Change orders are prevalent in the construction industry. These change orders can become unmanageable if not approached professionally as they can cause lengthy delays in the project completion, especially if these orders are not appropriately defined. In often cases, change orders lead to construction claims and delays because these are not properly addressed.
Therefore, the key to effective change order management is timely resolution and address. Contractors don’t like change orders because these require additional work and materials. Sometimes it leads to costs overruns due to inaccurate cost estimation of the change order. Therefore, change order management requires professional help and resolution.
Ways to Evaluate Costs under Change Orders in Construction Projects
If you are experiencing change orders but don’t know how to quantify these changes, don’t worry. Here are the top three ways that professionals in the construction industry use to evaluate the costs of change orders and quantify changes made in the initial scope of the project.
In most construction projects, during the bidding process, the owner includes a list of items with unit prices in the bid forms. In such cases, the contractor submits his bid proposal by filling in the rate of each item, including materials and equipment. These unit prices include a total estimate of all the direct and indirect costs, including overheads and profits. Thus the contract includes all the unit prices proposed by the contractor when the contract was awarded.
In such cases, when the owner requests a change order, the owner validates the cost of additional work and equipment by its unit prices, as mentioned in the contract. The owner verifies the material quantity required for the change order and compares its price with the unit price mentioned by the contractor on contract. Change order unit prices need to be the same as the unit prices under the contract.
In the Lump Sum method, the owner has to prepare a cost estimate separately of the scope of the work for each change order. This estimate needs to be detailed as it will be used to validate material quantities, labor wages, pricing, etc. These independent cost estimates should be provided in advance or at the time of the Change Order, so there are no delays.
If you are experience delays due to the owner, make sure to consult a construction delay expert witness. Another important consideration is that owner’s cost estimate should be based on current market rates, so you are paid in full and can support the change order without any issues. Your direct and indirect costs should include the following components:
If your project uses union laborers, then you need to provide their hourly rates. You also need these estimates for payroll, benefits, insurance, taxes, etc. Also consider factors that may increase the wages like overtime, schedule, transportation allowances, etc.
- Material Costs
For this, the contractors generally use base unit costs of materials or quoted costs or invoiced costs from suppliers and vendors. It also includes other additional costs for shipping, storage, tariffs, duties, etc.
- Equipment Costs
This includes contractor-owned, rental, or leased equipment costs. It also includes rental rates of equipment daily, weekly, and hourly costs, including operating costs of these items.
This includes the cost of consumables items and small tools. It is mostly calculated as a percentage of total labor cost, or cost per man/ hour.
Overheads include costs of contractor’s office, management, etc. Its percentage depends upon the project specifications, but a reasonable percentage is around 8.0% to 15.0%.
Time and Materials (T&M)
In Time and Materials method, contractor’s overheads and unit rates that are applied to actual costs are based on two factors:
- Rates that are decided during the bidding of the construction project and are included in the contract between the owner of the project and the contractor.
- Unit pricing and rates negotiated after the award of the construction contract.
In this method, the contractor sends daily reports on the completion of work for change order with all the extra work done, including time required and material costs. This is done to request monthly payment requests. The daily report can include labor and material costs and time required on a daily or hourly basis to complete the extra work that resulted from the change order.
The owner might also request the contractor to submit additional evidence like copies of invoices from subcontractors, material vendors, suppliers that were involved during work on the Change Order. If the owner raises issues in the court, make sure to get the help of construction claims consultants to secure your payments.
Effective Change Order Management in Construction
These are some of the most common ways to quantify change orders for effective management. Change orders are very common in the construction industry and can cause significant delays in the project and budget overruns. It is very hard to please the clients as they can request change orders when you are at the later stages of the project. If left unattended, these change orders lead to unmanageable consequences. However, with effective change order management, these changes can be profitable for your business.
So, instead of being afraid of them, it is time to incorporate changes in your project as soon as they are made to avoid delays and deliver a successful project to your happy clients.