What Is Change Order?
A change order is a formal amendment to an existing contract that alters the original scope of work, terms, or price. Primarily found within contract management, especially in construction, manufacturing, and government procurement, a change order documents deviations from the initial agreement. These modifications can arise for various reasons, including unforeseen site conditions, design revisions, material changes, or shifts in client requirements. Properly managed, change orders ensure that all stakeholders acknowledge and agree upon changes, providing a clear audit trail and adjusting financial and timeline expectations.
History and Origin
The concept of formal modifications to contracts has evolved alongside complex projects and the need for clear accountability. In large-scale endeavors, particularly in construction projects and public works, it became evident that initial plans rarely remain entirely static. The U.S. federal government, a major procurer of goods and services, formalized the process of contract changes through regulations like the Federal Acquisition Regulation (FAR). Specifically, FAR Part 43 outlines comprehensive policies and procedures for handling contract modifications, including change orders, to ensure transparency and prevent unauthorized alterations in government contracts.6 This framework helps manage the inherent flexibility required in long-term or complex agreements while maintaining fiscal responsibility.
Key Takeaways
- A change order is a written agreement that modifies an original contract, typically affecting its scope, cost, or schedule.
- They are prevalent in industries like construction, defense, and manufacturing, where project requirements can evolve.
- Reasons for a change order include unforeseen conditions, design changes, regulatory updates, or client-initiated revisions.
- Proper documentation and mutual agreement are crucial for validating a change order and avoiding dispute resolution.
- Failure to manage change orders effectively can lead to cost overruns, project delays, and legal disputes.
Interpreting the Change Order
Interpreting a change order involves understanding its impact on the original contractual agreement. When a change order is issued and agreed upon, it becomes a legally binding part of the contract, effectively superseding or amending specific clauses of the initial contract law. For a project manager, it means re-evaluating the timeline, project budget, and resource allocation. For financial stakeholders, it directly affects the project's profitability and cash flow projections. Careful review is essential to ensure that the agreed-upon changes are accurately reflected in terms of cost, schedule adjustments, and modified deliverables. It is not merely an administrative detail but a critical document that realigns the expectations and obligations of all parties involved.
Hypothetical Example
Consider "Horizon Towers," a hypothetical real estate developer, embarking on a new construction project for a 20-story residential building under a fixed-price contract with "BuildRight Contractors." Midway through construction, the city council passes a new ordinance requiring all new residential buildings over 15 stories to install a more advanced, fire-retardant exterior cladding system than originally specified.
This new regulation necessitates a significant alteration to the project's initial scope of work. Horizon Towers would issue a change order to BuildRight Contractors. This change order would detail the new cladding specifications, the revised material costs, the additional labor required, and any potential extension to the project timeline. After a period of negotiation, both parties would sign the change order, formally amending their original agreement to reflect the increased cost and adjusted completion date, thereby incorporating the regulatory change into the active contract.
Practical Applications
Change orders are fundamental tools across various industries, appearing wherever projects have defined scopes and timelines. In the defense sector, for example, they are routinely used to adapt to evolving technological requirements or unforeseen challenges in complex defense system development. A notable instance involved the development of new Air Force One aircraft, where the project faced significant delays and increased costs due to changing requirements and internal issues at the contractor, illustrating how changes can impact even high-profile projects.5
Beyond government and defense, change orders are crucial in the oil and gas industry for modifications to pipelines or drilling platforms, in information technology for software development projects where user requirements shift, and in manufacturing for changes to product specifications or supply chain disruptions. They provide a standardized mechanism to manage deviations, ensuring that all parties are aware of and agree to the revised terms, which is vital for effective project management and financial oversight.
Limitations and Criticisms
While essential for flexibility, change orders are not without their limitations and criticisms, often becoming a source of contention and risk management challenges. One major criticism is their potential to inflate project costs and extend timelines significantly. Uncontrolled change orders can lead to substantial cost overruns and project delays, impacting the overall project budget and profitability. Some contractors might intentionally submit low initial bids, anticipating that numerous change orders will allow them to recover and increase their margins later in the project. This practice, sometimes referred to as "low-bid then blizzard of change orders," can strain relationships between owners and contractors.4
Furthermore, poorly defined or excessive change orders can indicate inadequate initial planning, ambiguous specifications, or a lack of clear communication among project stakeholders. The U.S. Government Accountability Office (GAO) has often highlighted the need for federal agencies to improve acquisition planning to prevent systemic weaknesses that can lead to costly contract modifications.3 Disputes can also arise over the fair pricing of changes or the responsibility for unforeseen conditions, often necessitating complex dispute resolution processes.
Change Order vs. Contract Modification
While the terms "change order" and "contract modification" are often used interchangeably, particularly in common parlance, "contract modification" is a broader term encompassing all formal alterations to a contract. A change order is a type of contract modification, specifically one issued unilaterally by the contracting officer (in government contexts) or agreed upon by the parties to alter the scope of work, price, or schedule. Other types of contract modifications include supplemental agreements (bilateral agreements), administrative changes (unilateral changes that do not affect the substantive rights of the parties, like a change in payment address), and terminations. Thus, every change order is a contract modification, but not every contract modification is a change order.
FAQs
What causes a change order?
Change orders can be caused by various factors, including unforeseen site conditions (e.g., discovering hazardous materials during excavation), changes in client requirements or preferences, errors or omissions in the original design or specifications, new regulatory requirements or building codes, material shortages, or unexpected market fluctuations.2
Who issues a change order?
Typically, the party requesting the change (e.g., the project owner or client) initiates the change order, which is then submitted to the contractor for review and pricing. However, a contractor might also propose a change order if they encounter unforeseen conditions or believe a different approach would be more efficient. In formal settings like government contracts, a contracting officer typically issues the formal document.
Can a change order be rejected?
Yes, a change order can be rejected by either party if they do not agree with the proposed terms, costs, or impact on the project schedule.1 For a change order to become effective, it generally requires mutual agreement and signature from both the client/owner and the contractor. If an agreement cannot be reached, it may lead to further negotiation or, in some cases, formal dispute resolution as outlined in the original contract.
Are change orders always about increasing cost?
No. While many change orders do result in increased costs due to additional work or material upgrades, a change order can also lead to a decrease in project cost if it involves reducing the scope of work or substituting more economical materials. They can also solely address changes in project timelines without a direct cost impact, or serve to correct administrative errors.