Change order requests (CORs) are a standard part of construction projects. These requests are necessary when changes to the scope of work, cost, or schedule exist. Writing a change order request requires specific skills to ensure it is clear, concise, and compelling. It is also a process that starts long before a COR is submitted, and you need to understand the proper steps to ensure your COR remains valid and organized. This blog will explain the basics, run through the five statuses of a COR, provide some examples, and discuss the art of writing change order requests in construction. (Note for this article, we will be looking at external change orders where you, as the PM for a GC, request compensation from an owner)
What is a Change Order Request?
A COR is a document that outlines the possible changes or changes that have occurred to a construction project's scope of work, cost, or schedule. Change order requests are used to amend the original contract between the parties and should, in theory, require approval before any additional work is performed.
How do I manage multiple change Orders simultaneously?
Change orders can pile up and get out of hand quickly if you are not organized and closely monitoring their progress. For example, you may have several change orders at any given time and have the same subs pricing multiple changes. As the Project Manager, you will need a system to track the Status, cost, and schedule impacts of all changes across all subcontractors. To do this, you will need a robust system in place. The following is the system I have successfully used through the years to master Change Order management.
It basically has five statuses to categorize the current status of every CO, and each status has some basic steps involved. (All good General contractors will typically have a similar version of this in place). These statuses are L1 PCO, L2 PCO, L3 COR, L4 ACO and Void/Cancelled.
Let's break down the Letters and Numbers.
L Level
PCO Potential Change Order
COR Change Order Request
ACO Approved Change Order
Try to avoid getting too sidetracked by the acronyms. It will all make sense shortly.
L1 PCO - Potential Change Order Level 1
L1 PCO is the category where we put anything that has the potential to be someday submitted to the owner as a formal request to amend the current prime contract agreement. This is the stage where most of the work happens.
For example, let's say an owner contracts you to build a new office building. You have hard-bid a set of plans and specifications and were successfully awarded the contract for construction only. During the early stages of construction at an Owner Architect Contractor (OAC) Meeting, the client decides they may want to add an extra room to the building, which was not included in the original plans you bid on. So they provide you with a drawing called "Exhibit A" that shows the details of what they want. For argument's sake, this is the first change you have had to deal with on the project. We will call this "PCO 001 -Additional Room As Requested By Owner." (It is important to number each PCO. The simple way is to use a number in the chronological order it was created. So say this is the first possible change we would call this PCO 001. Side note - all change orders are potential in nature until you have the final approval.)
This extra room the owner has requested will require additional equipment, supervision, materials, and labor and will also impact the project's overall timeline.
Using your company's specific software to manage changes (Usually Viewpoint, Procore, or Excel), we now enter the details into our spreadsheet and label this in the L1 Status because it is only a potential change order at this stage. It will remain in the L1 Status until you have had time to understand all the details, put together the pricing by calling all the affected subcontractors, gather all the backup documentation, draft the actual Change Order Request document, and hit send.
So to summarize, A Level one (L1) status PCO is the stage where you, as the project manager, have found out about a possible change order, and you are working on understanding all the details, the pricing, and the schedule impacts before you are ready to submit it to the owner.
The L1 stage is where 90% of the work happens in change orders. To keep all the information organized, I recommend implementing the following habits.
As soon as a potential change arises, open your company's change order software and enter the information about the potential change. Give it a name, assign it a PCO number, and add a Rough Order of Magnitude (ROM)for cost. The owner will be asking for a ROM pretty soon. I typically add some additional notes that may be relevant.
Have a Job folder on your computer for this new building project. In that folder, have a subfolder for storing all PCO-related documents. Add a new folder for "PCO 001 - Additional Room As Requested by Owner" in the PCO folder. You keep all the PDF quotes from subs and anything else pertaining to this specific potential change in this folder.
In your email account, do the same thing. Create a subfolder for PCOs and Add a new folder for "PCO 001 - Additional Room As Requested by Owner". This is where you can put all emails related to the potential change. This is nice because you can file the email quickly and know where it is without getting sidetracked from whatever else you are engaged in at the time.
With these three steps in place, you will find and reference all of your conversations and the pricing related to the PCO with relative ease. Having this easy access to your well-organized correspondence is paramount and is absolutely necessary for the next step, "Compiling the cost."
Tabulate the Cost
I use excel for this process. It's quick and easy, and once you have a template set up, you can use it repetitively to tabulate the actual cost of the additional work quickly.
Take all your pricing from your subs and enter each one with a brief description of the scope they are providing.
See the Example below. (Need a Change Order Template like this? Please shoot me an email, and we will help you out)
How to Write A Change Order Request
Now that you have your scope, pricing with backup from each subcontractor, and your time impact on the project's critical path figured out, it's time to start writing the narrative explaining your entitlement to the $93,008 you are requesting for the additional room. Here are the fundamental building blocks of your narrative.
Note how much you want and what it is for.
Tell the story of how and when the additional costs arose and why you are entitled to additional compensation.
Explain how you did a great job getting them the best price possible and briefly list everything they are getting for their money.
List what is excluded from the change order request.
Note the date when you need approval so as not to impact the schedule further.
First off, remember, you must write your change order narrative so a 10-year-old can understand it. You live and breathe this project every day, but your client does not, and typically the person you are submitting the change order request to will have to send it further up the chain of command on their side for approval. The goal is to simplify their life so they can explain and advocate for you to the decision-makers. Also, being organized with all the steps noted above in place will instill confidence in your request and remove hesitancy and doubt during negotiations which will take place in the L2 PCO Stage of change orders.
The opening statement should be straight to the point. There is no need to sugarcoat it. Say how much you are requesting and what it is for in one or two sentences. See below (assumes the boilerplate heading, address, etc., is on a formal company-templated document)
Please issue a change order for $93,008 and a Ten (10) day compensable time extension if Client ABC would like to proceed with the owner-requested additional room at Office Building XYZ.
The following paragraph needs to tell the history and show the entitlement.
During the January 5th, 2023 OAC Meeting, Client ABC requested pricing for a new drawing labeled Exhibit A. This exhibit shows one new room on level 2 with MEP and architectural finish additions. The room and associated changes were not part of the bid package or included in our original Lump sum base bid.
Next, explain how you got them the best price and list what they are paying for.
We have successfully secured the most competitive pricing for the added scope by working closely with our trusted suppliers, subcontractors, and vendors. The scope of work detailed in this change order request encompasses all essential elements such as labor, materials, equipment, supervision, and installation necessary to provide the additional layout, framing, blocking, backing, electrical, HVAC, test and balance, associated commissioning, drywall, tape, texture, and paint, as depicted in Exhibit A, ensuring that the final product meets your expectations in terms of quality and functionality.
Exclusions
Including exclusions in your pricing is crucial to ensure clarity and interpretation of what is included in the scope of work. By listing the exclusions, you set clear boundaries and inform the client of what is not included in the price. This will help prevent any misunderstandings or disputes that may arise if the client expects something that is not included in the scope. It is highly recommended that you take the time to carefully identify and document all exclusions to ensure that everyone is on the same page and that there are no surprises or unexpected costs. For this example, let's say the exhibit did not show any doors or windows. Also, the owner will provide their own baseboard, and no reflected ceiling plan was provided, and when you questioned this, the client noted it was to be wood framed, hard lid, and painted.
The following Exclusions and Clarifications apply to this agreement:
Doors, frames, and hardware. Openings are bull nose gyp with no provisions for LV access control.
Windows
Base Board. The owner noted this would be OFOI
Acoustic Ceiling Tile. The ceiling will be wood framed hard, lid gypsum board with paint.
Access hatches. We assume access above the ceiling from the adjacent room.
Any scope related to PCO 002 - Additional Restroom Level 4
Permits, fees, design, or commissioning.
To ensure the project schedule is not affected, it's important to clarify when approval is necessary. It's essential to follow up regularly to reinforce this point. Unfortunately, on some occasions, clients may delay approving change order requests for so long that starting the work without approval becomes the only option, putting the project at risk. The level of risk and the likelihood of the change order being implemented will vary for each project and client. Providing exceptional customer service sometimes involves taking on a small amount of risk to alleviate the burden on the client if they don't have their paperwork in order. However, this approach must be tailored to the project and the client's relationship.
We appreciate your effort to timely review this request and issue the associated contract change order by 04/22/23 to avoid additional costs, schedule impacts, and possible rework. This quotation covers only the direct cost of the work. This quotation is only for the work described herein. No other impacts are considered unless specifically noted. Unless noted otherwise, this proposal will remain valid for ten days from the date of this proposal.
And there you have it. Having a basic framework to follow can be incredibly helpful when it comes to change order requests. It provides structure and ensures that all necessary information is included. While some change orders may be more complex in nature, having a foundation to build upon can simplify the process and make it easier to understand.
After gathering all the necessary information, including your compelling narrative, pricing breakdown, and supporting documents from subcontractors and vendors, it's time to compile everything into a comprehensive change order request (COR) and send it to the client. Before hitting "send," it's good practice to give the client a heads up via a phone call, informing them of the upcoming change, the cost and that you are available to clarify any details. Once you send the COR, the process moves to level 2 (L2) PCO, and it's up to the owner to make a decision.
L2 PCO - Level 2 Potential Change Order
If you have put in the work and provided honest, fair pricing, one of four things should happen in the Level 2 stage
The owner will call you up to run through the cost and try to haggle a better price. ( Pro Tip - You should consider building in inflation knowing in advance that you may be removing it. This helps the client's construction manager look like they have successfully negotiated down your number, and they will feel you are being reasonable and fair by agreeing to a concession) The client will discuss with their higher-ups, and you will get an approval in email telling you to proceed. This is now a Level 3 Change Order Request. You are also authorized to begin the work.
The owner will reject it and say it costs too much. In this case, the COR moves to Void or Canceled, and you and your subcontractors waste a bunch of precious time!
The owner will request revisions to the scope, and you will need to repeat the process over again. The Change order returns to L1 Potential change order while you revise it.
You cannot agree on the number, and the owner requests you proceed on T&M or under dispute if the prime contract allows. Proceeding under dispute is rare in my experience, but it can happen. The Change order returns to L1 Potential change order while you track the costs during the T&M period.
L4 ACO - Level 4 Approved Change Order
The L4 ACO is a document that comes after the building owner approves project changes in an email.
The ACO is an official document from the owner confirming they agreed to the changes and outlining how much more money they will pay the general contractor and when the project should now be completed. The owner and general contractor both sign this document and update the SOV (SOV stands for Schedule of Values, which is a document that lists all the tasks and costs associated with a construction project. Each month the general contractor bills a percentage of each of these items on the list in accordance with the work completed)general for the project to show the new amount of money the owner will pay. They add a new line to the SOV that says "ACO #1 - Additional Room As Requested By Owner."
As the general contractor works on the project and finishes parts of the extra room, they bill the owner for a percentage of the total cost of that new room each month. This way, the owner pays for the extra room as the work progresses instead of all at once.
Can I always get Pre-approval Before I Start working on the change Order?
When it comes to change order requests in construction projects, obtaining pre-approval before starting work is often a best practice. However, the reality of an active construction site can make this process more complex. In the first paragraph of this article, the phrase "in theory" was used to describe how change order requests are used to amend the original contract and should, in theory, require approval before any additional work is performed. However, there are situations where the project owner may be disconnected from day-to-day activities, and their construction managers may not have the authority to approve unforeseen conditions cost impacts that arise. Additionally, accurately assessing costs and impacts during unexpected situations may not always be possible, which can make submitting an accurate change order request challenging. As a result, the General Contractor may need to proceed on a Time and Materials (T&M) basis or T&M not to Exceed, which can be a riskier solution.
T&M and T&M not to Exceed
T&M stands for "Time and Materials." It is a type of contract arrangement in which the contractor is reimbursed for their actual costs of labor and materials, plus an additional fee or percentage of the total cost as profit. Under a T&M contract, the contractor provides the owner with a detailed breakdown of their costs, including hourly labor rates, materials costs, and any other expenses incurred.
In a T&M contract, the contractor usually bills the owner periodically, usually monthly, based on the hours worked and materials used during that period. The owner pays the contractor the billed amount and retains the right to inspect the contractor's records and receipts to verify the costs billed.
One of the main advantages of a T&M contract is that it allows the contractor to start work quickly, even when the project scope is unclear, or unforeseen conditions arise. This is because the owner only pays for the actual work performed and materials used. However, T&M contracts also have a higher degree of uncertainty and risk for the owner since the project's final cost is not known upfront. Additionally, the owner may challenge you, the General Contractor, on the costs and your entitlement after the work is completed, and you may not get paid if you don't have all your paperwork for backup.
T&M not to exceed is a variation of the T&M billing method where the client agrees to pay for the actual hours worked and the materials used, but with a cap or ceiling on the total amount the vendor can bill. This means that even if the project takes longer or requires more materials than initially anticipated, the client will only pay up to the agreed-upon maximum amount.
For example, let's say a vendor is contracted to complete a project using the T&M not to exceed billing method with a maximum budget of $10,000. However, if the project takes longer than expected and the vendor incurs $12,000 in labor and material costs, the client will still only pay the agreed-upon maximum amount of $10,000.
T&M, not to exceed, provides some cost certainty for the client while also allowing flexibility for the vendor to adjust the scope of work and timeline as necessary without having to renegotiate the contract or incur additional costs. However, it's important for both parties to agree on the maximum budget upfront and to monitor the project's progress closely to ensure that it stays within the agreed-upon limit.
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