Every project manager will go through the change order process. Whether we deal with it on the owner side or with subcontractors, change orders are part of the construction industry. However, how to present a change order to an owner is a task that takes time to perfect…and even when you feel it is perfected, the response you get may not be what you anticipated. Consider this process next time you present a change order to increase the chances that it will go smoothly.
First things first: What should go into a change order? Put yourself in the owner’s shoes. What would you need to know in order to make an educated decision about this change order? Every change order should have a cover sheet that identifies the standard project information, overall cost, an extension of time in days (if applicable), and a description of the reason for the change. Underneath that cover sheet, you should include the following:
- RFI – The RFI is a contract document that assists in supporting the change order, as it provides direction from the design team (architect, engineer, etc.).
- Submittal – If it is a new product being added to the project scope, a proposed submittal should be included so the owner and design team can comment and approve the product. This is also highly important, as it supports the cost associated with the change order. If you submitted a change order for one product but the design team wants to propose another, then the cost could impact your change order.
- Subcontractor proposal – A subcontractor’s proposal should always be included as back-up to support your cost. This can also include unit prices from the subcontractor and should be a break-out of costs, not just a simple lump sum number.
- Back-up documents / spreadsheet – If you have multiple subcontractor proposals or need to show the change in a product (original cost vs. added cost), a back-up spreadsheet shows the new product costs minus the breakdown of what was originally purchased through the contract. This clearly communicates the price difference to the owner.
- Architectural / Engineer Drawings / Sketches – Any drawing that are not already related to the RFI are important. This provides the entire team an understanding of where the “miss” or clarification was needed on the drawings. Again, this supports your own presentation to the change order.
These basics should be included in all change orders. However, the documentation you put into your change order proposal is only one part of the process. Let’s consider how you present the change order to the owner.
An owner needs to understand two things: why this is a change to the contract and why they are required to pay for it. Remember, just as you have a budget for your company, the owner has a budget for their project. It’s true that owners generally carry a 5% contingency on their projects, but they don’t want to spend it if it is not necessary. If the change was noted on the exclusions or clarifications section of the contract, simply add that section of the contract to your proposal.
You need to know your change order! Ask yourself if the information you are providing and the way you are explaining it would make sense to you if you were seeing this information for the first time. Remember, as the presenter and the individual who is putting it together, you should be in the position to best understand it. The owner may not have the same knowledge on the situation that you do. If you don’t know the information in it, how can you reasonably expect the owner to follow along and understand what you are presenting?
Do your homework! Have conversations with your subcontractors to fully understand their proposal. What went into it? Why will it take that long? Are there other options to decrease time or cost? The subcontractors are the experts in their field. Engaging in a conversation with them about their proposal will increase your knowledge to present the change order.
This leads me to my next point: detail, detail, detail! A one-line lump sum, as mentioned earlier, from a sub is not sufficient information to get you anywhere positive when you make your presentation to the owner. If the owner feels left in the dark about where the money is going, your change order is more likely to be contested. Show the break-out of material, labor, tax (if applicable), mark-up, etc. Providing information facilitates teamwork, opening the door for the collaborative discussions about hours or cost of material.
As a project manager, you need to know your owner. Every owner is different; knowing yours will inform when and how you present a change order. Some owners are okay with change orders being presented in front of the entire project team at the weekly project meetings. Others prefer a side conversation about change orders before the entire team discusses it. This can be a one-on-one phone call with the owner to review the item, discuss alternative ways to proceed, or to simply gauge their opinion on the change order. I strongly recommended this approach if your owner is open to it. In my experience it has led to excellent collaboration and/or negotiations where we understood one another and came to an agreement. As a result, when the change order was presented to the entire team at the next meeting, the owner and I were already on the same page, jointly “defending” the change order against any contentions.
Another resource for a project manager is the design team. If you are unsure about an item or want to discuss your change order proposal with the appropriate person, reach out to the architect or engineer. Make sure you have the them on board with your proposal if it is due to their drawings or specifications. In most cases, change orders result from an omission of design documents, a required change of design, or an owner upgrade. Due to this, you may want to discuss with the architect/engineer to make sure they agree with the proposed cost of a change order before you present it to the owner. In some cases, the architect or engineer will want to assist you in finding a solution, which could provide a less expensive alternative that was not originally considered.
When everything goes well and you have created positive relationships with your owner and design team, this all sounds easy. However, you still will not always get the answer you are looking for when you present a change order. With that being said, what should you do if your change order is not approved by the owner? Don’t panic! This is something that happens all the time. It is part of negotiating. In some cases, the owner simply contests the change order to try to get a lower number. No one wants to spend money. Understand the owner’s position. You may not agree with it, but listen to their side of the discussion to find out what you can do to meet on common ground.
Conversations with the owner are never bad thing. You should always encourage dialogue with your owner. Having a deeper conversation with the owner about why a change order is being rejected can potentially lead to an adjustment and consequently a change order that they will approve. In these cases, you may need to provide additional information or change the presentation in order to gain approval. Most owners work with lenders who have their own reasons for needing to understand why a change order is being submitted and approved.
Lastly, if all else fails, discuss it with your supervisor. If the decision from the owner on the change order is something you cannot solve, discuss options with your supervisor so they can get involved if necessary. Do not consider this as being “undercut” or as an indicator that you are not able to handle it. In some cases, higher powers need to be involved to get items resolved. The owner may be engaged in bigger conversations with your company about other projects that you are not necessarily aware of, making your supervisor an important ally in assisting you with the change order.
Many new project managers feel a sense of conflict or unease about change orders. This feeling usually creeps up because you either aren’t fully prepared or don’t know your owner. Therefore, it is very important to get to know the owner early in the project. Have conversations about how they prefer to do business and consider that when presenting your change orders. A change order is like a school presentation; the better prepared you are to present it, the better it will go. Emotions can get high with change orders, and the hardest thing to do can be to set them aside when something doesn’t go your way. It is human nature to have emotions affect you while presenting or discussing a change order. Do your best to leave them at the door. Remember – it’s nothing personal, just business.
What’s your thoughts on change orders? What did I miss?
Let Will know what you have to say and keep the conversation going.