And that's how projects end up over budget: Change Orders
So, you’ve confirmed your plan. It’s set in stone. Or, is it? Of course not. Nothing ever goes entirely according to plan, not even in the most well thought out project. And though changes are often thought of in a negative perspective as a troublesome event, there are ways of working to make changes less of a headache
In this blog post we’ll discuss how change orders work in a project, how to most efficiently implement them and seamlessly integrate them into an ongoing project. We’ll also touch upon how the forecast is impacted by change, and what difference there is between an updated plan and a forecast, though that might be a lengthier subject for a coming post.
Change Order Types
To start, we’ll go over two different types of change orders, let’s call them type A and type B. Type A is where the change order is kept in the same cost accounts or same activities, but just increasing the cost amount. For example, if a project’s original plan was to install 100 linear feet of pipeline and has to be increased to 120 linear feet, it’s an increase by 20% which will be added on top of the existing plan, impacting the planned approved cost. It might simply have been an miscalculation, or a change that was unforeseen, but the important note is that the cost increases from the original approved plan.
Type B on the other hand, is incrementing the scope of work from a non existing account. As an example for this type of change order, let’s say it was not anticipated to do a certain activity, such as painting a building in the common areas. Originally the plan was just to leave it unpainted, but with this updated plan new cost accounts for this particular activity or scope has to be implemented. The new cost account will include the event of hiring a painter, costs for the materials and all other expenses linked to the event that has arisen.
Forecast, or Change Order?
But then, how does the change orders and the forecast correlate with each other? What happens with the forecast when change is being implemented in the project? Basically what will happen, is a re-allocation of the expenses that are being paid. Say for example that you would have four months to pay 100K, and the forecast would be calculated to equal payments of 25 each month. If the forecast is updated with an expense due of 50 the first month, you then have 50 left to spend for the remaining three months which would then be distributed as 10, 10 and 30 or similar. The bottom line here is that you’re going to pay the same total amount you originally planned, it’s just a matter of when you’re paying it. What could also happen with a forecast is an extension in payment. Say, instead of making the payment of 100 in four months, the same amount is getting extended to seven months. Neither this will affect the total sum to be paid, but just how the expenses are being allocated.
It should be noted that the main assumption for the change orders we’re discussing in this post are part of a fixed price contract. If a change order is added to an agreed fixed contract, you will have to discuss the change to determine its legitimacy, and once proven, increase the budgeted amount.
For the most part, the costs are the crucial part of what’s being affected by change orders, but it’s also important to note how changes are impacting the schedule. Important questions to ask could be ”will the change order affect the timeline?” and ”how much longer will it take based on this change order?” Therefore, the aspect of not only quantifying costs, but also time, should also be included in a change order. This is typically done by updating the forecast values in the schedule timeline.
How can you avoid change orders and reduce the risk of cost overruns...
So changes are inevitable, but how do we ease the impact they’re having on the overall project and workflow? According to Construction Business Owner (1), there are a few steps one can take to mitigate the effects. First out is to set clear specifications for establishing change orders. Be sure to specify who can make a change order, and the timeframe for submitting a change order should also be specified as well as what kind of documentation that should be included in a change order submission. Secondly comes revision. This is a crucial part to avoid errors or any information being left out. Problems that arise due to shortcomings in the revision are always easier to handle at the beginning of the project. Every change order should also be clearly written down. Also, it’s important to ensure that the communication is clear and everyone is being informed. Lastly, they suggest implementing a tech solution to keep track of all change order events and well, what else can we say than that we completely agree.
Resources:
(1) https://www.constructionbusinessowner.com/management/5-steps-improve-change-order-management
