As a real estate investor, you are most likely to come across change orders if you've hired a contractor to do a renovation project on one of your investment properties. Still, these construction documents can have a big impact on your bottom line, which means understanding them is crucial.
With that in mind, we've created a guide to change orders in construction below. Keep reading to learn more about what change orders are, their role in the construction process, and what you need to know about them going forward.
What are change orders in construction?
At their core, change orders are contract documents that help to define the project scope during the construction process. As the name suggests, a change order indicates a requested change has been made to the original scope of the work. Typically, it indicates that the project owner has requested additional work be done on the project.
However, it may also be used if the contractor needs to update the contract price or project schedule due to an unforeseen condition. Notably, a change order is considerably different than a change directive. With change-order work, both the contractor and the project owner have to agree to change the construction contract before the work can occur.
On the other hand, with a construction change directive, the contractor doesn't have any say. This document is typically used to direct the contractor to do additional work if the parties cannot come to an agreement.
What role do change orders play in the construction process?
Put simply, change orders are very important construction documents. They help all parties involved in the transaction keep track of the project scope as the work progresses.
During the construction process, there are many different perspectives on how changing the scope of the work affects factors like the project cost and completion date. By giving the owner a written change order, it ensures everyone is on the same page about the project change.
In addition, having signed documentation that lays out the additional cost and timing needed to complete extra work cuts down on disputes between the contractor and the project owner. In this case, having a signed change order reflecting the scope of the additional work, along with the updated contract sum and completion date, is enough to keep many misunderstandings out of court.
What information should be included in a change order?
For investors, it may be difficult to understand a change-order form. Often, these contract documents contain vital information about your construction project but are not the easiest to read. With that in mind, we've taken the liberty of breaking down the information you'll find on a construction change order below. Read it over to get a better idea of what to expect.
Basic contract information
To start, like with any contract, your change-order form should contain basic information about your construction project -- the same information included in the original contract. However, you will want to look for the following info specifically:
- A contract number.
- The project owner's name and contact information.
- The contractor's name and contact information.
- The project address.
- The change order number.
Project change dates
Next, a change order form should specify certain dates. At a minimum, you will want to specify the date the construction change order was signed off on and approved. However, the construction contract might require a certain amount of notice for a larger project before changes can be made. If that's the case, you will also want to track down the date of the original request.
Updated scope of work
In this section, your contractor will provide a detailed description of the change order, including a description of any extra work being done or any work no longer taking place. Here, the more detail the contractor provides on the requested change, the better. Ideally, the change order will be written so that even someone unfamiliar with the project can understand the change being made and the reasoning behind it.
Updated project schedule
Afterward, you should see an updated project schedule. As a contractor, part of managing change orders is understanding how they will impact the completion date. To that end, your contractor should give you an updated project schedule with dates for any major milestones, as well as a new date of completion.
Cost of additional work
The next thing to look at is the cost of the additional work. This section should focus only on work related to the change order, including direct costs such as expenses related to materials or hiring a subcontractor, and should not mention any indirect costs related to the project as a whole.
Updated contract value
Lastly, you'll want to make sure the written change order contains information about the updated contract value. In contrast to the cost of additional work, contract value figures look at the project's cost in its entirety. It should incorporate the updated project cost, including the costs for any change orders that have taken place until this point in the construction process.
The bottom line
Now that you know more about change orders and how this type of provision affects a construction contract, you'll be better suited to make decisions based on the change orders you are given for your renovation projects.
Real estate investing is all about the bottom line, and every additional cost makes a difference. To that end, if you understand how the change order process works, you will have a better idea of how to handle them when they come across your desk.