How to stop losing money on change orders

What the paperwork shows

Public agencies count change orders, and the counts are not pretty.

The Federal Highway Administration reviewed 159 change orders on 28 highway projects in one state, worth $91.7 million in original contracts. Those changes added 3.5 percent to the total, about $3.24 million, per that FHWA review. One project in the same FHWA sample grew by more than 21 percent of its original contract value.

Only 55 percent of those change orders had adequate cost paperwork, per the FHWA reviewers. Only 76 percent had an adequate written reason for the change. On those jobs the owner was a state agency with inspectors on site. If they cannot keep the paper straight, a 4 person crew on a phone will not either unless it has a system.

Every row above is a public agency figure from highway or heavy civil work, and none of it was measured on residential or small commercial jobs.

Where the money goes

Most change dollars come from the plans, not the crew.

In the FHWA sample, plan problems such as design errors, omissions and changed site conditions made up 70 percent of the change orders and more than 94 percent of the change order dollars. The Texas Department of Transportation saw the same pattern. About 1 in 4 of its change orders and about 1 in 3 of its change order dollars over 15 years of records traced back to design errors and omissions, per a USDOT Volpe Center report citing TxDOT data.

The extra work is usually real and usually not your fault. The trouble is that the fix gets built on a Tuesday afternoon and the paper gets written on Friday, if at all. The FHWA review found change orders took 9.14 working days on average to process, and 60 percent got done within 5 working days. Those days are the gap where the memory of what was agreed goes soft.

Unsigned means unpaid

A verbal change is a collection problem you gave yourself.

California home improvement law, in Business and Professions Code section 7159, says a change order becomes part of the contract only if it is written and signed by both sides before the work covered by it starts. The same statute still lets a contractor recover for unsigned extra work under unjust enrichment. So an unsigned change is not a write off. It is a fight, and fights cost days you could be working.

California also caps the down payment on a home improvement contract at $1,000 or 10 percent of the price, whichever is less, and bars billing for work not done or materials not delivered, per section 7159. You cannot collect ahead of the work, and you cannot easily collect behind it without paper. The only clean window is the one where the change is signed and the work has not started.

Get it in writing first

One page, one signature, before the first cut.

Write the change on one page. Say what changed, why, what it costs, and how many days it adds. Get a signature on a phone screen before anyone picks up a tool. The FHWA reviewers judged 45 percent of change orders short on cost paperwork, and every one of those is a change someone can argue about later. Your one page is the thing that ends the argument.

Post your markup rule

Your price for extra work should fit on one line.

Ohio DOT, in section 109.05 of its construction specifications, pays 38 percent markup on wages and fringe for extra work, 15 percent on materials, 15 percent on rented equipment, and nothing on equipment the contractor already owns. Ohio DOT also pays a prime contractor 5 percent on subcontracted extra work between $10,001 and $500,000, then 2.5 percent above that, capped at $37,500 in total. Those are public numbers a state agreed to pay, not a private margin. But they show what a written markup rule looks like, and yours should be just as plain.

Know the caps

Some customers cannot sign a big change even if they want to.

Texas cities may not raise a contract by change orders more than 25 percent of the original price, and may not cut it more than 25 percent without the contractor's consent, per Texas Local Government Code section 252.048. The same law lets a city official approve changes of $50,000 or less on their own, or $100,000 or less in cities of 240,000 people or more, and anything bigger goes to the governing body. If you do city work, a $60,000 change is a meeting, not a signature.

Washington State DOT projects that ran a formal cost risk assessment before construction saw 4.8 percent less cost growth and 6.7 percent less schedule growth than projects that skipped it, per the Volpe Center report citing Gabel and colleagues. You need 20 minutes before the job asking what could change and what you will charge if it does.

What we got wrong

I went in thinking contractors lose money on change orders, and the data says otherwise.

I started this piece thinking change orders were where crews leak money. The public numbers say most change order dollars come from the owner's own plans, and on public work those changes pay a set markup, 38 percent on labor in the Ohio DOT spec. A contractor with paper in hand makes money on a change. The loss lives in the 45 percent of orders the FHWA reviewers found without adequate cost documentation, and in the verbal changes that never became orders at all.

I also have to be honest about the data. Every measured number here is highway or heavy civil work, and the FHWA sample is 28 projects in one state. Nobody handed me a dataset of HVAC shops or remodelers, so applying these figures to a 3 truck outfit is an inference, not a fact. The DOT Inspector General found that FHWA itself has no consistent definition of a change order across a program of about $52 billion a year, so even the big agencies are guessing at the edges.

What stays human

The software holds the paper. You hold the call.

Deciding what to charge is yours. Deciding to eat a $300 change to keep a good client is yours. Getting the signature before the work starts is yours, and no tool does that for you. What software can do is keep the change page one tap away, keep every signed change next to its job, and show you which ones are still unsigned at the end of the day.

VuseDesk's Contractor plan is $39.99 a month and the General Contractor plan is $99.99 a month. It records payments and never processes or moves money. Try it on your next change order and see if the unsigned pile shrinks.