Any change in the initial contractual scope agreed by each relevant party, including Client & Contractor that is hitting any major attribute of the project (scope, cost & schedule) is known as Change Order.
Sometimes it is mixed up with variation order, but to honest, I have never seen a documented form stated as variation order. It’s always called a Change odder – C.O. But in European countries, they call it a variation order as I have read it somewhere else.
A change order is an amendment in the contract. It should be on a later date once both parties have an initial contract. Being a good project manager, you must have a full grip to avoid any scope creep.
Why Change Orders?
Change orders are raised as there are design errors, change in conditions, procurement constraints, or the owner wants something to change later on. If a client wants to compress the schedule, then he needs to pay the acceleration cost that itself is a change order. If he wants to reduce the cost, then the scope will automatically reduce, or he needs to accept delays in project completion or on milestones wherever applicable accordingly.
Five Key Component of a Change Order
Following are the key components that a change order form should have;
1.Change in the Scope – Either additions or reductions. A change is just color can be referred into a change order even no monitory value involves. Better to document this for reference to give credit.
2.Change in Cost – Either plus, negative, or even zero.
3. Change in time – Never forget if you are on the contractor side & must plan as per resources or add optimum to avoid Liquidated Damages (L.D.). It should have a start & finish date even though not necessary as per Change Order form.
4.Signatures – It should be signed by authorized parties two or more.
5.Date of Change Order – The signature date must be included in the Change Order Form.
Who Initiates Change Orders?
Any of the parties either Contractor or the Client can initiate.
If a contractor tracks a major issue in the design that could lead to some serious issues to the final deliverable, then he can propose that to Client.
Change Order Negotiations | As a Contractor Point of View
As a contractor, you can claim the higher cost as was in the initial contract but be reasonable as if you are painting an area at the rate of 5$ per square foot, but now, during change order, you can claim 8$ instead of 5$. The reason is a Change Order is always a small & tricky quantity to handle, and hence you need to have extra resources in all categories to manage that stuff. To get that approval from the Client, you must calculate all that stuff and present it to him. Everybody thinks that it should be the same value as per contract, but believe me, if you give him a proper calculation, then you will get approval easily, or at least you can negotiate a little higher to the initial value.
One more thing very important, mostly contractors only see the price of the change order and get trapped as there should be proper TIME mentioned for a schedule for extension of time otherwise this acceleration (crashing) will eat away all of this amount or else you may be penalized for Liquidated damage if a project is delayed.
You need to understand Change Management to deal with all this stuff.
Change Order Limitations
In some contract documents, it is clearly stated that the change order value should not increase above 10% of the total value of the project. It may be variable, but normally it is mentioned to avoid any conflicts later. Change orders are inevitable in any project. It should be documented even it is just changed in color. The change order should be collected 100% upfront. This is standard says.
Benefits Change Orders
Change orders look annoying to either or both parties, but there are benefits, but the major benefit is it helps to avoid final deliverable rejection from the owner.
To maintain a change order form helps in this cause. Change Order form template is always the same within the organization to keep the harmony.
Every project has some issues regarding design change or any other major attribute but frequent change is always not good. It shows a lack of commitment by the client & he is not clear about his requirements as a change order is “Amendment into the Contract on later stage”. However, less than 10% amount change orders are reasonable & help for the acceptable deliverable to the customer.