Change Orders in Contractor Services

Change orders are formal modifications to an executed construction or service contract that adjust scope, cost, schedule, or all three simultaneously. This page covers how change orders are defined, structured, and processed across residential, commercial, and industrial contractor engagements. Understanding change orders is essential for anyone involved in contractor procurement, project oversight, or dispute resolution, because unmanaged changes are a leading driver of cost overruns and contractual conflict.

Definition and scope

A change order is a written amendment to an original contract between an owner and a contractor — or between a general contractor and a subcontractor — that modifies the work as originally defined in the contract documents. The American Institute of Architects (AIA), in its standard form AIA Document A201–2017 (General Conditions of the Contract for Construction), defines a change order as "a written instrument signed by the Owner, Contractor, and Architect" that authorizes a change in the work, contract sum, or contract time (AIA A201–2017, §7.2).

Change orders apply broadly across project types. On residential projects, they might document an owner-requested finish upgrade. On commercial projects, they frequently address unforeseen structural conditions uncovered during demolition. On government contracts, federal procurement rules under the Federal Acquisition Regulation (FAR), specifically FAR Part 43, govern the authority and process for issuing contract modifications (FAR Part 43).

The scope of a change order can encompass additions to the work, deletions from the work, substitutions of materials or methods, changes to the contract completion date, and adjustments to the total contract price. Not every field instruction rises to the level of a change order — minor clarifications that fall within the original scope of work are typically handled without a formal amendment.

How it works

The change order process follows a structured sequence from initiation through execution:

  1. Identification — A party (owner, contractor, architect, or engineer) identifies that the work differs from the contract scope. This triggers a change event.
  2. Request for Change (RFC) or Proposed Change Order (PCO) — The initiating party submits a written description of the requested change along with preliminary cost and schedule impact estimates.
  3. Pricing and review — The contractor prepares a detailed cost breakdown, including labor, materials, equipment, subcontractor costs, overhead, and profit. Overhead and profit markups on change order work are typically negotiated at the contract stage; industry practice places combined markups in the range of 10–20%, though the contract controls the actual figure.
  4. Negotiation — The owner, architect, or contracting officer reviews the pricing and schedule impact. Disputes at this stage may be resolved by a Construction Change Directive (CCD) under AIA A201 §7.3, which allows the owner to direct work to proceed before full agreement on price.
  5. Execution — All required signatories execute the change order, making it a binding amendment to the contract.
  6. Documentation — The signed change order is incorporated into the project record, and the contract sum and schedule are updated accordingly.

The distinction between a Change Order and a Construction Change Directive is operationally significant: a Change Order requires full agreement and signatures from all parties, while a CCD can be issued unilaterally by the owner when the parties cannot agree on price or time, directing the contractor to proceed at risk of later resolution.

Common scenarios

Change orders arise from predictable categories of events across most project types:

Decision boundaries

Not every change event should be processed as a formal change order, and the contractual framework defines the boundaries:

Within original scope vs. outside original scope — If a contractor's pricing already accounts for a particular condition or item, executing it is a contract obligation, not a change. The baseline is the contract type and structure: a lump sum contract shifts more risk to the contractor, while a cost-plus contract passes more cost variability to the owner.

Directed vs. constructive changes — A directed change is explicitly authorized in writing. A constructive change occurs when an owner's action (or inaction) effectively changes the contractor's work without a formal order — for example, issuing overly restrictive inspection standards that require rework. Constructive changes are recognized under federal contract law and in standard AIA documents as grounds for equitable adjustment.

Time limits for notice — Most contracts specify a notice period (commonly 21 days under AIA A201 §15.1.3) within which a contractor must submit written notice of a claim for additional cost or time. Failure to provide timely notice can waive the right to recover, making prompt documentation essential.

Pricing method options — Change order work may be priced by mutual agreement on a lump sum, on a unit-price basis, or on a time-and-materials basis with a defined not-to-exceed ceiling. The pricing method should be specified in the original contract to avoid disputes.

References

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