The Not-So-Hidden Cost of Undocumented Change Orders in Construction
Change orders in the construction industry result in a 30% loss of productivity on average. Moreover, it can take as much as an additional $10 million in revenue to cover for failing to collect on $100 thousand in change orders.
If you’ve spent any time in construction project management or are a construction business owner, you know that one of the leading issues on the job site affecting profitability is change orders. Change orders are changes in the project scope of work and often result in modifications to the original contract and project schedule.
Unfortunately, they are also typically unavoidable despite your project management team’s best efforts. So, since you know you’ll have to put up with change orders, do you know how to make the process as pain-free and profitable as possible?
Why Are Change Orders So Common in Construction?
There are many reasons changes can occur on your construction project. As mentioned, they are often an unavoidable fact and can result from unforeseen field or site condition changes, project design changes, or owner requests. Understanding the root causes of change orders can help construction companies identify patterns and troubleshoot ongoing issues.
The possible causes of change orders include internal influencers (builder or general contractor) and external forces (owner, designer, architect, sub-contractor, vendors, trades, site conditions, regulatory, and more).
Owner change orders are those made by the project owner or stakeholders due to poorly documented or merely altered project objectives or scope of work, scheduling, or financial issues and variations. Design change orders occur when the project designer substitutes materials or finishes or errors or omissions in the design itself.
Change orders can also occur through simple miscommunication, documentation, and coordination. For example, a conflict between the general contractor’s original contract and the work defined and contracted to sub-contractors can result in change orders. In addition, value-engineering and changes in technology during construction can also result in change orders.
External forces such as unforeseen or varying site conditions, inclement weather, availability of equipment or skilled tradespeople, safety conditions, and regulatory changes can also create the conditions for change orders on the project.
Change orders can also result from contractors attempting to improve their financial position, financial difficulties or mismanagement, or quality issues with the work itself.
What Do Change Orders Cost Your Construction Firm?
First, it’s critical to understand the total cost impact change orders have on your construction company. While change orders are sometimes an expected part of construction projects, estimating their actual cost accurately is difficult for even the most seasoned construction project manager.
According to a 2015 research study, change orders in the construction industry result in a 30% loss of productivity on average. However, understanding the actual direct, indirect, and consequential costs can help construction companies mitigate the potential financial losses.
Direct Costs are costs directly impacted by the requested change order. Typical direct costs include labor, material, equipment, and other expenses relating to the change order. These costs may also have some less apparent expenses like redesigning the structure, cost of communication with crew and engineers, extra set up and clean up, and more.
Indirect costs include overhead and can be a fixed or variable part of the construction project, depending on your business’ accounting practices. When the indirect costs are calculated as a percentage of the overall project, indirect costs rise as the project becomes more costly.
The timing of the change order during construction phases has a significant impact on consequential costs. For example, when labor power or project supervision is spread thin or reassigned because of inclement weather, documenting and performing change orders can lag and cost companies in difficult ways to measure.
It’s important to note that costs can quickly change as the scope or phase of the project does. Therefore, the cost of a change order is directly related to the project phase in which it is initiated. For example, changes in the design phase are much less expensive than changes made once construction begins or at later build stages.
Overall, the cost of uncollected change orders can have a tremendous impact on the financial health of your construction firm. According to a recent article in Construction Business Owner magazine online, it can take as much as an additional $10 million in revenue to cover for failing to collect on $100 thousand in change orders.
Improving Your Change Order Processes Can Have a Significant Impact on Your Profitability
Miscommunication, a lack of information, and poor documentation can create costly issues with change order management. However, a more proactive approach to change order management, implemented in the earliest planning phases of the project, can help mitigate the cost and schedule overruns.
When a change order is requested, the project manager needs to quickly ascertain the impact on the project’s overall time and budget, document, and report. Unfortunately, overestimates and underestimates are common when no actual data is used to support the estimating process. As a result, project managers often eat into the project’s profitability without convenient access to data and information.
The best methods to reign in change order management issues are having an established, standardized change order process, consistently training your project managers to successfully navigate it, and up-to-date technology for documenting and reporting. In other words, focus on your people, processes, and technology.
A well-documented, standardized process for managing change orders from owners, designers, architects, sub-contractors, or internal team members, can save money and time by standardizing your systems and workflows for addressing issues and communicating change orders to your staff. In addition, be sure to train your on-site and in-office project construction management teams thoroughly on the system you implement.
Construction project management software like CMPRO™ can help define and streamline your change order process in many ways, including:
- Establishing a standardized change order form that is clearly understood and easy to digitally submit and seek approval in the field
- Providing an audit trail of change order documents and files, you have stored in a centralized hub
- Improving team collaboration and communication involving requested project changes
- Helping define change order workflows and team roles and responsibilities
- Increasing team accountability and access to vital project information
The technology you implement in the field, like laptops, tablets, radios, digital cameras, drones, and much more, is more important than ever and can significantly impact change order management. For example, a poorly performing laptop, or a digital camera that stops working, can prevent your on-site construction management team from quickly and accurately documenting and communicating conditions that may warrant a change order.
Additionally, vital and urgent email communications that affect construction that fail to make it to the project manager because of failed technology can create costly delays. Therefore, it is crucial that you commit to providing and maintaining your technology in the field.
So, what is your construction firm doing right now to manage your change order process? Whether you operate as a general contractor or sub-contractor, there are things that CMPRO can help you do to manage change orders and even reduce costs on every project.
- Change order documentation, reporting, and tracking. CMPRO makes tracking change orders simple and effective, whether from the owner, materials vendor, sub-contractor, or internal team members.
- Daily reporting and communication between the on-site project team and the office. Poor communication and coordination between your project management team on the construction site and your office accounting team can cost your business thousands of dollars, possibly more, depending on the size and scope of the project. CMPRO helps you manage critical communications such as RFIs, Submittals, and Transmittals.
- Project budgeting and forecasting. Unknown or unforeseen costs can rob your construction project of its more complete contribution to your bottom-line profitability. CMPRO makes communicating the project budget and forecasting income and expenditures easy to manage. You can also easily manage Vendor Contracts and Pay Applications.
CMPRO is easy to learn and use, saving you valuable time and money in implementation and team training. Find out how CMPRO can help simplify your change order documentation, reporting, tracking, and communication by scheduling a demo, visiting our website, or contacting us at [email protected]
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