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The Change Order: Blessing or Curse?

The job is going great. It’s on schedule. Your crew is moving through the project like a well-oiled machine and under budget, to boot. You can make out a nicely profitable finish line from where you stand. It is a good day.

That’s when you’re informed that the 200-foot wall you just completed needs to move 12 feet that-a-way. And the 5,200 square foot ceiling has to drop 4 inches, give or take.

“But the drawings,” you protest.

“Sorry,” you’re told, “but they have to re-route the ducts. And, oh, yes, could you start right away?”

And up in flames goes your schedule and with it the smooth momentum of the project. It’s scramble time.

Blessing or Curse?

While some ceiling and wall contractors welcome the unforeseen—especially if they, in fact, had foreseen it at bid time but the architect had not—and the profitable change orders that go with it, others would rather stick to the task as planned, complete it and move on to the next project.

Whether blessing or curse, the change order isn’t going away. So how should we approach this creature? How do we turn a potential curse to a blessing? Should we ask “how high?” when the GC tells us to jump, or should we make it very clear to him precisely what he can do with that request?

Views on this subject abound, and we checked the pulse throughout the country to find out how AWCI member subcontractors, consultants and general contractors view change orders these days.

Do you always demand a signed change order prior to doing the change work, or will you start the work and get a signature later?

Replies Gerald Roach, president of Forks Lath & Plaster in North Dakota, says “it all depends on the general or the customer we are working for. It depends on the trust level I have with them.”

Greg J. Vangellow, president at R.W. Dake & Co., Inc. in New York, puts it this way: “Typically, we will demand a signed change order; however, for those customers with whom we have a strong relationship, this policy is more relaxed.”

Dave DeHorn, chief estimator at Brady Company in California, expands on this point: “It depends on the relationship you have with the GC and the type of project you are working on—whether public or private.

“For our good clients we will start work based on a written letter or email directing us to proceed. This works as long as, when it comes time to bill, the GC provides a written change order that we can bill against.”

Greg Smith, vice president at Mowery-Thomason in California, says “You try to obtain a signed change order prior to doing the work, but in reality that rarely happens.”

Adds Glenn McBride, Fort Worth division manager at Marek Brothers Systems, Inc. in Texas, “We normally perform the majority of changes prior to an executed CO in an effort not to impede the construction schedule.”

From a GC’s perspective, this is what Chuck Taylor, business development at Englewood Construction in Illinois, has to say: “Our corporate policy is no change order work without owner signature, and we pass that on to our subs, asking them not to perform such work until approved in writing by the project managers.

“That said, the challenge is that these days commercial construction runs so fast—losing a day can mean losing a week for loss of momentum—so we often approve change orders on the fly, even before owner approval.”

Craig Daley, president of Daley’s Drywall & Taping in California, says, “The funny thing is that almost every contract we enter into says that no extra work is to proceed without a signed change order, but no one does it that way. Trying to hold a client to their own contract language is not practical.”

A stricter perspective, this from Angelo Castelli, COO at On Center Software in Texas: “Nothing is more important than keeping proper paper trails concerning changes. Without a signature, a contractor runs the risk of not having agreement on what was actually requested.”

Mike Heering, president of F.L. Crane & Sons, Inc. in Mississippi, says, “Our company policy is always to price change order work and to obtain a signed confirmation of acceptance before starting it, making sure that the person signing the change order has the authority to do so.”

Lee R. Zaretzky, president of Ronsco, Inc. in New York, says, “We ensure we have written acknowledgement that the work is additional. Rarely, though, does the schedule allow time for receipt of a formal, signed change order prior to proceeding. This, like everything else, comes down to relationship.”

Tim Donohue, president of the Interior Finish Contractors Association of the Delaware Valley and owner of TE Construction Services in Pennsylvania, will “perform CO work if given a field work directive issued by someone authorized to do so.”

Kim Galie, president of Heartwood Building Group in Pennsylvania, has this outlook: “We’re supposed to have a signed change order, but that never happens. Typically we start work based on some direction in writing to proceed, usually an email. But we expect a signed, formal change order eventually.”

Robert Aird, president of Robert A. Aird, Inc. in Maryland, says, “While our company policy is not to start work without a contract, letter of intent, or purchase order, sometimes—especially with a good, regular customer—we do start the work without the signed CO. History and relationship are critical to that decision.”

Jerry Reicks, president of Jarco Builders in Iowa, says, “We do not push the pre-signed change order issue unless we know there will be problems collecting. However, our foremen and PMs carry CO booklets, documenting every request.”

Dane H. Shiplee, president of Union County Construction Group in New Jersey, always asks for a change order if their contract states that no additional work will be paid for if done without one.

“Oftentimes, the GC claims it’s OK for his superintendent to sign for the work even if the contract states differently. When I hear that I ask for a letter to that effect; only once in hand will I proceed with the additional work. I have noticed that GCs and their superintendents often suffer amnesia once the job is complete.”

To round up this question, Andre Grebenstein, project manager at the Martin Group in New Jersey, offers this view: “As a general contractor, all we require is an owner e-mail approval. It’s rare that we hold out for a signed change order. Of course, roughly 80 percent of our work is from repeat clients, which factors into our approach.”

Do you handle change orders differently for different GCs?

“Yes,” says Roach. “It all comes down to trust level. Some GCs, however, seem to forget what was talked about. With them you need it in writing before you start.”

In the experience of Robert A. Coyle, executive vice president of Dayton Walls & Ceilings in Ohio, “Some GCs we have learned to trust; with others, we have paid for the knowledge that they cannot be taken at their word.”

DeHorn suggests, “If we do not know a GC, we try to stick to our contract. If we know the GC, then we tend to relax the contract language.”

Smith says, “Some clients are very good at providing signed change orders, others take an inordinate amount of time. With the slow moving GCs we don’t let them get too deep into us with COs before we have a meeting to discuss where the project will go if this pattern continues.”

Says McBride, “Relationships, payment terms, risk are all factor in how we handle our change orders.”

In Taylor’s GC experience, “It’s a two-way street with clients we have relationships with—we know their word is good, they’ll make us good now or down the road. But with less trustworthy clients, we may even stop work until we receive a written change order.”

Charles Antone, COO of Building Enclosure Science, a Rhode Island construction consultant, believes that “every GC is different. If the GC forced you into a very low buy-in number at bid time, or if the drawings are very bad, or if the GC is combative, well, then you anticipate change order battles and you’ll have to demand a signed CO. Not so if you have a good, long-term relationship with the GC.”

Dick Mettler of Northwest Wall & Ceiling Contractors Association in Washington agrees. “You deal with change orders based on your experience with that GC or project manager,” he says.

Heering, “There are some GCs we work for that have always honored their commitments and will make sure you get what you have coming to you.”

Steve Angell, senior estimator at Dimeo Construction Company in Rhode Island, explains how he works with change orders: “I will do verbal change order work with GCs I know, but I still require email or text approvals with formal, signed change order to follow.”

Donohue also trusts those good relationships: “There are GCs we have had long-term working relationships with that stand by verbal/email directives to perform additional work. Others we treat strictly by contract.”

According to Kevin Biddle, president of Mader Construction Company in New York, “It all depends on how they have paid in the past and if they beat us up on pricing.”

Shiplee’s view is this: “If I’ve worked with a particular GC on many occasions and I know he can be trusted, I will do the work first and get the CO later. But, believe me, there are very few GCs that I trust that much.”

Under what circumstances would a change order not be necessary?

In Coyle’s experience, “There are some projects where the scope changes are nickel and dime items. Then I take a maintain-good-relations attitude.”

DeHorn tries to “limit formal change orders to $800 or more. This is a man-day’s worth of work plus some material. If it falls under that, then we log it as a ‘no cost’ change order. However, we do keep track of these, and if a GC or owner starts to beat us up over a larger change order, then we are quick to remind him or her of all the no-cost change-order work we have performed.”

Antone agrees: “The size of the work has a lot to do with it. With a $500 change order you have to ask yourself: Is it worth the annoyance to do the paper work? It’s often easier to do it than talk about it.”

In Mettler’s experience, “A lot of times there are tradeoffs—especially if you trust the GC you work with. I’ll do this for you, you do this for me. That’s how relationships are built.”

Adds Heering, “I guess if it’s not a very large change order and near the end of the job, and if the job was proceeding better than expected, then I might pass on a formal change order to avoid the paperwork involved.”

Aird points out, “It is not uncommon to trade services on job sites, however, in today’s construction world, if you don’t have it in writing, it doesn’t exist. “In fact, a superintendent told us just the other week: ‘If it’s not in writing, it’s just a lie in my mind.’ Sobering thought.”

Quips Shiplee: “In my book, the only time a CO will not be necessary will be in Construction Heaven where every single bit of necessary work-detail was actually shown on the drawings, and there were no unforeseen conditions.”

Now that jobs are coming back, do you view change orders less/more important than before (prior to and during the downturn)?

The general view here is that regardless of economic climate, documented change orders are crucial. Also, fierce competitive bidding is still alive and well and in this climate, a reliable way to bill and collect for your work remains crucial.

Or as Vangellow puts it, “Change orders carry the same level of importance, whether pre- or post-downturn.”

Greg Smith concurs, “Change orders have the same importance for us regardless of the economy.”

“When the economy was good,” says DeHorn, “you had a little extra money on a project. When a changed situation came up, you had the ability to take care of it with no cost to other parties. But during the downturn, there was no extra cash on projects, and still today, everyone is at a bare bones mentality come bidding time”

McBride’s view is that “change orders are equally important whether times are good or bad. However, during a downturn, projects are bid very aggressively and with margins that do not allow for contingencies to cover the small changes that may have been handled free of charge during the good times. This in turn creates a sense of nickel-and-diming and can be met with resistance.”

Antone says that with the economy improving, “there is probably less combative bidding these days. And the more cushion you have in the original estimate, the less you have to ‘make it back’ on change orders. Also, when it’s no longer all about the bottom line, relationships—and trust—tend to return to fashion.”

Says Dailey, “You can’t take your eye off the pending change order list, no matter the economy. On many jobs, change orders constitute more than your expected profits, so you can’t let them age out on you.”

Zaretzky says, “Change orders are and always will be a part of business, in good times or bad. We are always fair and are quick to offer credits for scope eliminated/reduced. Again it’s all about relationships and trust and being fair.”

Would you forego the need for a change order to keep the peace (and good relations) with your GC?

Yes, Coyle would. “And even more so during the downturn because general contractors were scratching and clawing to save the bottom line,” he says. “I try to live by the old saying though—‘Burn me once shame on you, burn me twice shame on me.’”

Coyle is not alone in this view.

Antone says, “You have to weigh it, but yes, absolutely. Keeping the peace is crucial if you have a good relationship.”

Mettler opts to keep the peace, too. “You would, depending on the cost. However, beware of the general who will make it up for you ‘next time.’ As a rule, I don’t buy that.”

Daley says you have to know where the money is coming from when trying to initiate a change order. “GCs can be on your side when the money comes from the owner,” he says, “but good luck on being paid from the GC’s pocket.”

Adds Donohue, “Yes under the right circumstances, as when you need to help a good GC deal with an unreasonable owner.”

DeHorn has waived a change order in the past—and he’d do it again. “The question,” he says, “is do you want to continue doing work with this GC?”

Taylor offers the GC’s viewpoint: “We often find ourselves between the sub and the owner (i.e., rock versus hard place), and in many cases where the owner is unwilling to pay the change order, it has come out of our pocket, especially where we want to protect our sub relationship.”

On the flipside, Castelli points out that while it’s tempting to sacrifice a change order for the sake of a good relationship with your GC, “the answer is no. I wouldn’t, and the truth is, neither should the GC or the sub. They need to make certain everyone is agreeing to what needs to be completed.”

Are change orders profitable?

Sometimes change orders are profitable, most of the time they’re not.

Roach’s take is that “you can make money on some COs, but they often mess up your job schedule and get in the way of other upcoming jobs.”

Coyle concurs, “If you really look at what goes into a change order, they are not profitable. For one, the project momentum is lost from stopping and starting on a project—this is a hard thing to make the owner/architect see. We all know what the true cost is but are forced to accept the ‘unit price’ attitude of owners and architects.”

John Rapaport, director of operations and legal counsel at Component Assembly Systems in New York, shares that it “depends on negotiating the right price for proposals that are then accepted and/or signed as ticket items in the field.”

Vangellow says, “They had better be profitable. However, we are frequently held to a pre-established markup for overhead and profit that limits how profitable they can be. This practice is fine as long as it yields a decent return for the work we do and risk we take in performing the change order.”

DeHorn offers a sobering perspective: “I don’t believe change orders are that profitable. They disrupt your planned work, they can delay the project, and they can keep you from securing additional work if the estimator is too busy dealing with change orders on a project rather than bidding new work.”

Smith’s thoughts are somewhere in the middle: “They can be profitable, but typically you are just covering costs. Also, trade-damage change-orders are always negotiated down because they are coming out of another trade’s pocket.”

According to McBride, “Change orders are rarely profitable. COs not only impede the schedule progress but they tend to reduce efficiency, which in turn costs more than anticipated. For change orders to be profitable, communication between project management, field staff and other trades is a must in order to ensure that all potential costs are included in the change pricing.”

Taylor’s GC perspective is that they can be profitable, “but some clients dictate what markup we can put on a change order—typically 10 to 15 percent. Some owners pay only 5 or 6 percent on a change order. Even at 10 percent, on a $500 CO the markup doesn’t even cover the admin side of things, much less provide any profit.”

Castelli and Heering both agree that change orders can be profitable if handled properly. “They can be costly if not agreed to, properly estimated—including both materials and labor, and then tracked,” says Castelli.

Heering concurs and adds, “You have to take the time to ensure you incorporate all things necessary to do the change order, including your overhead, putting a cost to each item.”

Reicks believes that if you lose money on a change order, “well, shame on you.”

Grebenstein says, “They are rarely profitable because you usually have to price them on the fly and rarely capture the full scope and associated effort.”

As an interesting side note: Peter Battisti, a consultant at Subcontractor Resource Center of America, is putting the finishing touches to a book on the very subject of change order profitability, aptly named “2020 Change Order Pricing.” In this book he stresses that job costing (detailed accounting of) each change is a requirement. So, why do so few subcontractors job cost changes? Battisti says there are three reasons. The first is that they don’t understand the contract language. Second, job costing creates more work for the field and office. And finally, job costing limits one’s ability to manipulate the cost.

The first step in adopting 2020 Change Order Pricing, according to Battisti, is to adopt the process of job costing all changes in the work.

Why do change orders come about in the first place?

Coyle suggests that change orders are the result of incomplete contract documents. “On some projects the owner initiates the change, for which they are typically more willing to pay,” he says.

Rappaport says they “usually they stem from an RFI to the architect leading to additional pricing from the subs.”

Vangellow says, “Increasingly, more and more changes are based on incomplete architectural drawings or are based on value added suggestions from the contractors in the field.”

Adds DeHorn, “There may also have been code updates that were not covered in the drawings.”

McBride concurs, “Most change orders correct errors in the contract documents caused by the architects being pressured to issue documents prematurely and/or for unforeseen conditions causing a change in scope.”

Castelli’s practical view is that “everyone changes their minds in the middle of a project—or something comes up that makes the original plan no longer valid. Either way: Document, agree, proceed.”

Galie suggests these reasons: “Field conditions, incomplete documents, MEP changes that alter the plans, and work that couldn’t be defined at time of bidding.”

While Biddle tongue-in-cheeks it: “At the risk of upsetting my architectural friends, I plead the Fifth.”

Shiplee sums it up nicely, “Change orders come from unseen conditions or poor drawings. They also occur when a project is expanded or reduced during the construction phase.

“I wish that owners and developers would get it through their heads that money spent on good design and drawings not only earns them a better price going in, but also keeps COs to a minimum.”

What would a world without change orders look like?

We would be living in a very different construction world if there was no need for change orders.

Roach says “it would mean good architects who could draw decent plans,” while Grebenstein says the world “would be much simpler and less confrontational.”

Coyle says, “We’re either talking about the perfect project or one where the subcontractor has lost his shirt because he has been deceived into doing additional work and not been compensated for it.”

To Rappaport it means “a conflict-free BIM tied to a real updated schedule.”

Building Information Modeling is the answer for Smith, too. He says, “This is something that owners and design teams are trying to achieve through BIM and the design/build process. The line of thinking is that if we can eliminate most, if not all, change orders through BIM and design/build, the project cost would become more predictable and the project delivery would be on time.”

A world without change orders sounds pretty good to Heering. “It would be like living in a dream world where everything flows along and into its own little space designed for it,” he says.

But Zaretzky also considers the sub’s value to the GC: “While ideal, it would also take the opportunity out of the business, as our clients count on us to help them manage risk and uncertainty.”

Biddle says no change orders “would allow our PMs more time on the job site tracking progress rather than in the office pricing up changes all day.” However, he adds, “It would be like the Bills winning the Super Bowl. Neither one is going to happen anytime soon.”

McBride also has a realistic take on the subject: “A world without change orders would be perfect but unrealistic. $#!* happens.”

One Last Thought

Is BIM the antidote for change orders?

Antone holds out hope: “BIM definitely creates a cooperative environment contractually, which is a prerequisite to a change-order-free project.

“Using BIM, you’ve signed up everyone before the final plans are released, and if all conflicts are worked out, you’ll have a smooth project.

“It’s early, but eventually owners are going to realize that upfront higher cost will pay itself back over the life of the project.

“BIM emulates controlled manufacturing in the field. It’ll never get there, but it tries to.”

Then he adds, “In the distant future, perhaps we’ll just roll out a huge 3D printer that spits out the building. And we’re done.”

You never know. It could happen. Until then, keep using those change orders to protect your work and (hopefully) make a profit!

Los Angeles-based Ulf Wolf is the senior writer at Words & Images.

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