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Do You Know The True Cost Of A Change Order?

Do You Know The True Cost Of A Change Order?

As frustrating as change orders are, they are inevitable in the construction world. However, that doesn’t mean that you should accept them as the “cost of doing business”.

As difficult as it can be to accommodate change orders, they’re simply a constant in the construction industry. At one point or another, you’re going to have to deal with one, for one of two key reasons:

  • Owner-initiated changes: Mostly unavoidable
  • Design errors and omissions: Often manageable with better oversight, tools, and processes

However, even though change orders are inevitable, that doesn’t mean you can’t apply a range of best practices to help avoid them where possible, and mitigate their negative effective otherwise…

What Causes Change Orders?

By paying attention to why change orders occur, you can identify patterns and troubleshoot issues. For instance, the possible causes of change orders in the construction of large buildings include:

  1. Change of planes by owner
  2. Owner financial difficulties
  3. Owner change of schedule
  4. Ill-defined project objective
  5. Substitution of material or procedures
  6. Conflict between contract and document
  7. Change in design
  8. The scope of work for the contractor is ill-defined
  9. Error and omissions in design
  10. Lack of coordination
  11. Value engineering
  12. Technology change
  13. Differing site conditions
  14. Contractor desire to improve his financial conditions
  15. Contractor financial difficulties
  16. Unavailability of skills
  17. Unavailability of equipment
  18. Defective workmanship
  19. Safety consideration
  20. Weather condition
  21. New government regulations

What’s The True Price Tag Of A Change Order?

It can be difficult to get an accurate idea of what a given change order is actually costing you. On average, change orders result in a 30% loss of productivity. Really understanding the specific and layered cost of a change order will help you minimize the negative effects.

  • Direct Costs: Typical direct costs include materials, labor, equipment, and other expenses relating to the change. These costs also include some less obvious expenses like the cost to redesign the structure, cost of communication with crew and engineers, cost of extra set up and clean up, etc.
  • Indirect Costs: Indirect costs (including overhead) can be a fixed or variable part of the construction project, depending on a business’ accounting practices. In cases when the indirect costs are a percentage of the overall job, the more expensive the job becomes, the higher the indirect costs are as well.
  • Consequential: Consequential costs are costs that are incurred because of the timing of the change order. By diluting labor power, reassigning supervision and causing interference from seasonal weather, change orders can slow down efficiency and cost companies in ways that are very difficult to measure.

How Should You Optimize This Process?

The bottom line is that you need to gather, track and analyze all the available data. The more you know about the change orders you deal with, the more you can do to limit their effects.

Your best practices for change order optimization include:

  • Detail and substantiate all material and equipment.
  • Develop company standard change order forms that are consistent, easy to read, and clear.
  • Use nationally recognized and accepted material and equipment pricing services.
  • Use industry-recognized labor units from NECA Manual of Labor Units when appropriate.
  • Submit a sample/template change order before any work commences to establish credibility, and familiarize GCs and owners with your standard format.
  • Remember that Overhead % ÷ direct cost % = markup %
  • Leverage guiding principles to educate your clients, peers, and community at large on the benefits of change order standards.

Have You Optimized Your IT Yet?

The fact is that IT can play a big role in improving the efficiency of your construction firm, despite the effects of change orders. The top two best practices to consider are:

  1. Automation & Project Tracking: Implement or improved automation in project tracking systems. Having the right software/CRM in place will drastically improve your change order process.
  2. Working With An IT Company: Larger companies can afford to hire IT managers that bring having experience with the software you use. The management of your construction CRM could be time-consuming, so having a second person on the IT staff to handle hardware support while your IT manager is responsible for your CRM is one option.  For smaller crews, this can be financially restrictive. They should instead outsource to a managed IT service provider like Data Magic that has experience in the construction industry and can help co-manage your network systems.

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