Understanding Change Orders in Construction

Change orders are inevitable in construction projects. They arise when the scope of work changes after the contract is signed—whether due to client requests, unforeseen site conditions, or design alterations. While they can be a valuable source of additional revenue, mismanaging them can strain relationships and damage trust.

Why Accurate Pricing Matters

Pricing a change order correctly ensures your business remains profitable while avoiding disputes. Undercharging erodes margins, and overcharging risks alienating your client. The goal is to find a balance that covers your costs, reflects the value of the work, and is justifiable to the client.

Step 1: Review the Original Contract

Before setting a price, revisit the original contract to check for clauses related to variations or change orders. Many contracts include provisions on how these should be documented and billed. Having a contractual basis for your pricing protects both you and the client.

Step 2: Calculate True Costs

Break down the change order into specific elements:

• Labour – Estimate man-hours required and apply your standard rates.
• Materials – Include delivery costs and account for potential price changes since the original order.
• Equipment – Factor in hire costs or depreciation.
• Overheads – Remember indirect costs such as project management time.

This detailed approach makes your pricing transparent and defensible.

Step 3: Communicate Early and Clearly

Clients dislike surprises—especially cost-related ones. As soon as you’re aware of a potential change, discuss it with the client before work begins. Provide a written proposal detailing scope, costs, and any impact on timelines. This helps prevent misunderstandings later.

Step 4: Justify Your Pricing with Evidence

Where possible, include cost breakdowns, supplier quotes, or labour rate sheets. Evidence builds trust and reduces the chance of disputes. If the change is due to client-driven adjustments, they are more likely to accept costs when the rationale is clear.

Step 5: Offer Options Where Possible

Sometimes a client’s budget is tight. Providing alternative solutions—such as using different materials or adjusting the scope—can help keep the project moving while maintaining goodwill.

Step 6: Document Everything

Every change order should be approved in writing before work starts. This protects both parties and ensures a shared understanding of what’s included and at what cost.

Final Thoughts

Pricing change orders well is about more than just numbers—it’s about trust, transparency, and professional communication. By following a structured approach, you can ensure fair compensation for your business while preserving strong client relationships.