A change order is a written amendment to an existing construction contract that must typically be reviewed and approved by the parties identified in the contract, such as the owner and contractor, before it becomes effective. It records work being added, removed, or modified and identifies the resulting adjustment to the contract price and completion schedule.
In change order construction situations, the need for an amendment may arise from unforeseen site conditions, owner-requested revisions, design errors or omissions, updated drawings, material substitutions, regulatory changes, weather events, or coordination problems between trades. A contractor may also propose value-engineering changes that reduce cost without impairing performance.
A construction change directive is different. It generally allows the owner or the owner’s representative, such as the architect, to direct the contractor to proceed with additional or revised work before the owner and contractor have agreed on the related price or schedule adjustments, subject to the terms of the contract.
The change order process begins when someone identifies work that differs from the original contract documents. The contractor should promptly provide notice in the form required by the contract, since missed notification deadlines may jeopardize payment.
The contractor then prepares a request describing the revised work, why it is necessary, and which party is responsible. Supporting materials may include photographs, requests for information, revised drawings, subcontractor quotes, supplier proposals, labor projections, and equipment requirements.
Next, the contractor develops an itemized pricing proposal and evaluates the schedule impact. The submission should state whether the change affects the critical path, requires additional days, or creates acceleration costs.
The owner, architect, and other designated reviewers evaluate the request. They may approve it, reject it, negotiate the price, or request additional support. Once the parties agree, authorized representatives sign the document. The approved amount and schedule adjustment are then incorporated into the contract, project budget, payment applications, and job-cost records.
Contractors generally price changed work by identifying labor, materials, equipment, subcontractor charges, taxes, insurance, overhead, and profit. When a change removes work from the project, appropriate credits for the deleted scope should also be reflected in the pricing. For unit-price contracts, changes are often valued using the contract’s established unit rates when applicable, while lump-sum change orders commonly rely on a negotiated price supported by a detailed cost breakdown or estimate.
Disputes often begin when the scope is vague, supporting quotes are incomplete, markup calculations differ, or the parties disagree about responsibility. An owner may view the work as part of the original contract, while the contractor considers it additional scope. Other disagreements involve productivity losses, delay costs, schedule extensions, or whether a design omission caused the change.
Taxes can also affect material and equipment pricing. Applicable Sales Tax Rules should therefore be reviewed when preparing and evaluating the proposal.
When changed work begins before approval, the contractor may pay employees, subcontractors, and suppliers long before receiving reimbursement. A growing backlog of unresolved requests can consume working capital and increase borrowing needs.
The accounting consequences can be equally serious. Approved changes generally adjust incurred costs, estimated total costs, and the contract price. Unapproved changes may need to be treated as claims, with revenue recognized only when recovery is probable and reasonably estimable. If costs are recorded without a corresponding contract adjustment, reports may show excessive underbillings. If revenue is increased but approval never arrives, the project may experience profit fade—a reduction in previously expected profit as actual costs rise or projected revenue declines, resulting in lower margins over the life of the contract.
Contractors should track approved, pending, and unpriced changes separately and reconcile them with payment applications, forecasts, and project schedules. Broader planning considerations, including the Financial Factors Construction Leaders Should Consider in 2026, may influence overall business strategy and profitability, but they should be evaluated independently from the determination of whether contract revenue is recognizable.
It depends on the contract and applicable law. Starting without written approval creates significant payment and liability risk. Work may proceed when an authorized written directive permits it, but the contractor should preserve notices, cost records, correspondence, and evidence supporting reimbursement.
A verbal agreement may be difficult to enforce, particularly when the contract requires written modifications. The parties may later dispute scope, price, timing, or authority. Contractors should immediately confirm verbal instructions in writing and obtain the required signatures before relying on them.
Often, but not automatically in every situation. Many bond forms extend to approved contract changes, although significant increases may require notice to or consent from the surety. Contractors and owners should review the bond language and notify the surety promptly.
No universal approval period applies. The governing contract usually establishes submission, review, response, and notice deadlines. Contractors should follow those requirements precisely and document delays. When the contract is silent, the parties should establish reasonable written review periods at the project’s outset.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Mike Reynolds, partner in charge of Bennett Thrasher’s Financial Reporting & Assurance practice, who has industry experience in Construction, or call us at 770.396.2200.
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