Change Orders – What are they, how to manage and minimize them

The design is finalized, your permits are in hand. You’ve selected a contractor and he started last Monday. You’re giddy with the excitement of seeing the old lath and plaster get demolished; your smile is permanent. Then, the contractor sits you down to go over a few things that came up during demo; he presents you with two change orders. You think to yourself, how many of these should I expect to see? The excitement shifts to nervousness and the smile may not come back for a while.

A change order is essentially a bill or invoice for labor and material that was not accounted for in the base contract.

There are two main types of change orders: justifiable and avoidable.

Justifiable Change Orders

Justifiable change orders are necessary adjustments made throughout the course of the project. A remodel is much harder than a new construction; it’s nearly impossible for the contractor to think of every possible conflict—they cannot see through walls or floors. There may be a beam in the wall right where an opening is supposed to be, or a big vent pipe right where a door is supposed to go. Another justifiable change order is the result of a change made by you, the owner. If the original plans call for four doors to be replaced, but you decide to replace six, the contractor will give you the price for two additional doors, labor and material for you to agree to or not.

Avoidable Change Orders

Avoidable change orders are those that could have been addressed before the project started.

Avoidable change orders fall into two categories, contractor and owner. For example, you knew you wanted a tiled bench in your shower, but it wasn’t shown on the plans. When it comes time to tile the shower and you notice there is no shower bench, the contractor gives you a change order that seems expensive and you’re upset because you thought you talked about this. These types of details need to be in the plans or a design spec of some sort, because the contractor can’t remember every detail you mention verbally. If a detail is not in the plans and/or design specifications the contractor used to price the job, it is almost certainly not included in the base contract.

Avoidable change orders from the contractor typically arise from not thinking through every detail. This is compounded by our industry’s model of free estimates. As estimators, we are overloaded by bid requests, and a side effect of this is that some projects don’t get bid as realistically as possible. Accurate estimates require site visits from electrical, plumbing, and mechanical professionals, which is difficult to schedule for every bid request. Most contractors ‘eat’ a certain amount of budget for this reason, but any grey area in the plans gives the contractor an opportunity to present a change order.

Lack of Detail or Clarity in the Plans

An example of an avoidable change order is often connected to a lack of details in the plans or specs, or the lack of a designer. Some owners think they can save money by not having the architect detail everything out. This just forces contractors to make assumptions, which may or may not match what you want. Paint colors are a great example. Most contractors bid for one color/sheen throughout, and every time you add another paint, it increases time, labor, and masking costs. An owner may say something like, “How could you not know we wanted 5 different colors in our home?” Change orders for paint colors can be large, but they are avoidable because paint is a detail that can be managed up front before going to contract.

Lack of Detail or Clarity in the Contractor Bid Proposal

Your bid from the contractor states, ‘Drywall $25,000.’ Everyone says, “great,” and moves on. Then it comes time for drywall and the contractor starts texturing—but you wanted to do smooth wall. The contractor gives you a large change order and now there is frustration all around. From the contractor’s perspective, texture is less expensive, and details about the drywall finish were nowhere in the design specs. They probably should have clarified, but that’s a separate point. From the homeowner’s perspective, the additional costs of smooth wall don’t make sense. This is why walking through your project and contract before signing can be a very helpful exercise.

Mark up on Change Orders

Change order markup is typically much higher than markup in the base bid. Contractors I’ve worked for will ask for as much as they think they can get, and you as the homeowner have little negotiating leverage. To be clear, this isn’t a money grab. Change order work is time consuming and the costs to the contractor are much higher. When all the ‘figuring out’ is done at one time in the base bid, there is an economy of scale—batching processes and placing bulk orders for supplies is much more efficient. When you want to add a window halfway through the project, a contractor has to consult the architect/engineer, get a bid on one window, work through the install costs and interior scope, put together a change order, and present it. It’s much more work than it seems, and contractors try to cover their costs and get paid for their time.

Contingency

In theory, change orders are supposed to be covered by the project’s contingency, which is a specific fund you set aside on top of the base contract cost. I get asked on probably every project, “Hey Mark, what should we hold as a contingency on this project?” It’s really hard to answer that question specifically, so you should hold as large a contingency as you can afford. You may hear percentages of the project, like 5-10%, which could be a starting point. Regardless, you need some amount of contingency. If you are getting a bank loan, it will likely be required. If you are self-financing, you need to set aside a reasonable amount for unforeseen conditions.

If you are doing a large main floor remodel, say a $500k project, I would recommend holding at least 5% ($25k) to cover unforeseen expenses. However, on a bathroom remodel that costs $30k, 5% would only be $1,500, which doesn’t cover much of anything these days, so more like 15% ($4,500) is appropriate.

How to Minimize Change Orders

The last question I get regarding change orders is how to avoid them. In new construction there is (arguably) a better chance of that, but I’ve yet to be a part of any project that didn’t have at least one change order. It’s typical to have several, and that’s okay. You can employ your architect to help vet bid proposals so you get one that is realistic and doesn't require as much change; there are also 3rd party companies that specialize in vetting contractor bids. However, most people’s financial positions mean the smaller the project, the more you need to rely on your own resources.

The best way to avoid change orders is to understand your project. Whether it’s residential or multifamily, you need to be really in tune with what the contractor is including and not including. This involves work on everyone’s part to communicate well before contracts get signed. Never assume the contractor knows what you want. Being engaged in your project will go a long way in limiting change orders.