Change order rate is the value of approved change orders on a job divided by its original contract amount. The project manager builds it one change at a time in the change order log, and the CFO reads it across the portfolio to see how much contract value has moved since award. Split by cause, it shows whether that movement came from owners adding scope, from gaps in the design, or from conditions nobody could see at bid time.
The definition
The Texas State Auditor’s Office, in a March 2020 audit of the Texas Department of Transportation (TxDOT), describes a change order as a written order to a contractor that details changes to the specified work, item quantities or other contract terms. The City of Chicago Office of Inspector General (OIG), in a June 2018 audit of the Public Building Commission of Chicago (PBC), adds that a change order states how the change affects cost, time and scope of work.
Three calculations come from the same log:
- Net change order rate: approved additive change orders minus approved deductive change orders, divided by the original contract amount.
- Gross additive rate: approved additive change orders alone, divided by the original contract amount.
- Rate by cause: the net approved value for one cause code, divided by the same original contract amount, so the causes add up to the net rate.
Keep the gross figure next to the net one, because a large credit can cover a lot of added work. In the Texas audit, construction change orders in TxDOT’s Pharr district netted to negative $19,037,911 over fiscal years 2018 and 2019. That total included the termination of part of one project worth $38,476,526.
Decide up front how contingency draws count. PBC builds a contract contingency, usually 3% of the construction budget, into the original contract price, so spending it does not change the contract value. The OIG measured percent change against the original contract price with the contingency and site work allowance taken out.
Published thresholds
TxDOT told the auditors its target is to hold construction change order costs and overruns to 5% or less of a contract’s original amount. On construction contracts closed from September 1, 2017, to August 31, 2019, TxDOT paid $6,451,132,004 against original amounts of $6,235,268,063, which is 3.5% more. By district, the results ran from 10.7% below the original amount in Houston to 10.5% above it in El Paso.
The Chicago OIG cited a construction auditing guide by Ron Risner, which advises that projects with change orders above 5% of the original contract price, and especially above 10%, warrant a thorough review. The OIG used the 5% line to choose nine PBC projects. Approved changes on those nine ran from 6.9% of the original base construction amount on the Dunne Tech Academy Scope B modernization to 17.2% on a turf field at the National Teachers Academy.
Both figures come from public owners. They tell a contractor roughly where an owner’s auditors start asking questions.
Choosing cause codes
PBC sorts each potential change into three categories, with “other” for anything that fits none of them:
- Owner-directed changes, which the client requests, such as a different paint color or a relocated playground.
- Differing site conditions, which could not be anticipated until work was underway, such as buried communication lines found during excavation.
- Errors and omissions, where the architect’s drawings or specifications left something out or failed to meet code.
The Construction Industry Institute (CII) arrived at a similar list. Its research team RT-158 studied the cumulative effect of change orders on electrical and mechanical contractors, and its 2000 publication RS158-1 names additions, design changes and design errors as the most common reasons for change orders.
Assign the code when the potential change order is opened. In the Texas audit, TxDOT paid 17.7% above original amounts on closed maintenance contracts, partly because it extends routine maintenance contracts by change order, and the auditors could not tell from the data which change orders added work and which extended a contract.
A worked example
The tables below are an example with round numbers. They show a general contractor with six jobs and $100 million in original contract value.
| Job | Original contract | Approved change orders | Approved rate | Pending change orders | Rate including pending |
|---|---|---|---|---|---|
| Medical office building | $25,000,000 | $1,500,000 | 6.0% | $400,000 | 7.6% |
| K-8 school | $20,000,000 | $1,800,000 | 9.0% | $600,000 | 12.0% |
| Distribution warehouse | $18,000,000 | $360,000 | 2.0% | $0 | 2.0% |
| Parking structure | $15,000,000 | $750,000 | 5.0% | $150,000 | 6.0% |
| Retail renovation | $12,000,000 | $1,560,000 | 13.0% | $300,000 | 15.5% |
| Office tenant improvement | $10,000,000 | $630,000 | 6.3% | $50,000 | 6.8% |
| All jobs | $100,000,000 | $6,600,000 | 6.6% | $1,500,000 | 8.1% |
Approved change orders add $6.6 million, a net rate of 6.6%. Counting $1.5 million in pending change orders raises it to 8.1%. The retail renovation, at 13.0% approved and 15.5% with pending, sits above both published lines.
| Cause | Change orders | Net approved value | Percent of original contract | Average days to execute |
|---|---|---|---|---|
| Owner-directed scope | 60 | $3,600,000 | 3.6% | 28.0 |
| Design errors and omissions | 45 | $2,200,000 | 2.2% | 35.0 |
| Differing site conditions | 15 | $1,200,000 | 1.2% | 18.0 |
| Other (allowances and credits) | 20 | -$400,000 | -0.4% | 14.0 |
| All causes | 140 | $6,600,000 | 6.6% | 27.2 |
Owner-directed scope accounts for more than half the dollars, at 3.6% of original contract value. Errors and omissions add 2.2%, and that is the row to bring to a meeting with the design team or to the next pursuit with the same architect. The “other” row is negative because it holds allowance reconciliations and value-engineering credits.
Leave the credits out and the gross additive rate is 7.0%, or $7.0 million. A portfolio report that shows only 6.6% understates the added work the field crews carried by $400,000.
Processing time and timing
Two more fields help explain what the rate does to a job’s labor. RS158-1 lists processing time among the factors that influenced whether changes led to labor inefficiency, and recommends that owners shorten it. Awad Hanna and colleagues at the University of Wisconsin-Madison built a statistical model from 61 mechanical construction projects, published in the Journal of Construction Engineering and Management in 1999. They report that the later a change order occurs in a project, the more it affects labor efficiency.
So record the date of field direction, the date the change order was executed, and the job’s percent complete at the time of the change. The Texas auditors found that work began before the change order was executed on 14 of the 63 construction change orders they tested, or 22.2%.
Fields to record
One row per change order in a spreadsheet or Power BI table covers all three calculations:
- Job number and original contract amount.
- Change order number, description and cause code.
- Amount, marked additive or deductive.
- Status: pending, approved or rejected.
- Date of field direction, date the potential change order was opened, and date executed.
- Percent complete on the job at the date of field direction.
How to start on your jobs
Export the change order log for every job closed in the last 24 months, along with each job’s original contract amount. Add a cause code and the field direction and execution dates to each row, then compute the net rate, the gross additive rate and the rate by cause for each job before adding the other fields.