The Change Order Survival Guide for Real Estate Developers

In the lifecycle of a complex real estate development project, changes to the construction plan are inevitable. From moments of architectural inspiration to unexpected conditions on the job site, developers need to be nimble to address a project’s evolving demands. A change order (also called variations or variation orders) allows a general contractor, subcontractor, or vendor to identify, define, and track these potential changes to a project in a way that is acceptable to all stakeholders. 

So, what constitutes a change order? A change order is any  amendment to a construction contract  that modifies the contractor’s scope of work, including added costs or time required to make such an adjustment. The majority of change orders are additive, where work, time, and expense are added to a given project, but there are also deductive change orders, where portions of the work are deleted, and costs must be subtracted from the original contract. 

The success of a real estate project depends on the proper management of change orders, and developers should understand why and when a proposal is necessary, how to minimize or mitigate any negative effects, and leverage the appropriate strategies and tools to ensure the project continues on time and within budget. 

Why Are Change Orders Necessary? 

The real estate development process is a complex and dynamic undertaking. As a result, 35% of projects will require at least one change order. Throughout the construction timeline of a given project, numerous situations may necessitate a shifting of plans, including: 

• Design Changes 
• Developers want to execute a vision for a project alongside architects and contractors, and sometimes, new ideas or adjustments might become necessary or clear only once the construction process has begun. 
• Regulatory changes 
• Zoning and other building regulations are mandated by state and local governments in a given geographic region and could be subject to change over the lifecycle of a project. Occasionally, a developer might be required to change the size and scope of a project to adhere to evolving regulatory restrictions or requirements in accordance with new laws. 
• Unforeseen site conditions 
• Even the most airtight construction plan is subject to the whims of the natural environment. For example, excavating land can prove more complicated if large rocks or other geological obstacles come up, resulting in the need for additional machinery or a revised project timeline. 
• Client requests 
• Owner’s representatives working on a project for a client may find their needs evolve over the course of construction, and it’s important to have a structure in place to meet new requests or demands that arise down the line. 
• Material or labor shortages 
• The COVID-19 pandemic caused disruptions to the construction supply chain that persist today, resulting in increased prices and bottlenecks on critical supplies. Intentional agreements with contractors can mitigate material or labor shortages, but in the current climate, developers need to be ready for material or labor issues to arise. 

In the dynamic development environment, any of the above concerns could necessitate a change order, and it’s important to understand the potential pitfalls the proposal process could present for your team. 

Negative Impacts of Change Orders

Though change orders address the unexpected, major disruptions to the development process can occur if modifications are not properly managed. By understanding the negative impacts such amendments can cause, project managers can prevent or mitigate the effects. 

Budget overruns are the most common issue developers might run into making adjustments to original contracts. In changing the scope or demands of a contractor’s work, additional costs are likely, and the vendor will be required to present a new quote as appropriate. The added costs are what project contingency is for, but small costs can add up, and variance should be carefully tracked to prevent surprises down the line. 

In an ideal scenario, the legal process begins with a contractor preparing a change order proposal that quotes a price for the extra work (or for the work removed.) Once the developer and the contractor agree on the scope, price, schedule, and format, a written change order is prepared and signed. Sometimes, a disagreement over a change order can arise between the developer and contractor, causing a delay in the development process.

Even without legal obstacles, additional construction will  extend project timelines,  and without appropriate planning, too many change orders could lead to a serious delay in project completion. Though it’s important to keep to an ideal timeline, developers should also be wary of rushing jobs and facing reductions in project quality. 

Luckily, real estate developers can mitigate all the potential negative impacts of change orders with appropriate planning, management tools, and communication strategy. 

Strategies For Minimizing Change Orders 

The best way to prevent the change orders from negatively impacting a project is to reduce the number a project requires through proactive, strategic planning. Here are a few key steps development teams can take to reduce the number of modifications necessary on a given project: 

• Developers should bring architects, general contractors, and other construction stakeholders into alignment with their vision during the pre-construction design process. The proper communication and coordination will help integrate constructability expertise into designers’ and GCs’ processes. 
• Eliminate ambiguities from the original contract. The statement of work (SOW) should include explicit and detailed directions for the contractor, preventing any miscommunications or misunderstandings about project requirements. 
• Include a change order process in the original contract with a vendor. When both parties know what to expect as changes or obstacles come up, the faster these issues can be tackled and resolved.
• Take advantage of technology to facilitate better project management practices. If an unexpected expense or updated cost isn’t documented, project managers will have to scramble to reallocate funds. Instead, firms can use technology to automate document management, ensuring updates to existing orders don’t get lost in the shuffle. 
• Keeping data on vendors from past projects in a dashboard can help your team proactively compare contractors and costs, ensuring your team solicits high-quality work from reliable sources. 

Even taking the above considerations into account, development teams are likely to carry out a number of change orders to complete a project. 

How to Handle Change Orders Efficiently 

In the inevitable case of a change order, handling the procedure efficiently will allow a project to continue on time and on budget. Here are several tactics your development team can leverage to handle the process smoothly and efficiently. 

• Have a process in place to address change orders promptly and efficiently. The more streamlined your change order approval process can be the less likely the project timeline will be disrupted. 
• Establish a communication strategy around change orders with financial partners or lenders. Financial partners might have different reporting expectations around contract or work changes; some might expect updated change order logs as they come up, while others may only need to know in a final report. 
• Value engineering can help developers make informed budget adjustments during a project without compromising on quality. If your team is tracking cost adjustments caused by change orders, it’s possible to note when a budget line is running too high and consider replacing a material in another budget line that will get the job done, but at a lower cost, to accommodate the higher budget line item. 
• Evaluate budget implications. It’s important to understand how the changes will impact the overall financial picture of your project. Technology can facilitate better  budget forecasting for development teams, allowing for the creation of real-time anticipated cost reports that proactively forecast where the project is headed. 
• Coordinating the proper documentation for a change order is equally vital to ensuring a project runs smoothly and can help increase transparency across the project. Leverage technology to automate the documentation process and generate reports to communicate changes clearly with financial lenders or other key stakeholders. 

Development teams working with unwieldy, ad-hoc spreadsheets may find change orders causing disruptions, delays, or unexpected budget concerns. Modern real estate development software can streamline the change order process for developers, contractors, and other relevant stakeholders by creating a centralized dashboard for contracts with cost and budget tracking.

The change order process comes with its headaches but doesn’t have to cause major discord or disruptions for your development team.  Download The Complete Guide to  Commercial Real Estate Data Analytics to further understand how data analytics can keep projects coming in on time and on budget for your development team.