The Importance of Change Orders
Even the best contracts are informed and written according to what is known at the time they are drafted. But as with any project, there are often unforeseen factors that can change the scope of work. This is when a change order becomes necessary.
A change order is needed for anything requested by the owner after the initial contract is signed that materially alters the agreed-upon scope of work. You, the contractor, will decide what requests are material enough to warrant a change order.
The most important thing to note about change orders is that they should always be in writing. Change orders are formal amendments to the signed contract, and if they aren’t written, then they can cause significant problems for you in the event of a dispute. For instance, if you verbally agree to add a window for a certain price, then the door is open for an owner to claim that there were other verbal agreements and/or misunderstandings. For example, the owner could believe that the additional window was offset by a reduction in another area when that was not what you intended. More significantly, it can create a disagreement as to whether the contract was actually for a fixed price or whether it was a hybrid contract, and therefore potentially subjects all of your records to review.
Other things to consider regarding change orders:
Documentation: Often, change orders are discussed with an owner on site where you may not have access to your computer. To get around this, either make a note of the change in an email to yourself, or in a note-taking app (such as Evernote or Google Keep). There are also apps through which you can create a change order via your mobile phone and get the owner’s electronic signature while meeting with them on site!
Payment: It’s always a good idea to insist on up-front payment of any change order (although this may not be possible in all circumstances, such as with a construction loan). Not only does this ensure you get paid for the work, but it also demonstrates the owner’s acceptance of the change request (i.e., the owner cannot claim they didn’t approve the change).
Reduction to scope: Changes don’t always increase costs, and can actually lead to cost reductions. For instance, an owner may run tight on funds and ask you to eliminate an item, such as a fireplace. Or, an owner may want to trade out items, such as eliminating a fireplace but adding built-in cabinets. The point here is to make sure you accurately estimate the financial impact the change will have on the project. Although the owner may want or hope for a significant cost reduction, the reduced costs may not be as high as they think, and it's good to be clear on these issues upfront.
Change orders are often a significant source of disagreement between owners and contractors – but it doesn’t have to be this way! Documenting changes accurately in a signed, written agreement will work wonders in eliminating this friction point.
And remember to reach out to us before you and your client sign on the bottom line – we are happy to help you create and/or review your construction contract. Should you find yourself in a contractual dispute during a construction project, Downs Law has the expertise to help you resolve the conflict. Contact us today and get the help you need!