Change Order

Updated on March 26, 2024
Article byShrestha Ghosal
Edited byShrestha Ghosal
Reviewed byDheeraj Vaidya, CFA, FRM

What Is A Change Order?

A change order is a formal document that traces the modifications or adjustments to the original work in a contractual agreement. It acts as a legal and binding record that documents the agreed-upon adjustments and provides a structured framework for managing variations in a project’s requirements.

Change Order

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It is a crucial concept in business and project management. This alteration may involve changes in project specifications, timelines, costs, and other essential aspects. It is initiated by either the client or the contractor, and it helps ensure transparency and clarity when there are deviations from the initial project plan.

Key Takeaways

  • A change order is an official document that describes how alterations to the original work occurred in a contractual arrangement. It is a concept used in corporate and project administration.
  • This document functions as a legally effective record of the revisions that were made and offers an organized system for handling changes to a project’s specifications.
  • However, the execution of the project may be delayed from the process of requesting, discussing, and implementing these orders. Moreover, it can be challenging to monitor and coordinate the cost implications, which could result in cost spikes.

Change Order Explained

A change order is a mechanism that records modifications to the original terms and conditions defined in a contractual agreement. This formal document aids in navigating alterations in various project aspects, including specifications, durations, expenses, and other necessary parameters. Thus, this order is essential for situations like evolving project requirements, unforeseen challenges, or shifting client priorities.

This formal document acts as a structured framework to address and accommodate deviations and ensure that all stakeholders are aware of the changes. Furthermore, it is a legally binding agreement that establishes the mutual understanding and consent of all the relevant parties involved in a specific project. The project team sets a clear and transparent record of modifications and minimizes the potential for misunderstandings or disputes down the line with the help of this order.

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Process

The change order process is as follows:

  • The process begins with the identification of a change in project requirements. The client, the project team, or external factors may initiate it. The proposed change is documented in detail, where individuals must specify the nature of the modification, the reasons behind it, and the potential impact on the project in terms of time, cost, and resources.
  • Then, the organization must assess the impact of the proposed change. If the change has a financial impact, a detailed cost estimation is conducted. This process includes assessing additional expenses or potential savings resulting from the change.
  • Next, the order, along with its documentation and assessments, is submitted for approval. Additionally, if necessary, negotiations take place between the project team and the client to reach an agreement on the terms of the change.
  • After reaching an agreement, the details are also documented in a formal document. This document includes a description of the change, the agreed-upon adjustments, and any associated terms and conditions.
  • All the relevant stakeholders are then informed of the approved order. This step ensures that everyone involved in the project is aware of the modifications.
  • Finally, the project team implements the approved changes according to the specifications mentioned in the order. The progress and impact of the implemented change are monitored throughout the project.

Examples

Let us study the following examples to understand this order:

Example #1

Suppose Dream Constructions is a company working on a project where the initial plan involved building a three-story office building. However, midway through the project, the client decided they needed an additional floor for expanded office space. The project team recognized this change and then documented the modification, detailed the need for an extra floor, and estimated the impact on the project’s timeline and budget. The proposed change was then presented to the client, who reviewed and approved it after negotiations regarding the associated costs and timeline adjustments. The approved order was formalized, and the project team then implemented the change.

Example #2

Financial experts frequently caution contractors to be mindful of unforeseen expenses related to project modifications. Custom integration firms are growing more conscious of these order risks, which allows them to transform a possible loss into a victory. Moreover, exclusive new research from D-Tools indicates that these orders are beneficial for integration companies. Integrators, in particular, are more than five times more likely to enhance their revenues from these orders than to lose money on them.

Benefits

Some change order contract benefits include the following:

  • These orders provide a formal process for accommodating changes to project requirements. They allow projects to adapt to evolving circumstances, client needs, or unforeseen challenges without compromising the overall integrity of the project.
  • The orders contribute to client satisfaction by incorporating changes requested by the client. Clients appreciate the responsiveness and flexibility demonstrated when their evolving needs are considered and implemented. It boosts positive relationships and potential future collaborations.
  • The formal documentation and approval process associated with the change order contract helps reduce risks by ensuring that all stakeholders are aware of and agree to the modifications. Furthermore, this process reduces the possibility of misunderstandings, disputes, and unexpected negative consequences arising from unmanaged changes.
  • It provides a clear breakdown of the costs associated with modifications to the project. Additionally, this transparency helps in managing budgets effectively. It also allows stakeholders to understand the financial implications of changes and make informed decisions.

Limitations

The change order request limitations are:

  • The process of proposing, negotiating, and implementing these orders can introduce delays to the project timeline. It may also involve additional costs for materials, labor, or other resources. Therefore, managing and communicating the cost implications can be challenging, and it may lead to budget overruns.
  • Frequent or poorly managed orders can contribute to scope creep, where the project gradually expands beyond its original objectives. It can also strain resources, impact project timelines, and lead to unanticipated challenges.
  • Ineffective communication during the process can result in misunderstandings or misinterpretations of the proposed modifications. This lack of clarity can lead to disputes and negatively impact relationships between stakeholders.
  • Implementing a change order request may require a reallocation of resources, which may affect the availability of personnel, materials, or equipment. Thus, balancing the resource changes with ongoing project activities can be a challenge.

Change Order vs Change Directive

The differences between the two are as follows:

Change Order

  • This order is a formal document used in project management to request or propose modifications to the original project schedule or budget. It is initiated by one party to address changes in project requirements.
  • The order outlines the specifics of the proposed change, including the reasons for the modification, its impact on project parameters, and any associated costs.
  • The document requires approval from relevant stakeholders before implementation. It also ensures that all parties are in agreement regarding the alterations to the project plan.

Change Directive

  • A change directive is a formal instruction issued by the client or project owner to the contractor on a change to the project scope, schedule, or other contractual terms.
  • It is used in urgent situations where immediate action is necessary and formal approval cannot be obtained beforehand.
  • Change directives provide a temporary solution to address unforeseen issues. They are a means of ensuring timely responses to critical project issues while maintaining a formal process for further approval and documentation.

Frequently Asked Questions (FAQs)

1. What is change order accounting?

This accounting is the financial management and documentation process associated with changes to a project’s scope, schedule, or budget. It involves tracking and recording the financial impact of approved orders and the additional costs or potential savings. This accounting process ensures transparency and accuracy in financial reporting by categorizing and detailing the changes. It enables project managers and stakeholders to assess the overall project cost implications.

2. What is the difference between sow and change order?

The Statement of Work (SOW) highlights a project’s scope, objectives, deliverables, and other details. Moreover, it acts as a primary document at the project’s outset. The SOW sets the initial parameters of a project. Conversely, a change order is a formal request or directive that proposes modifications to the original project scope, schedule, or budget after the project has started.

3. What is the difference between a PO and a change order?

A Purchase Order (PO) is a formal document issued by a buyer to a seller. It specifies the goods or services to be purchased, quantities, prices, and terms. Additionally, it represents the initial agreement between parties. However, a change order is a document that modifies the terms of an existing contract or purchase order.

This article has been a guide to what is Change Order. Here, we explain its examples, process, comparison with change directive, benefits, and limitations. You may also find some useful articles here –

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