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Demystifying Change Orders

By Georgia Stamelos  |  March 19, 2019

When a completed construction project doesn’t come in at the agreed-upon total project cost, what’s to blame? Construction change orders, that’s what. COs are ubiquitous in the industry but their commonness hasn’t made them any less burdensome. That’s one reason I decided to write an article about them as a sort of Project Owner’s Guide.  

It seems that whenever I speak to clients in the construction industry, COs are a topic of concern. They are to be a mysterious, persistent force that challenges even the most astute project management teams. But they don’t have to be!

Just start with this one basic tenant: A thoughtful and well-executed contract is the best start to any construction project, and making sure the terms of the contract are being adhered to throughout the term of the contract is critically important. So, the contract is key at the beginning, middle and end of the project. OK?

But change orders still exist. They’re there for a purpose and they’re not created needlessly, but rather, to fix unforeseen circumstances. Unfortunately, because money is almost always involved – in terms of cash and time – COs can become sources of friction, confusion and even mistrust.

What I try to explain to clients is that in order to track the cost budgets and manage contingency funds, and most importantly, minimize the overall increase in the contract price, owners must manage change orders appropriately. This starts with ensuring that the contract states exactly how change orders will be administered and processed. So, that leads to analysis.

My article on analysis goes into more detail but here are a few tips, and why they’re important to follow:

1. Stick to the contract

It is key to know what is allowed under the base contract to be able to review and verify the scope of the change order.

2. Stay in control

It is important to be able to track and understand COs as they come in. Set up a tracking and control log – and then use it.

3. Put it in writing

The project owner needs to confirm the detail of the work done under a CO with an inspection followed by documentation.

4. Verify

What’s the old expression? Trust…but verify. This should include: labor rates, quantities and hours in the change order, adjustments in owner-controlled insurance programs, and markups, too. 

5. Be prepared

Savvy construction mangers and owners will anticipate potential costs impacted by COs such as labor costs (which can be complex), material, equipment, subcontractors, contractually specified markups and other supplemental costs (which can also be complex).

If the contract addresses how change orders will be documented and dealt with, the owner and contractor can easily refer back to the contract to ensure they are following the provisions, which will minimize the disputes, delays and cost increases incurred by the project.

There you go… change orders demystified!

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About Georgia Stamelos

Georgia Stamelos, CPA, is a Director in the Commercial Business group at Marks Paneth LLP. She has over 20 years of experience in public accounting. Ms. Stamelos manages engagements for privately owned, closely held businesses in industries such as wholesale distributors, construction and professional services such as law, graphic design, architecture, and advertising. She advises her clients on all facets of accounting and tax matters. She is a member of the American Institute of Certified... READ MORE +

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