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Proactively Manage Construction Change Orders to Avoid Profit Erosion

May 9, 2013 2 Min Read Construction
Michael R. Viens, CPA
Michael R. Viens, CPA Retired, Former Director, Tax Strategies

Proactively manage construction change orders to avoid profit erosionDisputes commonly arise with construction contracts, particularly with change orders. If these disputes are not addressed with appropriate management focus, the distractions and economic costs of addressing them can result in significant profit erosion. In an economic environment where profits are already under pressure, change order dispute resolution can take on even greater importance.

A change to a construction contract typically requires agreement among multiple parties, often revolving around the owner, the architect, and the contractor. All parties play important roles, with potential outcomes often at odds with each party’s understanding of the project’s terms as well as the associated economic costs and benefits.

An effective change order management process begins with a thorough understanding of the contract’s requirements, including what constitutes a deviation giving rise to a change order and the document flow processes required to be carried out. It is important to appropriately identify the change and the particular relationships to the contract terms; e.g., additional work required, plan deficiencies, changes in specifications, delays in schedules, etc. Make sure there is clear communication among all relevant parties as well as appropriate documentation that details the nature of the change and the associated economic consequences. 

These processes and the steps required to resolve disputes along the way are generally addressed in the construction contract documents. When public projects are involved, it is also necessary to adhere to specific regulatory requirements that can vary by state, locality, and public agency.

Most construction projects, no matter how well-planned in advance, will involve some level of change orders. It is in the best interest of all parties involved to come to a successful resolution in an efficient and expeditious manner. Clear and timely communication, combined with management support and focus, are critical to ensuring a successful outcome.

Michael R. Viens can be reached at (215) 441.4600 or Email.

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Michael R. Viens, CPA

Michael R. Viens, CPA

Retired, Former Director, Tax Strategies

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