The Construction Change Order Process (And Why Subs Lose Money On It)

Ask a subcontractor where their margin went last year and you will hear about materials, or labour, or a builder who beat them up on price. Ask them to pull the file on three specific jobs and the answer is almost always the same: work was added in the field, the crew built it because the crew is paid to keep moving, and by the time anybody put a number on it the job was closed out and the builder had moved on.

That is not a negotiation problem. It is a sequencing problem, and sequencing problems have fixes.

What a change order actually is

A change order is an amendment to a contract. It changes the scope, the price, the schedule, or all three, and like the contract it amends it needs two things to be worth anything: it has to describe what changed, and the person who owes the money has to agree to it before the work happens.

Everything else (the form, the software, the numbering scheme) is bookkeeping around those two facts. A signed one-line email that says "yes, add the garage ceiling at $1,840" is a better change order than a beautiful unsigned PDF.

The five things that turn into an unpaid change

• A verbal from a superintendent who does not control the budget. Supers can tell you what to build. Very few of them can commit the owner to paying for it.
• An RFI answered with a drawing revision. The answer changed the detail, the detail costs more, and nobody treated the answer as a change.
• Existing conditions on a renovation. Rock, rot, an old slab that is two inches out. This is the most-disputed category in the industry and the one most likely to be discovered by a crew who is already on site.
• Scope that was always ambiguous. The bid said "insulate the attic". Nobody wrote down whether that included the bonus room over the garage.
• Work you did as a favour. It was twenty minutes at the time. It was twenty minutes eleven times.

A process that survives a real week

A change order process fails when it needs a calm afternoon. The one below is built to work from a truck, in the rain, by somebody who has four other things to do.

1. 1
   The person who sees it, reports itWhoever is standing on the problem files it the moment they see it. A photo and two sentences is enough. The crew lead is not being asked to price anything or decide anything. They are being asked to make the office aware while the work has not been done yet.
2. 2
   The office prices it the same dayQuantities, your own rates, and the honest number. Same-day matters more than exact: a price that lands while the builder still remembers the conversation gets approved; a price that lands in three weeks gets argued about.
3. 3
   It goes to the person who controls the moneyNot the super, unless the super is also the owner or has written authority. Send it to whoever signs. If you do not know who that is on this job, that is the thing to find out before the next one.
4. 4
   You get it in writing before you build itA signature, an approving email, or a recorded phone approval with the date, the name and who took the call. All three are evidence. A memory is not.
5. 5
   The contract sum moves, onceThe approved amount changes the contract value in one place, and every downstream document (the schedule of values, the next pay application, the final invoice) reads from that one place. If your contract total lives in three spreadsheets, this is where they start to disagree.
6. 6
   Nothing gets invoiced until it is resolvedA job with a change order that has been priced but not approved is not ready to bill. Invoicing it means either eating the change or sending a second invoice later, and the second invoice is the one that starts an argument.

The one control worth building

If you only add a single rule, add this one: a job cannot be approved for invoicing while a change order on it is pending. It is a small rule and it removes an entire category of loss, because the failure it prevents (invoicing the original contract amount on a job that grew) is invisible at the moment it happens and expensive six weeks later when somebody notices.

The version of that control that fails

Most shops that adopt this rule adopt it as a habit: a checkbox on the job folder, a line on the whiteboard, a standing question at the Monday meeting. Those work for a while, and then they stop working on the week everybody is busiest, which is the week they were needed.

What decides whether the rule holds is whether the hold happens as a consequence of writing the change down, or as a separate thing somebody has to remember afterwards. If it is separate there is a gap between the change existing and the job being flagged, and every unpaid change order you have ever eaten went through that gap.

One more detail worth getting right: a job with two pending changes is not resolved when one of them is approved. Half a total is not a total, so the hold has to survive until the last one is settled.

Keep one contract total, and add to it

The other half of the problem is arithmetic, and it is quieter. If the contract total is typed into an invoice, typed into a spreadsheet and typed again into your accounting system, those are three separate chances to be wrong, and sooner or later they will differ.

The fix is to keep one total and derive it: what the job was sold for, plus every change that has been approved. Nobody re-types the sum. Everything that quotes a total (the invoice, the statement, the aging report, the margin on the job) reads it from the same place.

This works on paper. It is one number at the top of the job file, with the approved changes listed under it and a running total beside them. What matters is not the medium; it is that there is exactly one of it.

Do not let a not-final total reach your books

The expensive version of this mistake is not one wrong invoice. It is a wrong invoice that got into the accounting system, got reconciled against a deposit, and now has to be corrected in two places by two people who each believe the other one has it right.

So the rule extends one step: a job whose total is not final should not be invoiced, and should not be pushed into your books either. Where the two systems are connected, the second half is the one people forget.

What to put on the document

A change order that gets approved quickly answers the questions the approver is about to ask, before they ask them. That means it shows the arithmetic, not just the delta.

• The contract amount before this change.
• What is changing, in the builder's language, not yours. "Add 340 sf of R-38 at the bonus room ceiling" beats "additional insulation per field direction".
• Why it is changing: a directive, an RFI answer, a condition found on site. Origin is what makes a change defensible six months later.
• The amount of the change, and any schedule impact in days.
• The contract amount after this change. This is the number the approver actually cares about, and leaving it off is why so many change orders come back with "what does that make the total?"
• A place to sign, and a date.

When the invoice has already gone out

Sometimes you find the extra work after the fact. The instinct is to correct the original invoice, and it is the wrong instinct: the customer already holds that document, their bookkeeper may already have entered it, and quietly moving the total is how a conversation about money turns into a conversation about whether you can be trusted.

Send a second invoice for the change, or a credit against the first if the change took work away. Both are ordinary, both leave a trail, and both leave the original standing with what happened to it visible beside it.

Track the ones that are not resolved yet

Every sub has a pending change order they have forgotten about. The fix is a list, sorted by dollars, that somebody looks at on a fixed day of the week: what has been priced but not sent, what has been sent but not answered, what has been approved but not applied to the contract, and what got declined and needs repricing. Four columns. It takes ten minutes and it is usually worth more per hour than anything else in the office.

The short version

• Write it down before the crew builds it.
• Send it to whoever signs the cheque, not whoever is standing there.
• Show the total after the change, not just the change.
• Never invoice a job with an unresolved change on it.
• Keep one contract total and add approved changes to it, rather than re-typing it in three places.
• If the invoice has already gone out, send a second one, and do not edit the first.
• Keep a list of the unresolved ones and look at it weekly.

Written by the team at Opulence Built, who also run an insulation and concrete contracting business. We mention our own software where it is relevant and say so when we do.