How GCs Can Improve Change Order Management and Protect Profit

Change order management is an important discipline for general contractors: Change orders are often the difference between getting paid for extra work, and donating your time and materials to the project. 

It’s inevitable that owner requests and changes happen over the course of a construction project. GCs must log changes and get approvals before the work erodes your already-slim profit in ways that are hard to spot. 

Change orders are a risk when they’re not managed. But with discipline and clear processes in place, they’re also one of the easiest ways to protect revenue beyond the original contract.  

Change orders can dramatically impact project profitability. 

According to FMI’s survey report, What High Performers Do Differently During Execution (Part 2), change orders can dramatically impact project profitability.  

Tight change order control is one discipline that separates successful general contractors from less disciplined organizations.  

Improve forecasting for stronger margin control 

Once approved, change orders should update the contract value, budget, commitments, labor plans, schedule, and forecast. If those updates happen in separate spreadsheets or disconnected systems, you may not see the margin impact until too late. 

“Forecasting isn’t about forms,” according to the FMI report. Forecasting means knowing where the project is headed while there is still time to act. 

The report found that firms with accurate, consistent cost-to-complete forecasts meet or exceed profit targets 92% of the time. Profit reliability drops to 73% for mostly accurate forecasts and 42% when forecasts are inaccurate.  

Accurate forecasts meet or exceed profit targets 92% of the time. Mostly accurate forecasts meet profit targets 73% of the time, while inaccurate forecasts meet profit targets just 42% of the time. 

If a GC logs and approves change orders but does not update the forecast, the business is operating with an outdated margin. The project may look healthy in the change log but unhealthy in the field.  

A connected cost workflow like Kahua’s Cost Management Suite helps the team see what each approved, pending or rejected change means for contract value, committed cost, projected cost, and expected margin.  

Change orders can be revenue opportunities or profit risks 

Each undocumented change is potential financial exposure. 

Revised drawings, owner requests, and changes in scope should prompt a look at the original contract. If the change is not there, the GC should log it, determine price and schedule impact, and get documented approval from the owner.  

Without that discipline, revenue that should be captured through a change order turn into unapproved work, often at the expense of the GC. 

FMI calls change orders “the litmus test,” because they show whether a contractor’s operating system holds up under pressure. A GC may have a process on paper, but the real test happens when the team is busy and someone wants the work done now. 

Not every change order creates easy profit, but disciplined GCs are better positioned to capture the cost, markup, delay impact, and of course documentation needed to protect margin. 

Schedule impact belongs in the change record 

A construction change order is not just a price adjustment. 

Changes in scope or owner requests may change labor needs and schedules. Even when the direct cost of the change is documented, the disruption to the schedule can still impact profit for GCs. 

FMI found that firms with highly consistent change order processes meet or exceed schedule expectations about 80% of the time, compared with about 65% for firms with less consistent processes.  

If the change affects schedule, labor, or procurement, those impacts need to be documented before they become invisible. A change-order log that captures only direct cost can still leave money on the table.