The bad news is that construction change orders often infect the home-building process with unexpected expenses, costly move-in-date delays, and mounting frustration. The good news? You can nip this virus in the bud with a little old-fashioned construction planning.
Save your budget by making decisions prior to building a new home.
First of all, what’s a contractor change order? It’s a document outlining the cost of items you decide to add or change after you’ve signed the contract for your building project. Builders may also count allowance overages as change orders assigning a change-order percentage fee to these overages. (In fact, there are builders who rely heavily on this type of change order as a profit center.)
Construction allowances are amounts the builder pre-allocates to various categories of items selected by the homeowner, things like cabinetry, flooring, roofing, plumbing fixtures, lighting fixtures, etc. If the homeowner’s choice costs more than the construction allowance for a specific category, the result is an overage.
Change orders for allowance overages work like this: Let’s say the builder has allocated $5,000 for all the closets in your home. After visiting the closet company’s showroom and making your finish and design selections, you find the cost is actually $11,000.00. If the builder charges 25 percent on top of the amount by which you exceed your allowance, you’ll pay the $6,000 overage, plus the 25-percent change order charge of $1,500, for a total of $7,500. These cost overruns can add up quite quickly.
Three reasons to avoid change orders:
- They can easily result in significant unexpected expense exceeding your budget by thousands of dollars.
- Because the added charges are out-of-pocket (you can’t go back and renegotiate your loan to include additional costs), there is less cash on hand for moving costs, decorating, and other items related to your building project.
- They can cause delays in the construction process, which could increase the home construction price even more.
If the project exceeds the maximum time allowed in your construction loan contract, you may be charged penalty fees and/or incur a higher interest rate for the life of the loan. Plus, the longer a house is under construction, the more interest is being paid on the construction loan.
Change orders hold up the works because:
- It takes the builder time to estimate and get pricing from subs.
- Some changes require additional permitting.
- Delays may occur while waiting for available subcontractors.
- Additional paperwork is needed to confirm and okay the change.
Note: This change order form paperwork is important to make sure everyone is on the same page. There is too much going on at any one time during a building project to count on memory, which means relying on word-of-mouth can be disastrous. Using change order forms, issued by your builder, that detail the changes, the corresponding costs, and require your builder’s and your signature is the best way to go
Looking at change orders from the builder’s perspective. Before we go any further, please understand that construction change orders can require much more effort and time on the builder’s part than you might think. First of all, just determining the cost of your request can take hours. The builder has to contact the appropriate subcontractors, gather their charges, and then estimate the cost involved in administering the change through all its stages.
Though there are builders that rely heavily on allowance overages as a profit center, most of the builders I’ve spoken with say they hate construction change orders. For one thing, changes can consume large amounts of cost estimating time better spent on the job site; they can cause huge construction delays; and for the most part they are not profitable. Several builders mentioned that while it’s common for the homeowner to feel they are paying too much for their requested change, in reality the builder may barely break even.
Talk with your builder about his definition of a change order before entering into a contractual agreement for the construction of your home. (Also confirm that the home construction contract reflects your understanding of his change order process.) It’s important to understand and be comfortable with how he handles this part of the job.
The builder deserves to make a profit from building your home, which includes covering the cost of change orders and associated administrative expenses. You deserve to understand under what circumstances you may incur these extra construction expenses. If the cost of a change order seems unreasonable to you, ask what it covers. Your may discover your request involves a more complicated deconstruction/construction process than you realize.
The bottom line is that charge orders are a royal pain for everyone involved. They represent headaches for most builders, unexpected expenses for you, and can delay the move-in date. In the end, they also can become a point of contention between you and your builder, and a source of frustration for the subcontractors.
Later this week, I’ll detail how you can avoid (or significantly reduce) change order charges.
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