Change orders: What they are and how to use them

Throughout the lifecycle of a contract, many things may need to be changed. You may need more supplies, fewer supplies, etc. Instead of breaking off the contract or having a negative relationship with partners or vendors, change orders are used.

What many people don’t realize is that there’s a right way and a wrong way to take advantage of change orders. In this guide, you’ll learn what change orders are, the key components, and how to use them the right way.

Understanding Change Orders

A change order is a formal written document that modifies the terms, scope, or conditions of a contract or project. It serves as an official request for changes to the original agreement and outlines the details of the proposed modifications. Change orders are typically used in construction, engineering, and other industries where projects involve complex plans and specifications. The primary purposes of change orders are:

1. Scope Changes: Change orders are used to address changes in the scope of work that were not included in the initial contract. This can involve adding or removing tasks, altering project specifications, or adjusting timelines.
2. Cost Adjustments: Change orders account for changes in project costs due to scope changes, unforeseen circumstances, or adjustments to materials and labor.
3. Formal Record Keeping: Change orders provide a formal and documented process to track alterations to the original contract, helping to avoid disputes and ensure clear communication between parties.
4. Contractual Compliance: Change orders ensure that all parties involved in the project are aware of and agree to the changes, thus maintaining compliance with the contract terms.

Common Scenarios Requiring Change Orders:

Change orders are common in various situations where adjustments to the original contract are necessary. Some typical scenarios include:

1. Design Changes: When project plans or specifications need modifications due to design errors, changes in requirements, or client requests.
2. Unforeseen Conditions: When unexpected circumstances arise during a project, such as encountering hazardous materials, site changes, or extreme weather conditions.
3. Scope Creep: When the project scope expands beyond the original agreement, necessitating additional work and resources.
4. Material or Labor Cost Changes: When the cost of materials or labor significantly differs from the original estimates, requiring adjustments to the contract price. For example, at the height of COVID-19, the cost of lumber skyrocketed. Many homes that were being built needed $50,000 – $100,000 more just for lumber.
5. Project Delays: When unforeseen delays occur, leading to schedule adjustments and possible cost implications.
6. Quality or Performance Upgrades: When clients request upgrades to improve the quality or performance of the final deliverable.

Different Industries Utilizing Change Orders:

Change orders are prevalent in various industries where projects involve detailed plans and contractual agreements. Some industries that commonly utilize change orders include:

1. Construction and Engineering: In construction projects, change orders are standard due to the dynamic nature of the work, evolving plans, and potential unforeseen conditions.
2. Information Technology (IT): IT projects may require change orders to accommodate changing technology, software requirements, or additional features.
3. Manufacturing: Manufacturing projects may involve change orders to address design modifications, material changes, or process improvements.
4. Architecture: Architects often use change orders to adjust project plans based on client feedback or changes in building regulations.
5. Film and Entertainment: In the entertainment industry, change orders are used to accommodate script changes, set alterations, or schedule adjustments.
6. Consulting Services: Consulting projects may require change orders to accommodate evolving client needs or to extend the scope of work.

Change orders play a vital role in project management by facilitating necessary adjustments to contracts and project plans. They enable clear communication, manage project changes efficiently, and ensure that all parties are aligned with the modifications made to the original agreement.

The Process of Implementing Change Orders

Identifying the Need for a Change Order:

The process of implementing change orders begins with identifying the need for a change. This can arise from various situations such as design modifications, scope changes, or unforeseen circumstances.

The need for a change order is typically identified by project managers, team members, clients, or other stakeholders involved in the project. The identification process involves assessing project progress, monitoring deviations from the original plan, and considering any feedback or requests from clients or end-users.

Impact Assessment:

After identifying the need for a change order, the next step is to assess the impact of the proposed changes. The impact assessment involves evaluating the following aspects:

1. Time: Determine how the change will affect the project schedule and whether it will cause any delays or adjustments to milestones.
2. Cost: Assess the financial implications of the change, including additional expenses or potential cost savings resulting from the modification.
3. Resources: Evaluate the impact on the project’s resource allocation, such as manpower, equipment, or materials required to implement the change.
4. Scope: Analyze how the change will impact the project’s overall scope and deliverables.

Based on the impact assessment, project managers can determine the feasibility of the change and whether it aligns with the project’s objectives and constraints.

Documentation and Approval:

Once the impact assessment is complete and the decision is made to proceed with the change order, the process moves to documentation and approval. This involves the following steps:

1. Prepare the Change Order Document: Create a formal written document that outlines the details of the proposed change, including the rationale, scope adjustments, cost implications, schedule modifications, and any other relevant information. A document automation tool like DoxFlowy can make it easier to standardize the language and create change orders more quickly.
2. Review and Approval Process: Submit the change order document to the relevant stakeholders, such as clients, project sponsors, or management, for review and approval. Obtain their consent and agreement on the proposed changes.
3. Contractual Agreement: If the change order involves contractual adjustments, update the original contract to reflect the agreed-upon changes. You may need to sign the added appendix or exhibit in the contract to ensure that it doesn’t cause a dispute later.

Communication and Collaboration with Stakeholders:

Effective communication and collaboration with stakeholders are essential during the implementation of change orders. This involves:

1. Clear Communication: Ensure all stakeholders are informed about the proposed changes, their implications, and the reasons behind them.
2. Addressing Concerns: Be open to addressing any concerns or questions raised by stakeholders regarding the change order.
3. Collaboration: Involve relevant team members in the execution of the change to ensure a smooth transition and successful implementation.
4. Change Management: Implement change management strategies to help stakeholders adapt to the changes and minimize any potential resistance.
5. Project Tracking: Continuously monitor and track the progress of the change order to ensure it is executed as planned and to address any issues that may arise.

By following these steps, you can effectively implement change orders, leading to successful project management and ensuring that modifications are executed smoothly.

Key Components of a Change Order

A. Detailed Description of the Change: The description should outline what specific elements of the project or contract are being modified, added, or removed. It should provide sufficient information to ensure that all parties involved understand the nature and extent of the change.

B. Rationale for the Change: Explain the reasons behind the need for the change. Whether it’s due to client requests, unforeseen circumstances, design adjustments, or other factors, providing a compelling rationale helps stakeholders understand the importance and necessity of the change.

C. Scope of Work: Clearly define the scope of the change to indicate what work is required to implement the proposed modification. The scope should be specific, measurable, and detailed enough to guide the project team in executing the change effectively.

D. Revised Timeline and Schedule: Include the revised timeline and schedule resulting from the change. This should outline any adjustments to project milestones, deadlines, and completion dates to account for the impact of the change on the project’s overall timeline.

E. Cost Estimate and Budget Adjustment: Provide a detailed cost estimate associated with the change. This should include the breakdown of additional expenses or savings resulting from the change. If the change affects the project’s budget, specify the adjustments needed to accommodate the new costs.

F. Signatures and Approvals: The change order should have spaces for all relevant stakeholders to sign and indicate their approval. This includes signatures from project managers, clients, contractors, and any other parties involved in the project. Signatures validate that all parties are in agreement with the proposed change and its implications.

Additional Components: Depending on the complexity and context of the project, a change order may also include the following components:

1. Impact Assessment: Include a summary of the impact assessment conducted for the change, covering time, cost, resources, and scope considerations.
2. Contractual Clauses: If the change order involves adjustments to the original contract, specify the relevant contractual clauses that are being modified or added.
3. Risk Assessment and Mitigation: Assess any potential risks associated with the change and outline strategies for mitigating these risks.
4. Documentation of Change Review and Approval: Provide a section to document the review and approval process, including the dates of review meetings and the names of stakeholders involved in the decision-making process.
5. Version Control: If multiple revisions of the change order are anticipated, use version control to track changes and ensure that the latest version is being referred to and implemented.

Including these key components in a change order helps ensure clarity, accountability, and a smooth implementation process. It serves as an essential document for managing modifications to a project and maintaining effective communication between all stakeholders involved.

Dealing with Change Order Challenges

Disputes and Conflict Resolution:

Change orders can sometimes lead to disputes and conflicts between project stakeholders. To effectively deal with these challenges, consider the following approaches:

1. Open Communication: Encourage open communication between all parties involved in the change order process. Actively listen to their concerns and work collaboratively to find mutually agreeable solutions.
2. Documentation: Maintain detailed records of all change order discussions, approvals, and decisions. Having a clear audit trail can help resolve disputes by providing evidence of the agreed-upon changes and the reasons behind them.
3. Mediation: If conflicts persist, consider involving a neutral third-party mediator to facilitate discussions and help find resolutions that are acceptable to all parties.
4. Escalation Process: Establish an escalation process to handle unresolved disputes. Define the steps to escalate the issue to higher authorities or senior management if necessary.
5. Legal Review: In cases of significant disputes, seek legal advice to ensure compliance with contractual obligations and protect the interests of all parties involved.

Mitigating the Impact of Change Orders

Change orders can have an impact on project timelines, costs, and resources. To mitigate these impacts, consider the following strategies:

1. Early Identification: Proactively identify potential changes during project planning and risk assessments. This allows for the development of contingency plans and risk mitigation strategies.
2. Impact Assessment: Conduct a thorough impact assessment for each change order to understand its potential effects on the project’s schedule, budget, and resources.
3. Negotiation and Fairness: Engage in fair and transparent negotiations to ensure that the impact of the change order is reasonable and acceptable to all parties involved.
4. Prioritization: Prioritize change orders based on their urgency and importance. Address critical changes first to minimize disruptions to the project’s progress.
5. Resource Management: Adjust resource allocation to accommodate the additional work resulting from change orders. Reallocate resources or consider outsourcing certain tasks if needed.

Handling Multiple Change Orders in a Project:

Managing multiple change orders can be challenging. Here are some strategies to handle them effectively:

1. Centralized Management: Establish a centralized change order management system to track and manage all change orders in one place. This ensures that nothing falls through the cracks.
2. Change Control Board: Set up a change control board or committee to review and prioritize change orders. The board can evaluate the impact of each change and determine the most appropriate course of action.
3. Regular Updates: Keep all stakeholders informed about the status of change orders and their impact on the project. Regularly update project plans, schedules, and budgets to reflect approved changes.
4. Dependencies and Sequencing: Consider the dependencies between multiple change orders. Sequence their implementation to minimize conflicts and ensure smooth execution.
5. Resource Allocation: Evaluate the availability of resources to accommodate multiple changes. If necessary, negotiate timelines with clients and adjust the project schedule accordingly.

Dealing with change order challenges requires proactive planning, effective communication, and a collaborative approach among project stakeholders. By addressing disputes promptly, mitigating the impact of change orders, and handling multiple changes efficiently, project managers can ensure successful project delivery even in dynamic and evolving environments.

Conclusion

As you can see from this guide, there are many considerations when creating and implementing a change order. It’s important to follow the proper steps so that you and other parties involved can reach a conclusion everyone is happy with.

Take advantage of DoxFlowy’s document automation capabilities to easily create standardized change orders to speed up your workflow and make changes more efficiently.

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