5 change-order pitfalls construction companies should avoid

Properly documented and handled change orders can mean more profitable jobs for construction companies. When the process doesn’t go smoothly, however, you risk not getting paid on time — or at all — for the extra work. Here are five common pitfalls to avoid:

1. Poorly defined scope of work. Among the most common causes of disputes is uncertainty over what’s considered within or beyond the job scope. In preconstruction meetings, review the contract (and building plans). Sometimes contractors assume a contract is “boilerplate,” only to later learn that it includes language well outside the normal scope of a certain type of job. Don’t hesitate to submit requests for information to clarify vague language.

2. Inaccurate, vague, or misleading language in bid documents. Sometimes bid documents state that the contractor is responsible for field measurements and building applications. In turn, project owners interpret this language to mean the contractor assumes responsibility for all costs when changes arise related to these elements. Unless you drew up the plans, think twice before taking on any job for which you’re responsible for field measurements and building applications.

3. Contracts limiting markups on change orders. Many owners want to discourage contractors from submitting low bids and overcharging on change orders later. However, contracts that limit maximum overhead and profit markup percentages can prevent a construction company from generating the revenue needed to cover its costs — especially when changes substantially add to project specifications.

Ideally, you should never sign an agreement that restricts you from making changes on a job without your full markup. At the very least, try to avoid contracts that limit you to “cost” or “cost plus 10%.”

4. Undocumented changes. It can be tempting to rely on verbal agreements and submit change orders later. However, you might end up submitting the change too late in the project to obtain approval or you might forget to submit it altogether. Without documentation, owners can reject the validity of the extra work and refuse to pay for it.

Be sure your project managers are following a formal change-order process. This typically means first notifying the owner in writing that extra or different work is required. Then, before performing the work in question, submit the change order paperwork and accompanying documentation along with a request for written authorization from the owner. Follow this process even for changes requested by the owner.

5. Unaddressed/delayed change orders. Some owners keep a long, readymade list of reasons to reject a change order. Others will simply sit on a change order for weeks, hoping the contractor will forget about it, give up on it or settle for a lower payment.

If you haven’t done so lately, review the language of your proposals. They should include a clear invoice submittal process with a payment schedule. Consider verbiage stating that, if a change order isn’t approved or denied within a certain period — say, three to five days — you’ll assume it’s been approved.

Ask your attorney to review any revisions to your bid documents or typical contract language. We can assist you in analyzing your past practices and results for handling change orders and help you refine your processes.

©2022 Thomson Reuters

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Bryan Eto
Bryan Eto

Bryan Eto is a Principal of BeachFleischman, a member of the Accounting & Assurance Department, and Construction Industry Practice Leader. He has been in public accounting since 1995.