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7 Methods for Handling Change Orders

Work added or removed from the original construction plan’s contract is known as a change order. Change orders are something with which almost every contractor has had to deal. Depending on how significant the change may be, you may have to adjust the contract or change the completion date of the project. Unfortunately, when change orders are not handled correctly, they can decrease the profitability of a project or damage a contractor’s reputation.

So how exactly do you handle change orders? There are a few different methods for managing them that can help you maintain your profit and reputation:

  1. Review your original contract
    Before you do anything else, you should return to the initial agreement. Addressing the terms upon which you and your client agreed helps you determine if the change order lies outside of the originally defined scope of work. On top of that, you should check to see if there are any conditions or terms that state how to go about any changes in the project. If there is a clause present for change orders, then it should be relatively simple to follow the standard procedure and get done what needs to be done.
  2. Get it in writing
    One of the most important parts of taking care of a change order is to get the new request in writing. Miscommunications are quite common, and if there is one, it is your word against the word of your client. However, if you have the change order in writing, it is extremely difficult to become confused or make a mistake. When you record the addition to or deletion from the project, make sure you record all of the necessary details: materials, cost, time, and anything else that may be deemed important.
  3. Communication is key
    When it comes to completing any project, communication is important–but it is especially crucial to clearly convey all details to everybody when a change is made to any job. Consistently communicating with your customer both before and during the completion process of the project can be very helpful in dealing with change orders or even preventing them!
    Overall, constantly keeping in touch with your client will improve the trust in your relationship and increase the likelihood of timely decisions (as opposed to last-minute changes). The better informed a client is, the more satisfied he or she will be.
  4. Develop a process and stick to it
    One of the best ways to handle change orders is through a process you have already developed. Instituting a routine reaps multiple benefits for your company. You operate much more efficiently. You avoid disputes much more easily. Most importantly, you keep your project on track.
    If you have a set process for change orders, there will be very little or no confusion when one arises, along with no panic from those who normally would not know how to handle it.
  5. Limit the number of change orders
    Putting a cap on the number of change orders is a very effective way to limit them. While you do not necessarily provide the customer with an exact limit, you can emphasize the cons of change order after change order. Nobody likes the idea of extra costs or delayed completion dates, both consequences of disruptive change orders, so conveying these pain points to your clients urges them to make their decisions very early on.
    If clients do request a change order, a method many contractors use is incorporating a fee–but then waiving it. Not only does the fee persuade clients to avoid change orders, but waiving it later on makes them feel like they are getting something back.
  6. Avoid procrastination at all costs
    It happens to the best of everyone. “I’ll do it tomorrow,” you say. You say the same thing the next day, and then the next, and so on. Doing it later is one approach you do not want to take for change orders. The work will undoubtedly pile up until it is an overwhelming mountain of back-office work you have to handle all at once. Waiting can also lead to disputes if you fail to update your customer; dealing with change orders beforehand avoids confusion and allows you and your client to come to an understanding of what is requested and what can be done.
    Not only do some people procrastinate documenting the change orders, but they may also wait to collect payment. If you wait until the end of the project, your clients may forget and then feel blindsided by the sudden addition to the bill. It is best to collect it in full beforehand or have them pay half up front and half upon completion.
  7. Understand the psychology of pricing
    In his blog post, Steve Ball discusses the psychology of pricing. When it comes to pricing psychology, there are two points you should take into account: price leverage and payment resistance.
    Price leverage is ever-changing; it refers to who has the most price sensitivity at a time. Before any work is done, the contractor has more price leverage because the customer needs the work done–and that is why this is the best time for the contractor to receive the maximum payment for the requested change. Once the contractor completes the work, the leverage shifts to the customer; a contractor may be left with whatever the customer is willing to pay.
    Payment resistance results from a customer feeling no sense of control. This occurs especially when change orders are not completed quickly since they may not be able to approve or alter the terms of the change. Ensure that you actively communicate with your clients so you can avoid payment resistance.

Change orders can be bothersome, but oftentimes they are inevitable. The only thing you can do is find the best way to handle it and then get it done. By implementing the methods listed above, you can handle change orders more efficiently and maintain–or boost–the profitability of any given project. If you already use one of these methods, try adding another one to your routine–and if you use none of them, it may be time to change the way you handle change.

Gita Faust

About the Author

Gita Faust has over 30 years of accounting experience in the real estate and property management industry, Gita Faust is more than just a real estate investor; she is also popular for her work as an accountant, consultant, mentor, speaker, QuickBooks Top ProAdvisor, QuickBooks Solution Provider, member of Intuit’s Trainer/Writer Network, and, of course, author. Gita is well-known for her exemplary leadership and advisory skills. In fact, she even helped pioneer the adaptation of QuickBooks to suit the needs of professionals in real estate and property management. To share her knowledge she has written a series of courses titled Simplified Accounting Solution, which provides step-by-step guidance for those working with QuickBooks.

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