Real Estate Articles
Written by Brent Pace for Gaebler Ventures
Change orders are a reality of construction, but being prepared for them and knowing how to deal with them can save you a lot of money.
When you are managing construction, change orders are a fact of life.
But there are ways to minimize change orders and make sure your contractor thinks twice before asking for a change. Here are a few things you should think about to manage change orders effectively.
Get good plans
Having a good set of plans can save you a ton of money. Before you ever hire a contractor, you should try to get as complete a set of plans as possible. Get your architect, the tenant, and you (the owner) to literally sign on a set of plans together. That way you all agree on exactly what is being built.
The lowest bid may not be the best
When the contractors bid the plans, you may see one bid that is much lower than the others. In some cases, this is an indication of how badly the contractor wants the job. However, in most cases it indicates that the contractor probably missed something on the plans. It would be wise to meet with that contractor and the architect to go through the plans and make sure they were properly understood before awarding the contract.
Another reason the low bid may not be the best deals with the contractor's change order strategy. Some contractors bid artificially low to get the project, banking on the idea that they will be able to generate a bunch of change orders to pump up their contract size. As an owner you should directly address this with the contractor before he is hired and make sure they understand that you will be very stingy with change orders.
Negotiate change order structure
When the contractor bids the plans, if they miss things that were already on there they have to take responsibility for it. Most good contractors understand that, but make sure that you communicate that directly to each contractor who bids the project. However, many times a change order will be totally unavoidable and will be entirely the fault of the owner. You may have simply forgotten a feature on the plans that is vitally important to the space.
To minimize the cost of these unexpected change orders, it is best to negotiate with the contractor in advance. Many general contractors will charge as much as a 15-20% overhead and management fee for any change order. That means if your change will cost $20,000 to build, the contractor could charge you an additional $3,000 to $4,000 just for managing that change. If possible, negotiate a lower change order fee in advance of hiring a contractor. This will also help you make it clear that change orders are not to be a profit center for the contractor on your project.
Document change orders
Any change order needs to be signed by at least three people: the project architect, the project owner, and the general contractor. Each change order should specify the exact change being made and the total cost of that change. A copy of each change order should be kept by all of these parties as well. In addition, if you are being financed by a bank they may also wish to be included on change order approval and pricing.
In addition to documenting each individual change, a running change order log should be kept. This log will document the date and substance of each change as well as the additional cost produced. If possible, the log should help you to update the total project cost to make sure you are prepared for what the construction will cost you.
Brent Pace is currently an MBA candidate at University of California at Berkeley. Originally from Salt Lake City, Brent's experience is in commercial real estate development and management. Brent will have tips for small business owners as they negotiate their real estate needs.
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