovation projects. These clauses stipulate that the final contract amount will not go over a determined amount.
Example of Time and Materials Change Order
Time and material change orders are when it’s difficult to estimate the overall cost. Some factors might alter the end price. An example is if the contract is written up but as work progresses, one of the subcontractors discovers faulty wiring.
The electrical system is not up to the standards of The National Electrical Code (NEC). These are required repairs before construction continues.
They need to hire an electrician. The job will take a full work week to complete. Here’s the breakdown of the cost change.
The cost for labor and materials is $3 per square foot. The job is for a 2,000 sq foot house. That would be $6,000 to be added to the initial value of $20,000 for the overall remodel.
Unitary Cost Change Order
A unitary cost schedule is vital for controlling the cost of extra work units where the quantity of work is out of the project budget.
This type of change order is for unitary cost schedule values. These often occur when the cost of a project is easy to predict.
It can be used for any change, such as design changes, scope changes, and cost changes. The construction change order should include all information about what has changed and why. These are usually so owners can have more control over the scope of work.
The construction change order should include all information about what has changed and why. This consists of any new work units that have been added or deleted from the original plan, as well as any new costs associated with these work units.
Example of Unitary Change Order
Concrete contractors may have a unitary cost schedule for cubic yards of concrete poured. Let’s say the homeowner decides to add length to the original estimates, to extend their patio space. Since they’ve already signed the proposal, a change order is requested. This is an example since you can purchase in large quantities, and it can be a unit estimate of cost and labor.
Why Do You Need to Know Types of Change Orders?
Construction change orders are documents used to communicate the changes that need to be made to construction projects, and they can massively change the scope of work. Therefore, as a contractor, you need to know the difference between each change order so that you accurately document what is needed. If the change order stipulates time and materials, you’ll want to ensure that you are tracking your crew’s time and the materials you are using.
The type of change order will depend on the changes requested, your ability to estimate, and the comfort level of the client.
Construction projects are constantly changing and evolving as they progress. This means that there will always be possible changes in the construction project, and these changes will need to be communicated through construction change orders.
Construction projects often have the need for altering the initial plan. Whether a change in the job site occurs, a delay in materials, or a change in the mind of the client, a change order will inevitably be issued. Using the right type of change order for projects will help you turn change orders from liabilities to assets.
Once you understand the meaning of these change orders, you will know what’s best for your proposal.
If you’re a contractor, your best option is to consider using change order software, like Trak Changes, to simplify the process.
Start your free trial of Trak Changes today and see for yourself how you can save time by streamlining the process of change orders.
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