How to Estimate Change Orders in Construction Projects

As a contractor, the construction change order estimate is very painful to handle. You can not say no to your client and not even ignore them. You have to find the right solution and adjust all the estimates according to the change order plan. Several projects experience one major change throughout the project. No matter how carefully you have planned everything, unexpected changes and site discoveries are expected. They are never a part of the original contract. Contractors have to accurately estimate to determine whether a project ends in profit or loss.

Some contractors are busy handling other project tasks, which compel them to outsource accurate construction cost estimating services from a reliable company. Professional estimators have years of experience in tackling change orders under budget. So, one of the best solutions is outsourcing experts for your needs. SMA Estimating LLC is a leading firm in the USA offering precise estimates according to the project needs.

What Is a Change Order in Construction?

A construction change order is made because of a modification in the original project scope of work. Basically, it provides a legal record of the agreement between the customer and the contractor. It contains the information about the new work and the price to perform it.

Change orders are not rare exceptions. They are normal in the routine of construction projects. According to the industry data, the change orders account for 10–15% of the contract value on major projects.

On average, they roughly cover 4% of a project's cost even at the outset. For this reason, it is important to understand how to estimate them accurately.

Why Change Orders Happen

It is better to look into the major reasons that are causing change orders.

Design errors and omissions

According to the Purdue University study of INDOT projects, the pre-construction document quality is mostly compromised. This leads to design errors and omissions.

Differing site conditions

The unforeseen site conditions are also one of the top causes of change orders. It includes:

●     unmapped utilities

●     contaminated soil

●     hidden structural problems 

Owner-initiated scope changes

It is also common that the clients revise their concepts in the middle of the project. This directs to the requesting of different materials and layouts.

Material and labor cost fluctuations

Price fluctuation in materials or any sudden change in the labor availability force contract renegotiations. It is better to hire the best Construction Estimating Company for your projects. They are capable of handling all types of projects.

The Three Types of Change Orders You Must Know

1.   Lump Sum Change Orders are a fixed price agreed upon before work begins. Its best use is when the change order is clearly known

2.   Time and Materials (T&M) Change Orders are used when the work cannot be accurately estimated under emergency conditions. The final cost is only known after the work is completed.

3.   In Unit Price Change Orders, a fixed price is set for each unit of work. Unit prices can be adjusted when actual quantities significantly change from original estimates.

Steps to Estimate Change Orders

Step 1: Identify and Define the Scope of Change

The process begins with an accurate definition of what has changed. This means reviewing the original drawings and specifications against the proposed modification.

●     Review revised design plans

●     Confirm whether the change is owner-directed or contractor-initiated

●     Identify which contract sections are affected

Step 2: Calculate Direct Costs

Direct costs are directly connected to the physical work. Note down that early-stage changes are less expensive to implement. They are traceable, which includes:

●     Labor 

●     Materials 

●     Equipment 

●     Subcontractor costs 

Step 3: Estimate Indirect Costs

This is the step where several contractors underestimate the change orders. Indirect costs are less visible. Neglecting them can erode profit margins. It includes:

●     Overhead 

●     Extended general conditions 

●     Consequential impacts 

●     Administrative costs

Step 4: Apply Profit and Markup

Once you are done with profit and markup, apply the profit margin specified in the original contract.

You have to be very careful while evaluating it. Do not simply apply the profit percentage to direct costs alone. Overhead must also be recovered before profit is measured.

Formula:

Total Change Order Price = (Direct Costs + Indirect Costs) × (1 + Overhead Markup) × (1 + Profit Margin)

Step 5: Assess Schedule Impact

Every change order must also evaluate its impact on the project timeline. Consider:

●     Does the change add activities to the critical path?

●     Will additional work delay the completion date?

●     Are there liquidated damages in the contract tied to late completion?

●     Does the schedule impact affect downstream trades or coordinated deliveries?

Step 6: Add a Contingency

Keep in mind that a well-planned change order estimate also has some ambiguity. It is important to include a contingency of 5–10% of the estimated total.

Step 7: Document and Submit Formally

A complete change order estimate should always include:

●     A clear written description of the change

●     Itemized material costs with quantities and unit rates

●     Detailed labor breakdown by trade and hours

●     Equipment and tool expenses

●     Schedule impact analysis

●     Overhead, profit, and any applicable taxes

●     A contingency allowance

Best Practices for Accurate Change Order Estimation

To excel in change order estimation, you need to clearly communicate throughout the project.

●     Use detailed contracts from day one 

●     Document everything in real time  

●     Never work off memory 

●     Align all parties early

●     Leverage technology 

●     Establish approval thresholds

●     Track change orders with a log 

Conclusion

Contractors and project managers who are experts in handling change orders can protect their margins and deliver the projects under budget. Follow the best practices to achieve the desired results. If you have no experience in this field, the best decision is to outsource to a reliable estimating company. Never take risks of leaving your finances to guesswork.