Construction industry studies show that change orders represent an average of 8% to 14% of contract value. Based on this statistic, effective management of change orders can clearly be a key to profitability. While all heavy construction companies have some type of process for identifying and managing change orders, many do not have a process that maximizes the recovery of change orders.

This is surprising when you consider that every dollar recovered falls directly to the bottom line. Therefore, a 1% of contract value increase in change order recovery, increases net income, as a percentage of revenue, by 1%. In our low-margin industry, that is huge.

There are four important steps to managing change orders:

  1. Identify that requests of the contractor to perform additional work are not part of the original contract scope and therefore eligible for change order recovery.
  2. Price the additional work. It is important that this be done promptly and accurately.
  3. Submit the change order with the appropriate documents and within the timeframe prescribed by the contract.
  4. Monitor the status of the change order until the approval process is completed, and it is paid!

Identifying the Need for Change Order Recovery

Identifying that additional work qualifies for a change order may sometimes be obvious, but other times it may not be so obvious. It is important that field supervision have an adequate understanding of the physical scope requirements of the contract. Managing costs of the contract in alignment with the estimate facilitates this.

When B2W Estimate is used to create the original estimate, line items and costs can be loaded directly into the job cost system as bid and costs are tracked accordingly. In addition, if field supervision is using B2W Track to report performance in the field, the variations in project scope are more easily identified, as costs and quantities are likely to exceed bid amount in the related line items.

Determining the Value of a Change Order

Turning to the pricing step, B2W Estimate makes it easy to price change orders quickly and efficiently using the same assumptions and structure as the original estimate. This B2W capability allows contractors to essentially handle change orders like estimates within estimates, keeping them uniform and linked with the base bid. Since change order pricing is frequently the stumbling point in the process, utilizing this approach to accomplish it quickly and accurately should result in increased change order recovery.

VIDEO: Manage Change Orders in B2W Estimate

Submit and Monitor Change Orders

For submitting the change orders and appropriate documentation, project management software can aid in accomplishing this. These solutions can also help contractors monitor the status of the change order from “cost event” to “approval.”

Managing Change Orders

An overarching requirement for change order recovery is management focus. Project owners frequently try to push change order resolution to the end of the job. This often results in contractors not recovering full contract value. Change orders are not like wine, they do not improve with age. The push for prompt resolution must come from management.

There are many ways a construction company can improve profitability by leveraging technology. Change order management is one of the higher return opportunities.

Herb Brownett